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HomeBusinessNigeria should participate in OECD's rulemaking process to achieve inclusive benefits

Nigeria should participate in OECD’s rulemaking process to achieve inclusive benefits

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Nigeria should continue to participate in the rule development of the Organisation for Economic Co-operation and Development (OECD) to ensure that the interest of the country and Africa is factored into the design and development of the rules.

The conclusion was reached at a meeting with the delegation from the OECD and Nigerian representatives on April 4 and 5, 2023, at a workshop jointly organised with the Federal Inland Revenue Service (FIRS) to discuss the maximisation of the benefits of the Two-Pillar Solution for Nigeria.

The outcome statement from the workshop was signed by the Executive Chairman of the Federal Inland Revenue Service (FIRS), Muhammad Nami, and the OECD Representative, Ben Dickinson.

Stakeholders at the meeting resolved that “there is the need for Nigeria’s continued participation in the rule development as a member of the inclusive framework to ensure that the interest of the country and Africa is factored into the design and development of the rules.”

The Outcome Statement noted that, whether or not Nigeria endorsed the statement of October 2021 and the detailed rules to be released later, to address challenges arising from the digitalization of the economy, the country’s tax base and fiscal policy options would be impacted by the implementation of the Two-Pillar Solution, especially Pillar 2’s global minimum tax rules of a 15percent effective tax rate (the GloBE rules).

The meeting consequently observed that there was a need for Nigeria to immediately implement fiscal policy measures to address these potential impacts.

“In light of this, there is a need to commence immediate implementation of fiscal policy measures around the Global Minimum Tax Rules, in view of the fact that other jurisdictions around the world have commenced implementation of measures that will enable them to reap top-up taxes allowed under the rules, which will be to the detriment of Nigeria from 2024 if no step is taken.

“There is also an urgent need to review and streamline Nigeria’s tax incentives, as the rules will have the impact of allowing other jurisdictions to mop up taxes not collected in Nigeria due to tax incentives,” the statement read.

The stakeholders also observed that Nigeria could implement and reap the benefits of Pillar 2, even where it does not wish to implement Pillar 1, noting that “effective implementation of Pillar 2 rules holds significant potential for increased tax revenue to fund government programs, boost the economy, and keep Nigeria as an attractive investment location.”

As part of its recommendations, the OECD-Nigeria Meeting urged stakeholders within the country to commence internal engagements and “draw up a national strategy for immediate streamlining of its tax incentives, to avoid ceding its tax base to other jurisdictions, owing to the implementation of Pillar 2 rules.”

The Workshop Statement enjoined Nigeria to take immediate steps to respond to Pillar 2 through the implementation of tax policy options, which may include “changing its income tax rule to bring up its effective tax rate to a minimum of 15% or introducing a qualified domestic minimum top-up tax (QDMTT).”

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The meeting stressed the need for Nigeria to continue to participate in the rule development process “as a matter of importance to protect national interest.”

Nigeria is a member of the Inclusive Framework and has actively participated in the rule development process despite not endorsing the Inclusive Framework’s October 2021 Statement on the grounds that it was in Nigeria’s best interest not to do so to ensure that the country does not lose out on potential revenue from the digital economy.

The Two-Pillar Solution, a proposal by the OECD Inclusive Framework, is a set of proposed rules endorsed by 138 countries across the world as a uniform solution to the tax challenges of the digitalized economy, as well as base erosion and profit shifting.

Nigeria, one of the four members of the Inclusive Framework that did not endorse the set of rules, met with the OECD delegation last week to familiarize relevant government officials with the rules, Nigeria’s position, and the potential benefits of the Two-Pillar Solution to the country and the world in general.

The workshop was attended by key stakeholders, led by the Executive Chairman of the FIRS, Nami, who was represented by the Coordinating Director of the Executive Chairman’s Group, Muhammad Lawal Abubakar. Also in attendance were representatives of the Office of the Vice President, the Federal Ministry of Finance, Budget, and National Planning, the Federal Ministry of Justice, the Federal Ministry of Industry, Trade, and Investment, the Nigerian Investment Promotion Commission (NIPC), the Nigeria Export Processing Zone Authority (NEPZA), the Oil and Gas Free Zone Authority (OGFZA), the Nigeria Export Promotion Council (NEPC), the Joint Tax Board (JTB), and some states’ tax authorities.

In a statement in May 2022, the Executive Chairman of the FIRS noted that the country had concerns over the impact the rules could have on Nigeria’s tax system and revenue generation.

“There are serious concerns about how the rules (particularly on Pillar 1) would compound the issues in our tax system. For instance, to be able to tax any digital sale or any multinational enterprise (MNE), that company or enterprise must have an annual global turnover of €20 billion and a global profitability of 10%. That is a concern. This is because most MNEs that operate in our country do not meet such criteria, and we would not be able to tax them,” Mr. Nami stated then.

“Secondly, the €20 billion global annual turnover in question is not just for one accounting year, but it is that the enterprise must make €20 billion in revenue and 10% profitability on average for four consecutive years; otherwise, that enterprise will never pay tax in our country but in the country where the enterprise comes from, or its country of residence,” the statement read.

Thirdly, he noted that for Nigeria to subject a multinational enterprise to tax under the rule, the entity must have generated at least €1 million in turnover from Nigeria within a year.

Nami stated that this is an unfair position, especially for domestic companies, which, with a minimum of N25 million (about €57,000) in turnover, are subject to company income tax in Nigeria. He added that this rule will take so many multinational enterprises out of the scope of those that are currently paying taxes to Nigeria. In other words, even the MNEs that are currently paying taxes in Nigeria would cease to pay taxes to us because of this rule.

Fourthly, on the issue of dispute resolutions under the Two-Pillar Solution, the FIRS Executive Chairman explained that the rules were such that in the event of a dispute between Nigeria and a multinational enterprise, Nigeria would be subject to an international arbitration panel as against Nigeria’s own justice system.

“It would be subject to international arbitration and not Nigeria’s judicial system and laws—even where the income is directly related to a Nigerian member of an MNE group, which is ordinarily subject to tax in Nigeria on its worldwide income and subject to the laws of Nigeria. We are concerned about getting a fair deal from such a process. More so, such a dispute resolution process with a multinational enterprise in an international arbitration panel outside the country would lead to heavy expenses on legal services, travel, and other incidental costs.

“Nigeria would spend more, even beyond the tax yield from such cases,” the service said in the statement.

 (omayowa@globalfinancialdigest.com; Newsroom: +234 8033 964 138)

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