The OECD Two-Pillar Solution—a Perspective on Nigeria’s Position

The advent of technology has turned the world into a global village. Economic transactions including those across international boundaries can now take place at a speed and scale that were never contemplated about a century ago, when the first set of tax systems for international trade was designed.

In response, the Organization for Economic Cooperation and Development, together with the G-20 countries, have been making efforts to address the gaps in the outdated tax system. The OECD has therefore issued new guidelines, with the base erosion and profit shifting projects 1.0 and 2.0.

BEPS 2.0 is unique. It represents the first major effort developed and generally acceptable by a comity of nations to address the issue of taxation of multinational enterprises, especially those operating in digital economies. After its release, around 130 countries assented to the proposal. The acceptance cuts across different countries with varying levels of socioeconomic development.

A Summary of BEPS 2.0

Pillar One of BEPS 2.0 creates new taxing rights for market jurisdictions irrespective of physical presence of MNEs. The second solution encapsulated in Pillar One streamlines the determination of the arm’s length remuneration of related party distributors that perform in-country baseline marketing and distribution activities, while focusing on the needs of low-capacity jurisdictions. The proposal covers MNEs with annual turnover of 20 billion euros ($21 billion) and pre-tax profits of 10% and above.

Pillar Two enforces the imposition of a global minimum corporate income tax rate of 15% by adopting the income inclusion rule and the undertaxed payments rule, both known as the GloBE—global anti-base erosion—rules. For jurisdictions with treaties, Pillar Two also adopts the subject to tax rule. The proposal covers MNEs that meet the threshold as determined under BEPS Action 13 on the country-by-country reporting standard.

Perspective on Nigeria’s Position

In May 2022, the chairman of the Nigeria Revenue Authority stated that participation in the global solution would negatively impact the country’s fiscal revenue. Nigeria therefore withheld its assent. We provide below a perspective on why Nigeria may not participate, at least in the near future.

Home grown alternative: Nigeria has one of the lowest tax-to-gross domestic product ratios in the world. The tax revenue is far below what is required to meet national budgetary requirements for economic development. The size of the informal sector, at 57.7% in 2021 (most of which is outside the tax net), makes it difficult for government to generate adequate tax revenue to support the population of about 200 million. Thus, the country continues to rely extensively on tax from the formal sector, especially MNEs.

It was in this context that Nigeria amended its tax code to address the players in the digital economy. This occurred in 2020, prior to the issuance of BEPS 2.0. The amendment introduced the concept of significant economic presence. This requires corporate players in the digital economy to file and remit both income and value-added taxes in accordance with the country’s tax laws as soon as a company starts to earn 25 million Nigerian naira ($54,000) and above in any financial year. By the end of 2022, three years after this move, Nigeria generated the highest tax revenue in its history. Nigeria may therefore be deemed to have verifiable statistics to support its home-grown alternative and may be unwilling to move to the multilateral arrangement.

Unprecedented debt-to-income ratio: The country is making every effort to develop its internal capacity and to be self-reliant. Currently, the economy is mostly import-dependent, with most manufactured consumer goods having significant imported components. Unfortunately, Nigeria relies significantly on foreign exchange earnings from the oil and gas sector to support the high import bill; however, the drop in the price of crude oil and the impact of Covid-19 in the last few years has been tremendous.

The country not only drained its foreign exchange reserves required to support its import bill; the government also accelerated the pace of its public spending to stimulate the economy. This increased domestic and foreign debt to an unprecedented level. The country therefore needs to improve its tax collection to augment public expenditure. It’s not likely that the Federal Executive Council will entertain any discussion that will leave any segment of the economy out of the tax net.

Counterproductive to foreign direct investment: Finally, it is most likely that assenting to the BEPS 2.0 arrangement may deny the Nigerian economy the opportunity of attracting foreign direct investment. Tax is a significant cost component in determining returns on an investment. The government has discovered and resorted to the use of tax as a tool to further both domestic and foreign direct investment, creating different avenues for granting tax incentives to investors.

Given the global minimum tax rate under Pillar Two, it is definite that beneficiary MNEs from treaty countries will forfeit the tax benefit on repatriation of returns. This will wipe out the intended benefit and make Nigeria unattractive and non-competitive for international investible funds.

Conclusion

The OECD and G-20 must be commended for making efforts to sustain global tax revenue by addressing loopholes in the outdated tax system. They also should be commended for drawing up a framework for equity and fairness in the international tax system.

While BEPS 2.0 is positive, Nigeria has designed a home-grown alternative to protect its tax base. The alternative has not only been tested, but also has shown that it can improve the country’s tax-to-GDP ratio. Thus, despite the country’s active participation in developing the new framework, the government has used the knowledge derived from this to develop an alternative. The indications aren’t that the country may give up an alternative that appears to be showing positive results, compared to the multilateral option that will cause some MNEs to generate income from Nigeria without paying tax.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Tayo Ogungbenro and Israel Ajayi are partner and senior manager in the transfer pricing unit of KPMG in Nigeria. Opinions expressed in this article are personal.