Tobi Aminu

The digital transformation of the global economy and the shift towards a user-based digital market that has been primarily driven by the evolution of the internet and the increasing interconnectedness that it facilitates between people and multinational enterprises (MNEs) create significant tax challenges for all jurisdictions and for international taxation. The tax challenges relating to the digitalisation of the economy and in particular the fact that many MNEs have reduced their effective tax rate significantly (via the exploitation of the existing ‘nexus’ rules through targeted international tax planning) by shifting profits to low (or no) tax jurisdictions, rather than paying their share of taxes in the jurisdictions where value is created, have been a key aspect of the Base Erosion and Profit Shifting (BEPS) Action Plan implemented by the Organisation for Economic Cooperation and Development (OECD). The main challenge that the OECD aims to address is the one that relates to the existing “nexus” rules that allocate the right to tax the profits of non-resident enterprises to the jurisdiction where these profits are sourced and where physical presence exists (i.e. through the creation of a permanent establishment). The profit allocation as per the existing “nexus” rules is based on the arm’s length principle and the authorised OECD approach by focusing on the concept of “significant people functions” which looks at the functions performed, assets owned and risks assumed by the non-resident enterprise. Until recently, the existing “nexus” rules were perceived by many international tax experts as the most appropriate method to allocate taxing rights to the jurisdictions where the physical and economic substance is created. However, they are now rendered as obsolete, since they are not effective when it comes to the allocation of taxing rights for the profits that arise as a result of the value created from the exploitation of data and user participation, which are the main characteristics of the new highly digitalised business models. Further to the OECD BEPS Action Plan and the need to address the aforementioned tax challenges relating to the digital economy, the EU Commission issued several proposals for directives on a revenue-based “digital services tax” and the introduction of a digital permanent establishment (PE) concept (also referred to as “virtual PE”). Despite the fact that the Economic and Financial Affairs Council of the EU (Ecofin) did not reach an agreement on the “digital services tax”, member states like France and the UK have recently introduced new domestic legislation which provides for a “digital services tax”. While such an initiative may be a step in the right direction, it creates further challenges. Unilateral tax measures facilitated by the application of a revenue-based “digital services tax” will result in double taxation for MNEs, which cannot be relieved under the existing provisions of double tax treaties. In order to address the aforementioned issue and ensure that the sustainability of the international framework for the taxation of cross-border activities is not undermined, it is imperative to reach consensus at an international level. This is also stressed in the programme of work recently published by the OECD/G20, as part of an initiative to develop a solution to the tax challenges arising from the digitalisation of the economy. According to the programme, the aim of the OECD/G20 is to develop a consensus-based solution by the end of 2020, which will be based on the revision of the existing profit allocation and nexus rules and the design of a system to ensure that MNEs pay a minimum level of tax, in an attempt to prevent base erosion and profit shifting.   Source: Global News

“What that means is, if A wants to impress B, and takes B to eat at the Transcorp Hilton, A will pay VAT for services enjoyed. This is because of the environment. “The cost of the Coca Cola they will drink at Transcorp Hilton at N1,000 could have been bought at N100 in any supermarket without paying any VAT. “Also, A can buy chicken, with all the ingredients in the market, cook it and eat without any VAT. But, instead of spending N5,000 for that meal, if A decides to go to the Transcorp Hilton and spend N20,000, then A must pay VAT. It is a choice A has to make. The only exemption for VAT are items required by everybody, regardless of choice. There is no VAT on those. Items like education, medical etc. These are things that, regardless of choice, one is expected to have. But, if one decides to buy a brand new car, one will be expected to pay VAT. The next question is what VAT is used for? About 85 per cent of VAT goes to state governments that cannot pay salaries or provide good roads or primary healthcare, despite being their constitutional responsibilities to do. If they do not have the funding, either through the pay-as-you-earn (PAYE), personal income tax, or VAT, then they can’t do it. VAT is a personal choice. The same Nigerians go to Ghana, South Africa, England and pay VAT three times the amount they pay in Nigeria. Or they go to Dubai and pay the same amount collected in Nigeria.   Source: Global News

The Economic and Financial Crimes Commission, on Tuesday, arraigned a whistleblower, Lord Edem, before the Lagos State High Court in Ikeja for raising a false alarm over an alleged N700m pension and tax evasion fraud. Edem was arraigned before Justice Hakeem Oshodi on one count of making a false statement to a public officer. He pleaded not guilty to the charge. It was gathered that Edem provided false information to a public officer and the EFCC about the involvement of a company, where he was an employee, Starsonic and Sacvin Group of Nigeria, in a pension and tax evasion fraud. According to the EFCC prosecutor, S. O. Daji, the defendant claimed that the management and staff of the company were involved in massive pension fraud, tax evasion and other fraudulent activities to the tune of N700m. He added that the defendant committed the offence on August 7, 2019. The offence was said to contravene Section 96 (a) of the Criminal Law of Lagos State, 2011. Justice Oshodi, a vacation judge, ordered the remand of the defendant in prison, while the case file be returned to the registrar for re-assignment.   Source: Punch

Nigeria could be facing a fiscal crisis if it doesn’t improve its ability to collect taxes, the authorities have warned. Government expenditure has doubled and debt servicing costs have grown, but revenues have missed their targets by at least 45% a year since 2015. Despite that, the Nigerian president’s office has praised the work of the national tax body,the Federal Inland Revenue Service (FIRS), for doubling the number of taxpayers since 2015. Some online users were quick to ask if that’s true, why hasn’t there been an equivalent increase in government revenue, and as a result improvements in things like schools, roads and healthcare? Getting more people to pay tax In 2018, 19 million Nigerians paid into federal or state coffers, according to government data. A World Bank report in that year put the country’s economically active population at 65 million – so even with rising numbers of taxpayers in recent years, that is still less than 30% paying tax. The government has been going after individuals that it believes are liable for tax and have not been paying. Two years ago, the country offered a 12-month amnesty for Nigerians to declare and pay taxes on all previously undeclared income and assets to avoid penalty payments and possible prosecution. A World Bank report last yearsaid this was only partly successful with just 8% of the target achieved by the end of the amnesty period. However, many Nigerians will be reluctant to pay taxes because of concerns the money raised may be siphoned off instead of being spent on health, education and other public services. Oil price goes down. The big issue facing the government has been lower international oil prices and the recession experienced by the Nigerian economy in 2016. The average price of crude oil fell from around $113 a barrel in 2012 to just over $54 in 2017. Nigeria is Africa’s largest oil producer and between 2012 to 2014, the oil sector provided 57% of total government revenue. This fell to 41% between 2016 to 2018. The government says that value added tax (VAT) and company income tax have been on the increase since 2015. But a UN report this yearshowed that in 2018, Nigeria’s estimated VAT gap – the shortfall between potential and actual VAT collections – was one of the largest in Africa. VAT gap in selected African countries. Nigeria also says it is intensifying measures to collect tax from new revenue streams, such as online transactions. It has said it will ask banks to charge tax at 5% on online transactions, both domestic and international, from January 2020. A report this year by Oxford University’s Oxford Martin Schoolestimates that non-oil revenues have risen but adds that much of the gain has been wiped out by inflation and currency movements. How does it compare globally? According to some estimates, Nigeria has one of the world’s lowest ratios of tax to GDP. That is the total amount of tax collected as a proportion of GDP – the value of the country’s goods and services. In 2016, it was at 6%, going by figures from the Organisation for Economic Co-operation and Development (OECD), a grouping of the world’s leading market economies. That is the latest year for which data is available. The tax-to-GDP ratio in South Africa was 29%, Ghana 18%, Egypt 15% and Kenya 18%, says the OECD. The average for OECD members – which includes all the advanced economies – was 34%. The World Bank uses a slightly different measurement of tax take, which does not include most social security payments. This puts Nigeria’s tax-to-GDP ratio in 2016 lower at just 3.4%. In 2017, the ratio did improve to 4.8%, according to figures provided to us by the Nigerian authorities. We don’t have a figure for 2018, but it is worth pointing out that 15% is the levelwhich the World Bank says is necessary to achieve economic growth and poverty reduction. How do you improve tax take? Many other developing countries have a low tax-to-GDP ratio and recent data indicates that about 60 countries fall below the 15% threshold. Bernardin Akitoby, an assistant director in the IMF, says a typical advanced country has a tax to GDP ratio of around 40%. Mr Akitoby says there is no one-size-fits-all solution to increase the tax take – but there are a few lessons that can be drawn from countries that have been successful in the past:   Source: The constable