Background
The various modern concepts of globalization and digitalization are watershed in the practice of international taxation. Strategies to counter various tax challenges – which may take the form of conflicting claims by both residence & source countries of MNEs to taxable income; or the extreme exploitation of tax avoidance mechanisms such as tax havens for the reduction of tax liabilities resulting in under-remittance of fair value of tax due, amongst others – are now rife. These present a case for a consideration of the future of international tax. Primarily, the transformation presented by technology globally has resulted in significant shifts the global business operations and priorities. Hence, concepts such as digitalization, Artificial intelligence, climate change, sustainability, etc., now shape conversations around taxation of multinationals and cross-border transactions. Some of the trends which define the future of international tax include the following:
1. Technology and Tax administration
As the single most important determinant of the trends in International Taxation, the adoption of technology has significantly redefined tax administration globally. In many ways, the integration of technology into taxation will revolutionize interactions between individuals, businesses, and tax authorities. Notably, advancements in research about artificial intelligence, data analytics, and blockchain present tax authorities and taxpayers with simplified and streamlined reporting process, improved tax compliance, and tax service delivery. These improvements in the adoption of technology would aid tax management processes that would in the long-term foster tax fairness to taxpayers.
Globally, exchange of information for the purposes of transfer pricing and tax compliance has been simplified by the use of technology. Similarly, in Nigeria, the adoption of the TaxProMax portal by the Federal Inland Revenue Service (FIRS) has not only reduced administrative burdens but also ensures tax system efficiency through the provision of electronic tax filing, online payment gateways, and the simplification of tax compliance for individuals and businesses, both domestic and international. Leveraging technology could potentially curb tax evasion and fraud, enhance revenue collection, exchange of information, and promote transparency in tax administration.
2. Global Tax Cooperation
As a result of the global nature of the Base Erosion and Profit Shifting (BEPS), as facilitated by the increasingly interconnected world we live in, the need to develop effective internationally acceptable frameworks and standards for the effective taxation of taxable incomes and minimizing the risk of tax avoidance and evasion arose. While these frameworks, regulations or soft laws are generally legally non-binding, they are persuasive, influential and constitute notable guides for the cross-border taxation of MNE economic activities. Therefore, global collaboration through entities such as the Organization for Economic Corporation and Development (OECD) and the Committee of Experts on International Cooperation in Tax Matters within the United Nations (UN) have led the development of these frameworks. As a result of this framework, initiatives such as the Common Reporting Standard (CRS) which is a global standard for the automatic exchange of information to address tax evasion has been helpful in achieving tax transparency and equity in cross-border taxation. Similarly, global tax cooperation has also resulted in the development of the Two Pillar solutions to BEPS through the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting.
3. Tax and Environmental, Social, and Governance (ESG)
Globally, sustainability has become a prominent subject in the face of rapid climate change actions. Hence, governments around the world are exploring innovative ways to incentivize eco-friendly practices through taxation and companies are entrenching actions that promote sustainability. Carbon taxes, green credits, and other ESG-related measures are gaining traction. This shift aligns with global efforts to combat climate change and promote responsible business practices.
For instance, as part of Nigeria’s commitment to global climate change actions to mitigate environmental degradation, the Nigerian Fiscal Policy Measures (FPM) 2023 issued by Former President Muhammadu Buhari had introduced excise duty at the rate of 10% on Single Use Plastics (SUPs) such as containers, films, and bags with effect from 1st June 2023 and on motor vehicles with engine sizes 2000 cc – 3000 cc and 4000 cc – above at the rate of 2% and 4% respectively for the years 2023 and 2024. Similarly, the Import Adjustment Tax (IAT) rates on the importation of plastic items such as plates, sheets, films, etc., were also increased to 40% from 30% as contained in the 2022 – 2026 ECOWAS Common External Tariff (CET). It is worth noting however that this provision has been suspended in the meantime by current President Bola Tinubu.
- Effective application of taxes on provision of public services will spur taxpayers’ willingness to pay— Athe
- Taxation of Companies in the Digital Economy: On Nigeria’s Refusal to Endorse the OECD/G20 IF Digital Tax Deal''
- Multiple taxation, epileptic power supply affecting hospitality industry - Operators
Considering the mounting environmental concerns, the implementation of taxes which target carbon emissions, disposable plastic usage, and other harmful practices are significant as they can aid environmental conservation and sustainability. Notably, in recognition of the role of the Nigerian oil and gas sector as a significant contributor to greenhouse gas emissions and environmental deterioration, the Nigerian government through the National Council on Climate Change, in February 2023 announced its plans to unveil a Carbon Tax Policy and Budgetary System in line with the provisions of the Climate Change Act 2021 (the “Act”) aiming to reduce gas flaring; encourage the transition towards cleaner environmentally friendly energy sources and new technologies. Significantly, the introduction of tax incentives in the Electricity Act 2023 would promote activities in renewable energy projects.
4. Taxing the Digital Economy and Assets
The apprehensions of the international tax community about achieving effective taxation have grown alongside the ongoing evolution of the digital economy as reflected by the rapid rise of digital platforms and e-commerce services which challenge traditional tax models. Therefore, in order to establish a fair and effective tax regime for the digital economy collective efforts such as the introduction of Digital Services Taxes (DSTs) have become more prominent since the outbreak of the Covid-19 pandemic. Notably, the OECD aims to create a universally acknowledged framework for taxing the digital economy. In Nigeria, DST at the rate of 6% is charged on companies which provide digital services. Notably, the CITA makes provision to the effect that where a Non-resident company which provides digital services in Nigeria, has significant economic presence (SEP) and profit can be attributable to such activity, it would be liable to tax in Nigeria.
In the same vein, digital assets such as cryptocurrencies, Non-Fungible Tokens (NFTs) and other blockchain-based assets are becoming mainstream in recent times. Consequently, tax authorities are developing tax forms and regulations to include digital assets. Significantly, Nigeria’s Capital Gains Tax Act (per the amendment to Section 3 of the Act by the Finance Act 2023) makes provisions to tax digital assets at the rate of 10%. However, the challenge which arises is that while the majority of persons who trade in digital assets are individuals (and though the Act applies to them) there is little compliance efforts for the taxation of digital assets owned by individuals.
Overall, the future of international tax aims to achieve a more efficient, fair, equitable, transparent, and socially responsible fiscal environment using technology, international cooperation, and incorporation of sustainability practices.
WTS Blackwoodstone, is an international business law firm, that delivers innovative solutions across diverse client needs, specializing in core practice areas such as International Tax, Tax Advisory & Compliance, Corporate and Commercial law, and Transactional Services for companies operating in Nigeria.
As the Nigerian partners of WTS Global, operating in over 100 countries, WTS Blackwoodstone aligns with a global tax practice that offers a comprehensive range of tax services. https://wtsblackwoodstone.com/
Ifeoma Nnaji (Managing Associate) is the team lead of Legal Regulatory/Comm. Secretarial Group
Tobi Adekoya is an Associate in the firm’s Tax Advisory Group
