• Friday, June 21, 2024
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OECD’s two-pillar solution to challenges of taxation in digital economy

Report sees countries ignore final OECD BEPS’ recommendations

The importance of multilateralism in solving global taxation challenges cannot be overemphasised and this is why the two-pillar solution drawn up by the Organisation for Economic Cooperation and Development (OECD)/G20 countries to solve the challenges encountered in taxation of the digital economy globally is a step in the right direction. However, in drawing up a globally applicable plan, the approach must be truly inclusive in such a way that no section of the global economy is left out or disadvantaged.

The OECD on 1 July 2021 released a Statement on a two-pillar solution to the challenges of taxing the digital economy. The objective of the two-pillar initiative, according to the OECD, is to ensure that multinational entities (MNEs) pay a fair share of taxes in the jurisdictions they operate and earn profit from, whether they have a physical presence there or not. An implementation plan is being drawn up and will be available from October 2021 though, effective implementation of the initiative is slated for 2023. Of the 139 member countries of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS), a total of 132 countries have signed on to the statement while 7 countries including Nigeria are in disagreement with the provisions of the statement.

Pillar One

The crux of Pillar One seeks to reallocate 20-30% of profits of the largest and most profitable Multinational Enterprises (MNEs) in excess of USD100 billion (residual profits), to the market jurisdictions where the MNE’s users and customers are located. This will empower developing countries with the right to tax major MNEs on the income they earn from their operations within their jurisdictions.

Pillar Two

Pillar two introduces a global minimum tax at the rate of 15%. This is aimed at protecting the rights of countries to tax payments (like interest and royalties) made to companies in other countries when they are not taxed up to the expected minimum rate of 15%. This implies that companies with over EUR 750 million ($889-million) of global annual revenue would be subject to a global minimum corporate tax. Even if a company can shift its profits to a tax haven, those profits would still be subject to tax at the minimum rate of 15%. Government entities, international organisations (including shipping companies), non-profit organisations, pension funds or investment funds that are Ultimate Parent Entities (UPE) of an MNE Group or any holding vehicles used by the group are exempted from global minimum tax.

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The global minimum tax may lead to the demise of tax havens, which will improve the ability of all countries, including developing countries, to ensure they can protect their tax base from tax avoidance and/or total erosion. The global minimum tax will also relieve pressure on developing countries to provide excessively generous tax incentives to attract foreign investment.


The application of Pillar One of the Statement is limited to MNEs (including tech companies) with global turnover above 20 billion Euros and profitability above 10% (i.e. profit before tax/revenue) of which between 20-30% of the excess profit over 10% of revenue will be allocated to market jurisdictions using a revenue-based allocation key. By signing onto this plan, countries agree to apply the international rules while suspending their domestic rules on Digital Service Taxes and other relevant similar measures on all companies.

Also, Pillar Two stipulates a global minimum corporate tax rate of 15% for companies with a global turnover of more than 750 million Euros. The two-pillar initiative has been described as “historic” and may eventually be adopted globally. However, with countries exhibiting a positive attitude towards global solutions to these issues, the existence of political and technical differences among countries will continue to determine the effectiveness of implantation efforts.

There is also the challenge that these global initiatives do not take into consideration the need of developing nations to have higher tax rates to raise sufficient revenue to fund their budget, reduce poverty and provide basic amenities without which the MNEs may not be able to profitably run their businesses within these localities.

The current tax rate in Nigeria for big companies with over 100 million Naira turnover yearly is 30%. Also, MNEs have been compelled to file tax returns under the Significant Economic Presence (SEP) Order 2020. The application of the two-pillar initiative will result in Nigeria conceding to the adoption of global minimum tax, with the MNEs operating in Nigeria being subjected to the 15% global corporate tax rate. This might result in a low tax yield given the prevailing tax rate in Nigeria. Also, this might create an uneven competitive advantage for Nigerian companies.

The adoption of Pillar Two is also an avenue to remove the use of several tax incentives to attract FDIs, which are critically needed to develop core sectors of the Nigerian economy. With the initiative, global companies will be challenged to open trading offices within the countries where they earn a chunk of their income. With the active population of the Nigerian market, this will be a positive drive for the Country.

The Chartered Institute of Taxation of Nigeria believes that there is a need for greater inclusiveness of developing nations in making international tax policies so that they do not get the short end of the stick when these policies are passed and implemented.

The Institute considers the Two-Pillar as beneficial initiatives for the Nigerian government and urges the government to collaborate with other developing countries in the OECD member countries to push for an increase in the global minimum tax rate for the benefit of the African Union while considering signing the statement. An increase in the global minimum tax rate to the OECD recommended average rate of 21.5% should be more beneficial to developing countries like Nigeria.


1. The government should together with other African nations continue to engage the Members of the OECD/G20 Inclusive Framework on BEPS to drive an all-inclusive plan that takes into consideration the peculiar situation of developing African economies.

2. The minimum global tax rate should be revisited for inclusiveness of Nigeria and other African countries to ensure global tax competitiveness is maintained while also driving increased revenue for the government.

3. The place of the African Tax Administrators Forum (ATAF) should be maximized in negotiating global solutions to taxation of the digital economy.

Text of a position paper by Awogbade, FCTI, registrar/chief executive, Chartered Institute of Taxation of Nigeria (CITN)