There was excitement in the international tax space on 8 October 2021, with the announcement of a Two-Pillar solution to address the tax challenges associated with globalization and the digital economy.

The landmark deal will ensure that affected Multinational Enterprises (MNEs) are assessed to tax at a global minimum rate of 15% from 2023 and will reallocate profits from the world's largest and most profitable MNEs to countries worldwide, ensuring that these companies pay a fair share of tax wherever they operate and generate revenues.

This decision by the OECD/G20 Inclusive Framework (IF) on Base Erosion and Profit Shifting marks a major reform of the international tax system, with 137 IF members (as at 4 November 2021) being signatory members with the exclusion of Nigeria.1

In this article, we have summarized the Two-Pillar solution and evaluated the implications from a Nigerian perspective.

The Two-Pillar Solution: Summary

Pillar 1: Profit Re-Allocation

Pillar 1 provides an approach that accommodates increasing changes in business models arising from digitization by introducing new nexus rules and profit allocation mechanisms which as a result, expands the taxing rights of market jurisdictions where income is generated by the MNEs.

Pillar 1 applies to In-scope MNEs2 which are MNEs with global turnover above €20 billion3 and a profit-margin above 10%. An In-scope MNE will be deemed to be taxable in any member jurisdiction where it derives at least €1 million revenue in any financial year. For developing economies, such as Nigeria, where the Gross Domestic Product (GDP) is lower than €40 billion, a reduced revenue threshold of €250,000 applies.

Pillar 1 seeks to re-allocate twenty-five percent (25%) of In-scope MNEs residual profit4 to other member jurisdictions where the MNEs derived the global revenue from using a revenue-based allocation mechanism and the simplified-streamlined arm's length remuneration for marketing and distribution activities.

Pillar 2: Global Minimum Tax

Pillar 2 establishes a framework for a global minimum taxation regime through a series of interlocking rules. These include Global Anti-Base Erosion (GloBE)5 rules (Income Inclusion Rule - IIR and Undertaxed Payment Rule- UTPR) and the treaty-based Subject to Tax Rule (STTR).

The IIR imposes top-up tax on the income of a foreign entity, at the jurisdiction of the Parent Entity, if that income was ab-initio subject to an effective tax rate that is below 15%. While the UTPR6 denies deductions or requires an equivalent adjustment to the extent that the low tax income of a constituent entity is not subject to tax under an IIR.

The STTR allows source jurisdictions to impose withholding tax at a minimum rate of 9% on certain related party payments (interest and royalties).

The GloBE rules applies to large MNEs with over €750 million7 annual consolidated revenue. The goal is to ensure that large MNEs are globally taxed at a minimum of 15%, and reduce the appetite for aggressive use of tax havens.

The Two-Pillar solution has been estimated to impose taxing rights on more than $125 billion of profit for re-allocation and generate around $150 billion new tax revenue globally per year, as well as the additional benefits of stabilization of the international tax system and increase in tax certainty for both taxpayers and administrators.

The Two-Pillar solution also mandates signatory IF members to suspend existing Digital Sales Tax (DST) and prohibits an introduction of any variant of DST after the commencement of the Two-Pillar initiative in 2023.

Lastly, the OECD is committed to assist with the drafting of multilateral instruments and also provide support to tax administrations for seamless implementation of the Two-Pillar solution.

Implications for Nigeria

In 2019, Nigeria introduced a DST, the Significant Economic Presence Order, 2019 (SEP Order), to address the loss of tax revenue arising from the digital economy.

The SEP Order introduced a new tax nexus for Non- Resident Companies (NRCs) engaged in the provision of digital, technical, management, consultancy or professional services to a recipient domiciled in Nigeria, requiring these NRCs to pay tax in Nigeria based on the revenue earned from Nigeria. Although the SEP Order is currently in force, the Nigeria tax authority is yet to provide adequate guidance on the implementation of the Order and how the taxes will be levied.

The conundrum before Nigeria is the fact that an agreement to be part of the Two-Pillar solution will require an automatic suspension of the SEP Order, with no opportunity in the future to introduce any variant of DST.

It is therefore pertinent that an evaluation of the available options is carried out.

Maintain the SEP Order

A significant advantage of this option is that the threshold of ₦25 million for some digital services in the SEP Order allows Nigeria to capture more MNEs for taxes when compared to the thresholds provided in the Two-Pillar solution. The SEP Order also has a wider coverage of activities apart from the digital economy including activities like technical, management, professional and consultancy services. As such, it appears that more entities will be captured in Nigeria for taxes.

In addition this option will allow Nigeria continue to review the digital economy and other activities of NRCs, update and implement new rules independently, in order to close any future gaps without recourse to the OECD.

However, it may be important to identify the administrative complexities that the SEP Order will introduced for MNEs, considering the fact that 137 IF members are signed on to the Two-Pillar solution. This may trigger significant non-compliance with the SEP Order which may affect the realization of any projected tax revenues from the taxation of NRCs under the SEP Order.

Another major con is the potential reputational risk and trade tension that may arise by sticking with the SEP Order. The SEP order as a unilateral measure can be inefficient and lead to disputes with other countries – because it may create double taxation and lead to trade retaliation. Nigeria is an import-dependent economy that is also actively seeking Foreign Direct Investments (FDIs). A decision not to be part of the Two-Pillar solution may worsen trade relations and discourage inflow of FDIs.

Lastly, the lack of guidance on the implementation of the SEP Order till date may suggest a lack of capability by the tax authority to effectively administer the SEP Order considering the technology requirements and administrative complexities involved. It is therefore important to note that where implementation is not properly done, the proposed revenue from the SEP Order may not be realized.

Join the Two-Pillar Initiative

The Two-Pillar solution is an easy plug-in alternative for Nigeria, where the tax authority can enjoy the support of the OECD for efficient implementation of the regime and effective tracking of tax revenues.

Although, a number of large MNEs are not headquartered in Nigeria for the purpose of the IIR tax revenues, it is noteworthy that Nigeria may potentially earn additional tax revenues from the following sources:

  • Profit re-allocation from Pillar 1 under Amount A – Nigeria has a teeming population consuming digital solutions/contents.
  • Retention of simplified-streamlined arm's length profit from Pillar 1 under Amount B for entities in Nigeria performing marketing and distribution functions within an MNE.
  • With the possibility to reduce the threshold under GloBE rules for MNEs headquartered in Nigeria, earn IIR tax revenues on profit from jurisdictions with tax rate lower than 15%.
  • Earn UTPR tax revenues from Nigerian taxpayers making payments where the jurisdiction is not active under IIR.
  • Earn UTPR tax revenues as it may be applicable to Nigeria.

Also, as Nigeria's current tax rate is higher than 15%, there is little or no possibility of Nigeria losing potential tax revenue to other jurisdictions from the profit of MNE subsidiaries in Nigeria under the IIR.

Where Nigeria opts-in, voluntarily compliance will be easy for MNEs and with the efficient framework designed and supported by the OECD, the likelihood of earning these tax revenues is more probable when compared to the SEP Order option.

This option also mitigates the risk of trade wars, mitigate reputational risk and encourages FDI inflows as investors are certain about tax treatments in Nigeria as it relates to digital economy and other economic activities.


The Two-Pillar solution is at its final stages where the details are being perfected and this allows Nigeria to critically evaluate the pros and cons as highlighted above in order to arrive at a decision that is most aligned with its economic policy direction and is in the general interest of economic growth.

Also, potential businesses that may be impacted by this decision should seek to understand the changes, their impact from a Nigerian standpoint and put in place mechanism to monitor developments and the implementation timetable for timely and effective response.



2. Mining companies, shipping, regulated financial services and pension funds are excluded

3. The turnover threshold will be reduced to 10 billion euros 7 years after the two-pillar agreement comes into force (if completed within one year).

4. Residual profit is defined as profit in excess of 10% of the consolidated revenue of the MNE

5 Exempted from the application of GloBE rules are: Government entities, international organisations, non-profit organisations, pension funds or investment funds that are Ultimate Parent Entities (UPE) of an MNE Group or any holding vehicles used by such entities.

6. There is an exclusion clause from the UTPR for 5 years for MNEs in the initial phase of their international activity, defined as those MNEs that have a maximum of €50 million of tangible assets abroad and that operate in no more than 5 other jurisdictions.

7. Countries may apply a lower revenue threshold for the IIR in respect of groups headquartered in their country

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.