“Unfair”, “Unreliable”, “Concerning” these were the echoes that followed the Executive Chairman of the Federal Inland Revenue Service (FIRS), Mohammad Nami's speech at the Chartered Institute of Taxation of Nigeria 2022 Annual Tax Conference as he addressed Nigeria's rejection of the Organisation for Economic Co-operation and Development (OECD)'s two-pillar approach (Onu, 2022; FIRS, 2022). Shortly thereafter, the FIRS issued a Public Notice on 23 May 2022 underscoring its position that the two-pillar solution to the taxation of the digital economy is not in the country's best interest (FIRS, 2022).

Prior to the release of the OECD's two-pillar approach, and in response to increasing globalization, economies around the world sought effective media to ensure that the huge amounts of profits being made by these multinational enterprises (MNEs) were being fairly allocated amongst the jurisdictions in which the companies derive the income. Upon thorough investigation, tax authorities in various jurisdictions discovered that these MNEs were taking advantage of the differing tax systems and eroding the profit bases of countries with relatively higher tax rates by shifting profits to countries with lower tax rates . The developing economies, especially, were receiving the brunt of these exploitative tax planning strategies due to their heavy dependency on corporate taxes. The OECD estimates that a shocking $240 billion is lost annually due to tax avoidance by MNEs (OECD, 2021).

Perceiving the severity of this issue, in 2013, the OECD formulated the Inclusive Framework on Base Erosion and Profit Shifting (BEPS) as an “international collaboration to end tax avoidance”. The framework contained fifteen (15) measures intended to “tackle tax avoidance, improve coherence of international tax rules and ensure a more transparent tax environment”. This culminated in the 2015 BEPS Action 1 report titled, “Addressing the tax challenges of the digital economy”. In a bid to remain relevant and keep with the present times, members of the OECD/G20 Inclusive Framework on BEPS agreed to a two-pillar solution to address the challenges faced in the taxation of the digital economy (OECD, 2021). Of the 140 members of the Inclusive Framework, Nigeria is among the four countries that have rejected the approach.

This article examines the OECD's two-pillar approach and critically analyses Nigeria's “pillar-less” approach.

4IR and the Digital Economy in Nigeria

Welcome to the “4TH Industrial Revolution”(4IR). The 4IR is characterized by disruptive trends necessitated by emerging technologies which, in turn, resulted in the birth of the digital economy. The digital economy introduced us to business without borders. With just a phone or a laptop, billions of business transactions are conducted transnationally, in real time. The OECD succinctly defined the digital economy as “all economic activity reliant on, or significantly enhanced by the use of digital inputs, including digital technologies, digital infrastructure, digital services and data”. Through the medium of the digital economy, companies are able to conduct their businesses on a large scale and across various continents, without having physical presence in these countries.

Netflix, Twitter, Uber, AliExpress, Amazon, Airbnb- by the advent of digitization in Nigeria- these businesses have become household names without constructing four-walls within the country. These Non Resident Companies (NRCs) permeated the borders of Nigeria's teeming population with profitable solutions and are currently generating huge amounts of revenue from the country.

The OECD/G20 BEPS Two-Pillar Solution

Leading up to the two-pillar approach, profits of foreign companies were taxed only in jurisdictions where they had a physical presence. Gradually, with the emergence of digitalization, the tax authorities in these jurisdictions began seeking measures to put in place to ensure that the NRCs' profits were not escaping taxation. These countries began to formulate Digital Service Taxes (DSTs) to ensure that these companies were captured in the tax net. However, due to the fact that these DSTs were custom designed to suit each respective jurisdiction, there became a lack of consistency in the tax laws internationally. In order to address this challenge, the OECD introduced its two-pillar solution.

Pillar One

This pillar focuses on the highly profitable MNEs with annual Group turnover of over 20 billion euros and profits above 10% of revenue irrespective of the MNE's physical presence in any jurisdiction. The OECD has an intention to reduce this threshold to 10 billion euros upon successful implementation. This approach allocates 25% of profits in excess of 10% of revenue to the market jurisdiction, where the company's customers are resident, with revenue as the allocation key. However, only jurisdictions that are allocated at least 1 million euros in revenue (250,000 euros if the jurisdiction has a gross domestic product less than 40 billion euros) would receive an allocation. This pillar provides the market jurisdictions with the right to tax the residual profits generated by the MNEs within their jurisdictions.  This is contingent upon their agreement to the Multilateral Convention which requires all signed parties to remove all DSTs and commit to not re-introduce them in future (KPMG, 2021).

Pillar Two

This pillar consists of the Global anti-Base Erosion (GloBE) rules and the Subject to tax rule. The GloBE rules consist of the Income Inclusion Rule and the Undertaxed Payment Rule. These rules adopt a common approach and apply to MNEs that meet the 750 million euros threshold. The minimum tax rate for the GloBE rules is 15%. The intention of these rules is to disincentivize MNEs from shifting profits as the difference between tax rates in various jurisdictions will be marginal, hence, as the OECD terms it, “ putting a floor on tax competition” (OECD, 2021) .

Nigeria's Pillar-less Approach

The reasons why Nigeria is going pillar-less

In the Public Notice issued, the FIRS explained why the two-pillar approach is believed to be “unfair“ to Nigeria. With regards to Pillar One, the FIRS disclosed that majority of the MNEs with operations in Nigeria do not meet the 20 billion euros Group revenue threshold and as such these MNEs would not be captured in Nigeria's tax net and their profits would go untaxed. In view of the fact that these MNEs must have met the threshold for four consecutive years in order to be taxed, the FIRS stated that such companies would end up never paying tax in Nigeria. Additionally, the FIRS stated that in comparison to the domestic companies that are mandated to remit their corporate taxes once their earnings are above 25 million naira (about 57,000 euros), it would be unjust for these MNEs to be subjected to corporate taxes only when they have generated at least 1 million euros in turnover within Nigeria. By consenting to this rule, the FIRS believes that even MNEs that are currently paying taxes in Nigeria would no longer be within the scope, thereby causing a reduction in the country's tax revenue. In the event of a dispute between Nigeria and an MNE, Nigeria would be subject to an international arbitration panel. Concerns are that this process would cost Nigeria a lot more than the tax yield from such cases.

In respect of Pillar Two, the tax authority's concerns, that there are not enough MNEs generating Group turnover of above 750 million euros, are the same. The FIRS fears that this solution will be detrimental to Nigerian economy, especially because of the country's heavy reliance on its tax base.

The proposed ‘pillar-less' approach

In 2020, the Federal Government of Nigeria issued the Companies Income Tax [Significant Economic Presence (SEP)] Order. The SEP order was created with the intention to expand the scope of Nigeria's tax net to include the taxation of NRCs providing digital, technical, professional, management or consultancy services- companies that were, hitherto, not subjected to tax because the absence of their fixed bases. The SEP threshold for NRCs in Nigeria is gross turnover above 25 million naira in a given year from any or a combination of activities listed in the SEP Order. As an alternative solution, the FIRS has affirmed its commitment to annually amend tax regulation in Nigeria, like the SEP Order, to reflect current global realities.

Secondly, the FIRS stated that it has employed the use of technology to bring digital transactions into DST scope. The Data-4-Tax Initiative developed by the FIRS in conjunction with the state revenue authorities, in collaboration with the Joint Tax Board, seeks to achieve a 200% increase in tax revenue by utilizing blockchain technology to collate data on economic transactions into a central National Tax Data Bank.

The final approach stipulated by the FIRS is its establishment of a specialized office, the Non-Resident Persons Tax Office (NRPTO), to implement the taxation of NRCs. The purpose of the NRTPO is to promote tax certainty and avoid all instances of double taxation on the profits generated by the NRCs in Nigeria.

For Better or For Worse

For better

The Nigerian ‘pillar-less' approach expands the Nigerian tax net to include substantially more NRCs resulting in increased tax revenue for the country. The ambiguity surrounding how the NRCs' profit would be taxed under the SEP order was eliminated by the Finance Act 2021 which introduced an amendment to the Companies Income Tax Act (CITA). Section 30 of the CITA now reads that the FIRS has the authority to charge a fair and reasonable part of the turnover as taxes. Where the profits disclosed by the NRC are lower than what is expected by the FIRS, the tax authority is empowered to assess the company to deemed profit (usually 6%) on the total income derived from Nigeria.

Asides the fact stated above, an additional advantage of Nigeria's rejection of the OECD's two-pillar approach is the global recognition that the FIRS has garnered for its practical approach to the OECD's recommendation. The FIRS has proven that indeed one size does not fit all and has instead devised an approach that is better suited to its economy. This signals to the world that Nigeria is a forward-thinking economy therefore challenging the stigma against tax authorities of developing economies

For Worse

Nigeria's option for a unilateral approach to the taxation of the digital economy will lead to a reduction in the NRCs ‘confidence to set-up shop in the country. The OECD's proposal of an international arbitration panel assures MNEs that if in any instance they feel unsatisfied with the way the tax authorities are handling an issue, there is an impartial and international body that is primarily concerned to the settlement of such disputes. Fear of being subjected to Nigeria's unilateral tax laws might discourage NRCs from trading within the Nigerian Jurisdiction. This will in turn have a bearing on the country's tax revenue in years to come. Additionally, varying taxation systems might prove burdensome for NRCs with subsidiaries in different jurisdictions.

With the unabating improvement in technology, there is the question as to Nigeria's capacity to keep track of all digital transactions that are being carried out within the economy. With the advent of technology like virtual private networks (VPNs) enforcement of DSTs might become extremely challenging. As such, Nigeria will need to commit to innovation in order to ensure that the country's tax base is not eroded.


While Nigeria's bold repudiation of the OECD's two-pillar solution as unfit for its local economy , even in the face of a great deal of kickback, is highly commendable, immense effort will have to be channeled towards the sustainability of the country's alternative approaches. This is because, presently, an air of uncertainty thickly abounds throughout the nation as to whether Nigeria has the capacity to hold fast on its refusal to sign, or if the country will eventually succumb and adopt the OECD's solution which will mean a capitulation on Nigeria's part and jettisoning of the pillar-less approach.

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