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A Nation Without ‘Pillars’: Nigeria’s Rejection Of The OECD’s Two-Pillar Solution – Tax Authorities

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“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”

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

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

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

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

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’

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

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.

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