• UN Committee of Experts – agenda published

    B.M.R. On

    The UN Committee of Experts has published the agenda for its 21st Session.

    The meetings will run from 20 to 29 October.

    As far as updates to the UN Model are concerned, Wednesday 21 October is the main day.

    Also worth following proceedings on Friday, 23 October. That’s the date scheduled for discussing the proposed Article 12B of the UN Model (dealing with taxation of automated digital services). This particular agenda item will be concluded on Tuesday, 27 October.

    The agenda may be subject to revision, so the dates given above may change.

  • Inclusive Framework documents leaked – again

    B.M.R. On

    Another fortnight, another leak. This evening, the latest sets of leaked Inclusive Framework blueprints are once again merrily making their way across the internet.

    These versions are dated 2 October. They’ll definitely contain a lot of what we will hear during next week’s Tax Talks session.

    I’ve had a quick look at both documents, but I’m not going to delve any deeper into them. Given how close we are to the Tax Talks session, it’s wiser to wait for the official report. No point ploughing through almost 500 pages of text that may or may not be changed by the time the Tax Talks session comes round.

    That said, I’m sure some of you would prefer to get the juicy details upfront. Fair enough, I say. So, for the curious (and impatient) among you, here are the leaked Pillar One and Pillar Two documents.

  • A note on Nigeria’s Significant Economic Presence rules

    B.M.R. On

    Earlier this year, Nigeria introduced measures to tax foreign digital businesses that generate income within the country. The new taxing right rests on the concept of a business having a ‘significant economic presence’ within Nigeria.

    The rules took effect on 3 February 2020. They cover both digital and non-digital businesses, however, this post focuses on the digital businesses aspect of the rules.

    ‘Significant economic presence’

    There are three scenarios under which a taxpayer would be deemed to have a ‘significant economic presence’ (SEP) in Nigeria.

    Scenario 1.

    The taxpayer has a gross turnover or income of more than NGN 25 million (around USD 60,000) from any or a combination of the following activities:

    • streaming / downloading services of digital content;
    • transmission of data collected from Nigerian users, generated via a digital interface;
    • provision of certain goods and services via a digital platform to Nigeria; and
    • provision of intermediation services via a digital interface linking suppliers and customers in Nigeria.

    It’s debatable whether the gross turnover threshold has been set at an appropriate level. If the aim is to target only the large multinationals, one would argue that the threshold is rather low, and would also catch other, smaller, businesses. On the other hand, one should also consider the size of the market. While USD 60,000 might not seem like a lot of money for one country, it’s worth setting that amount into the African context. But also worth noting that Nigeria is one of the larger African markets. The threshold doesn’t seem to fit right, in any case.

    Scenario 2.

    The use, by the taxpayer, of Nigeria domain name (.ng) or registration of a website in Nigeria.

    Scenario 3.

    Where the taxpayer has a “purposeful and sustained interaction with persons in Nigeria” by customising its digital page or platform to target persons in Nigeria (localised pricing, billing, payment).

    Scenarios 2 and 3 do not contain a revenue threshold. This means that even small businesses can be caught by the rules – for example, a non-resident SME that supplies digital services to Nigerian customers via a Nigerian website, and using localized pricing. Here the amount of turnover is immaterial – the turnover condition applies only to Scenario 1.

    What happens if / when a global solution is found?

    The OECD has been doing its utmost to persuade countries to hold off on introducing unilateral measures to tax digital businesses, and instead to wait for a global solution from the OECD Inclusive Framework. However it also realises that many countries will plough on regardless.

    Bearing that in mind, the OECD issued some guidance for countries that wish to introduce unilateral measures.

    The OECD advises that such unilateral measures should have the following characteristics:

    • they should be temporary;
    • they should be targeted;
    • they should minimize overtaxation; and
    • they should have little to no impact on small companies.

    So how do the Nigerian rules fare?

    Temporary?

    Well, not exactly. The rules provide that they will remain in place until a global solution (i.e. an international agreement) is in place. But they will only be withdrawn in respect of any taxpayers or transactions that come within the ambit of the international agreement. For those falling outside the agreement, the rules will remain. This is quite a sensible belt-and-braces approach, even though it will likely lead to complexity. Worth contrasting that with the position in other countries (for example, the United Kingdom) where such taxes have been introduced with the clear commitment that they would be withdrawn once a global solution is in place. The Nigeria position is a kind of halfway house.

    Targeted?

    To some extent. As mentioned above, the rules cover both digital and non-digital businesses. As far as the digital part is concerned, it is clear the types of businesses being targeted. The issue though is that the net might be being cast too wide.

    Which leads on to the next point.

    Minimize overtaxation?

    Absolutely not. As stated above, the threshold in Scenario 1 might be on the low side. And, as for Scenarios 2 and 3, there is no threshold at all. As drafted, the provisions would land heavily on small businesses.

    This also links in to the point about the impact on small businesses.

    Limitation of the SEP rules

    There is one serious limit to the rules, though.

    They are domestic rules, and therefore will be overridden by any of Nigeria’s tax treaties that contain a permanent establishment provision. That provision will prevail over the domestic law rules, with the effect that the relevant income will only be taxed in the source state (in this case, Nigeria) if the non-resident company has a permanent establishment in Nigeria. As the standard definition of ‘permanent establishment’ is not wide enough to cover the Nigerian ‘significant economic presence’ concept, that concept will be overridden by the treaty concept of permanent establishment.

    The SEP rules will therefore work only as concerns a jurisdiction with which Nigeria does not have a double tax treaty.

  • Some thoughts on the draft Article 12B, UN Model

    B.M.R. On

    Back in August, the UN Tax Committee announced proposals for the taxation of automated digital services. Specifically they proposed the inclusion of a new article in the UN Model. But will this really work?

    The draft Article 12B would permit source states to tax income from automated digital services, where such income arises within their jurisdiction.

    Amid all the excitement about the draft provision, it’s worth sounding some notes of caution.

    First, it is a proposed article for a Model tax treaty. It is not effective until it finds its way into an actual, real-life tax treaty.

    Second, what are the chances of this Article actually being included in the tax treaties that matter, where digital taxes are concerned? Would developed countries (where the digital businesses are generally resident) consent to include this provision in their tax treaties? I wouldn’t bank on it.

    And if, for example, two developing countries include this provision in their own tax treaty with each other, what would be the point of that? The provision has its full effect if a developing country includes it in a treaty with a country where a relevant digital business is resident. Hardly likely to be the case for, say, two African countries.

    Also, as treaties do not themselves grant taxing rights, this provision can only work if the domestic law of the source state already taxes income from automated digital services. Very few African countries currently levy a tax on income from automated digital services. (Perhaps that might change, following the publication of ATAF guidance on drafting digital services tax legislation. Even so, I have my doubts about the feasibility of implementing such complex rules.)

    So I would say, don’t hang out the bunting just yet. The UN Tax Committee proposal is a good one, even a sound one. But we are still far from a comprehensive solution.

  • Designing digital taxes – ATAF guidance published

    B.M.R. On

    ATAF has just published its suggested approach to drafting digital services tax legislation. The document is available on its website.

    At the recent ATAF – African Union Commission High Level Policy Dialogue (held at the end of August), we were told to expect the document. It was released earlier today.

    The document provides drafting guidance for African countries seeking to introduce digital services taxes. Quite a few countries have done so already, or are in the process of introducing them, for example, Nigeria, Kenya, and Tunisia. Others will obviously wish to follow suit.

    Drafting the legislation is the ‘easy’ bit. Beyond that, there are many challenging parts, not least implementation. It is tempting for governments to focus on the ‘much-needed revenue’ they imagine they are losing due to the digitalised economy. However, when it comes to domestic resource mobilization, there are far more pertinent issues for African economies, such as the formalization of the informal economy. I would argue that African governments would be better served focusing on those for now. That would be a far better use of scarce tax administration resources.

    Also, given the efforts currently underway to find a global consensus solution for taxing digitalised businesses, it might be worth waiting it out, to see what the OECD Inclusive Framework comes up with. There’s almost no point going to the trouble of designing and implementing a complex digital services tax, only to have to repeal it once a global solution is implemented.