International Businesses in the Digital Economy: Why Nigeria Adopted its Significant Economic Presence (SEP) Rules over OECD’s Corporate Tax Agreement

Digital Tax

Jude Ayua, Associate



When the Organization for Economic Cooperation and Development (OECD) recently released its Minimum Corporate Tax Agreement (the “OECD Agreement”), the Federal Inland Revenue Service (FIRS) in Nigeria did not accept it.  According to the FIRS, it did not consider the OECD Agreement to be in the best interest of the country. In this article, I will briefly highlight and discuss the provisions of the OECD framework on base erosion, profit sharing, and taxation of international businesses in the digital economy, the three reasons why the FIRS rejected it, and the four steps FIRS has taken to ensure that Nigeria’s revenue is not hurt by its decision.


The OECD Framework on Base Erosion, Profit Shifting and Taxation of International Businesses in the Digital Economy

The OECD Framework, according to a statement released by the OECD, is the result of OECD’s Inclusive Framework on Base Erosion and Profit Shifting (BEPS) Project, which has made significant progress in ensuring a more coherent, substantial, and transparent international tax system. Part of the BEPS Project is to address the tax challenges arising from the digitalization of the economy which has not complied with the basic rules governing the taxation of international business profits. Consequently, large multinational enterprises (MNEs) earn significant revenue in foreign markets while those markets benefit only little or no tax revenue. 

In the Two-Pillar solution proposed by the OECD, Pillar One synchronizes international tax rules into the digital economy market, thereby enabling market jurisdictions taxing rights over MNEs. This is whether or not they are physically present in those jurisdictions. Pillar Two provides for a minimum of 15% tax on corporate profit, putting a floor on tax competition. The Agreement has been adopted by 137 members of the OECD. 

The FIRS Executive Chairman, Mr. Muhammad Nami, has explained what FIRS considers the unfairness of the OECD Framework to Nigeria and developing countries in general. In a recent statement by the FIRS, Mr. Nami stated that after reviewing the Agreement, FIRS was concerned about the potential impact of the OECD Agreement on the country’s tax system and the revenue generated from tax revenue. According to the FIRS Chairman, “there are serious concerns on how the rules would compound the issues in our tax system”. To justify FIRS’s stance, at least four reasons were provided by the FIRS Chairman.


Three Reasons Why the FIRS Rejects the OECD Framework

  1. Thresholds for taxing MNEs under the OECD Framework are unfavorable to Nigeria

    First, Nigeria stands to lose significant tax revenue because the OECD Framework excludes companies or enterprises whose annual global turnover is less than €20 billion and a global profitability of 10%. According to the FIRS Chairman,  “[t]hat is a concern … because most MNEs that operate in our country do not meet such criteria and we would not be able to tax them”. Indeed, the Nigerian economy is largely dominated by companies and enterprises that are yet to grow their turnover and profit to the level of bigger and more competitive economies such as the United States for instance, OECD economies. Consequently, Nigeria will stand to lose while some others gain.  

  2. MNEs with significant economic presence in Nigeria will pay tax in their home countries but none in Nigeria

    Second, the OECD Framework requires that even if a company or enterprise makes the €20 billion global annual turnover, such company or enterprise would still be excluded from being taxed in Nigeria if such turnover and 10% profitability is not sustained in an average of four consecutive years. 

    Interestingly, while such a company or enterprise will never pay tax in our country”, it will pay tax “in the country where the enterprise comes from, or its country of residence”. From a Nigeria perspective, it should not be difficult to imagine why the FIRS must think that the OECD Framework is unfavorable to the country.

  3. Unfairness to Local Companies if MNEs Don’t Pay

    Third, the OECD Framework requires that for a multinational enterprise to be liable to tax under the rule, the enterprise must have generated at least €1 million turnover from Nigeria within a year. Also, Nigeria stands to lose tax revenue it currently generates from MNEs that are already paying tax to Nigeria if the OECD Framework was adopted. This is because considering that domestic companies with a minimum of above N25 million (that is about €57,000) turnover are also subject to companies income tax in Nigeria. According to the FIRS Chairman, “this is an unfair position” especially to domestic companies who fall into the same category.


Internationalization of tax dispute resolution and exclusion of Nigerian Laws and Courts

Lastly, the FIRS considers the provision of the OECD Framework subjecting disputes that may arise over tax between Nigeria and MNEs to an international arbitration panel, not Nigeria’s justice system. The FIRS Chairman considers this unacceptable. In fact, “even where the income is directly related to a Nigerian member of an MNE group, which is ordinarily subject to tax on its worldwide income and subject to the laws of Nigeria”, the OECD Agreement excludes Nigerian courts and laws. From heavy expenses on legal services to travelling expenses and other incidental costs, “Nigeria would spend more; even beyond the tax yield of such cases”, the FIRS Chairman pointed out.


Four Measures the FIRS Has Taken to Ensure that Nigeria’s Rejection of the OECD Framework Does Not Hurt the Country’s Tax Revenue from MNEs 

The FIRS Chairman, in response to the concerns raised by some stakeholders and the members of the public about the potential losses Nigeria might face for failing to adopt the OECD framework, pointed out four steps Nigeria has taken to ensure that this isn’t the case. 

  1. Nigeria’s newly introduced Significant Economic Presence (SEP) Rules

    First, Nigeria has already developed her own domestic solution to the challenge the OECD Framework is trying to solve: the Significant Economic Presence (SEP) rules. The SEP Rules were introduced through the Finance Act of 2019 and 2020 to cover for MNEs in the digital market. With the thresholds set by the SEP Rules, MNEs that have no physical presence in Nigeria, are required to register and pay tax to Nigeria. To ensure that the Nigerian tax system keeps up with changes in the digital economy, the FIRS Chairman asserted that Nigeria has “made it a point of practice to annually amend [her] tax laws to reflect the current global realities.”


  2. Nigeria has deployed technology to ensure that it meets standards.

    Second, Nigeria has deployed technology in order to bring digital transactions to the tax net. Consequently,  according to the FIRS Chairman, “companies like Twitter, Facebook, Netflix, LinkedIn, among others, who have no physical presence in Nigeria and that were hitherto not paying taxes have now registered for tax purposes and are paying taxes accordingly”. Nigeria has in fact surpassed its tax revenue target for 2021 “despite the challenge posed to the global economy, including our own economy, by the COVID-19 pandemic”.

  3. Blockchain technology to help the FIRS enhance tax Administration

    Third,  the FIRS is confident that its Data-4-Tax Initiative, a blockchain technology which FIRS is jointly developing with the internal revenue service of the 36 states and that of the FCT, will enable the FIRS have “seamless view and access to all economic activities of individuals and corporate bodies in Nigeria going forward, including money spent on digital commerce”. The initiative is under the auspices of the Joint Tax Board.

  4. Establishment of a tax office for Non-resident persons 

    Lastly, the FIRS has set up a specialized office, the Non-Resident Persons Tax Office, to manage the taxation of non-resident persons and cross-border transactions. This includes all tax treaty operational issues and income derived from Nigeria by non-resident individuals and companies.


From a Nigerian perspective, the OECD Framework, while commendable, reasonably easy cause of concern for a developing country such as Nigeria. Considering that different OECD members are at various levels of economic growth and development, it is a tough challenge for the OECD to cater to the peculiar or unique factors each economy faces in an international framework for taxing international businesses.

Therefore, the FIRS’s decision to apply local solutions to the problem of taxing MNEs with no physical but significant economic presence in Nigeria seems plausible. Besides, being the biggest economy in Africa, Nigeria has immense potential in the digital economy. Nigeria cannot, in our opinion, afford to adopt international frameworks that may not adequately address her concerns. The Nigeria government must make or adopt laws, policies, and regulations that are beneficial to her local economy, not just for the sake of making or adopting them. 

Will Nigeria adequately implement the SEP Rules, deploy its proposed technology, and manage the new tax office for non-resident persons? Time will tell.

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