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The OECD’s Global Tax Deal and its Implications for Nigeria

In July 2021, the Organization for Economic Co-Operation and Development (OECD) had announced that there would be changes to the international tax rules applicable to multinational companies across the world.[1] This new arrangement would entail a final detailed implantation plan released in October 2021 with an effective date set for 2022.

In July 2021, the Organization for Economic Co-Operation and Development (OECD) had announced that there would be changes to the international tax rules applicable to multinational companies across the world.[1] This new arrangement would entail a final detailed implantation plan released in October 2021 with an effective date set for 2022.

This approach is borne from Pillars 1 and 2 of OECD’s Base Erosion and Profit Shifting (BEPS), which advocate a global tax rate and allocation of more revenue to market-facing jurisdictions. MNEs (especially digital services outfits) will pay less tax to the headquarter and more to where they service customers. In addition, MNEs will now be subject to a global companies’ income tax rate of 15%.

In a bid to optimize, this development might usher in the need for corporate restructuring by digital services outfits, who currently adopt various tax planning schemes such as the Uber’s Double Dutch or Google’s Irish Sandwich systems.  As of October 2021, 136 countries have signed this agreement with countries such as Kenya, Nigeria, Pakistan, and Sri Lanka yet to agree to the details of this arrangement. This article centers on the exclusion of the extraction sector and the implications of the global tax deal for Nigeria.

Exclusion of the extractive sector

The global tax deal involves taxing service companies in the jurisdiction where their services are offered, i.e., the market jurisdiction. As pointed out above, a change has been made from digital services tax operated by most countries to a broad rate. This pillar applies to all MNEs with a global turnover of €20 billion[2]  and a pre-tax margin of 10% and above; with the exception of the extractive and regulated financial services industry.

BEPS has always targeted digital services companies. The reason for the exception of extractive sector is quite obvious- most extractive business are brick and mortar businesses, and are quite unlikely to avoid taxes in the resource-owning country. If these rules were applied to the extractive sector, by the operation of the market jurisdiction theory, a huge chunk of these profits from the sale of those extractives would be shifted from the resource-owning country to other locations where they are marketed- USA, UK, China, Germany which is the entire point of the BEPS. For instance, China and USA are the biggest markets for cobalt which is used in manufacturing Apples’ iPhone and other high end technology products[3]. But the largest supplier and source of Cobalt is the DR Congo.

This exception is a positive development while we continue to debate whether Nigeria should sign or not. For Nigeria’s 2022 budget, oil revenue is set at N3.53 trillion, up from 2021’s N2.01 trillion representing a 43% increase[4]. In addition, the Petroleum Industry Act which is expected to spike investments and increase revenue in the oil and gas sector from 2022 upwards at least. 

It is clear that where the OECD intends to include the extractives sector, a separate mechanism should be designed for its taxation and Africa must be at the forefront of this discussion as a major depositary of these resources.  

Nigeria and the Global Tax Deal

Allocating more revenue for market-facing jurisdictions seems equitable, especially with Nigeria having over 200 million potential customers to whatever is being cooked at the Silicon Valley. But this comes at a time when Nigeria is slowly phasing into diversification and moving away from total reliance on its oil receipts with huge tax expectations from the digital services sector.[5] The companies’ income tax which is currently 30% for MNEs, when compared to the 15% rate set by the OECD, might seem low and inadequate to sustain such a peculiar economy.

The benefit of this deal is quite obscure for Nigeria, more so at a time that attempts to tackle evasion by digital services companies are being made. For instance, the Significant Economic Presence (“SEP”) Order has given a new meaning to what constitutes permanent establishment. The SEP Order allows even the most distant company to fall within the Nigerian tax net once it performs a taxable activity, as opposed to the previous interpretation under the former Companies Income Tax Act.

OECD members and in fact most developed countries where these digital services companies are headquartered do not really stand to lose anything; as is being touted especially by Ireland. From a tax and foreign direct investment (FDI) standpoint, Ireland had operated a 12% tax rate for over 10 years. This lured big players such as Google, Apple, Pfizer etc. to set shop in Ireland. Now, the trick is not in the companies’ income tax rate, it is in employment tax (at a maximum rate of 40%)[6], indirect taxes such as capital gains and stamp duties etc.  

With the UK gone from the European Union, Ireland became the only English-speaking member of the EU, a great factor that has been considered by quite a number of US companies finding an EU headquarter. Agreeing to this deal will most likely not affect Ireland in anyway. Flip the coin heads or tails in this situation, countries like Ireland will always win. Can the same be said for emerging economies where these companies only come to sell services and do not really employ or carry on substantial taxable activities, save occasionally withheld taxes on transactions?


The global tax agreement is a culmination of decades of research, but certain issues are to be considered for an effective deployment of the mechanisms. Some of these issues include:

  • What dispute resolution systems are in place, to ensure there is no double taxation as to the mandatory profits allocated to these market jurisdictions? The agreement has not touched on dispute resolution mechanisms especially in the emerging economies where operating these types of disputes is a challenge.
  • What is the treatment of goods or services that are products in their market jurisdictions? We assume the procedure is retained however; it would be beneficial if the OECD made a clear position on this.

Finally, the situation in Nigeria with respect to this tax deal replicates itself in a host of other countries across Africa and Asia. It is therefore worrisome that some developing countries have gone ahead to agree to this lofty idea- an agreement they were not included in during negotiation. Perhaps, in an alternate universe, where Nigeria has the Celtic Tiger or Netherland’s tax to GDP ratio, this would be workable. But our economic realities are such that our finances might bear the brunt of trying to be among the cool kids a little too soon.

International businesses are enjoined to consult their tax experts to assess the risks and implications of this new development on their operations.

Arthur: Ibrahim Moshood, Associate Attorney, Centurion Law Group

Centurion Law Group:

Reach out to our Centurion tax team, comprising of tax experts, lawyers, accountants and business professionals who advice on a range of complex tax and regulatory compliance issues across Africa.

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