CHAPTER TWO

LITERATURE REVIEW

2.1 INTRODUCTION

This chapter is designed to provide reviews of concepts, definitions, views as

well as ideas used in the study.

It also provides reviews of literature with respect to challenges faced by tax

administrators when taxing digital companies or corporations. The chapter
dwells more on the concept of the digital economy, digital taxation,
significant economic presence, permanent establishment and base erosion
and profit shifting(BEPS). This chapter is segmented into three parts:
conceptual framework , empirical review and the theoretical framework
which is done in order to help the researcher to be acquainted with the area
of study.

It is hoped that the review will form the basis upon which the analysis will be
made and conclusion drawn therein.

2.2 CONCEPT OF TAXATION

The government of Nigeria, like others in different parts of the world has
legislative powers to impose on its citizens any form of tax and at whatever
rate it deems appropriate. A perusal of the Nigerian tax laws shows that no
attempt has been made to define the term “tax”. However, the oxford
advanced learner’s dictionary defines ‘tax’ as: Black law dictionary defines
tax as: “Money that you have to pay to the government so that it can pay
for public services”. “Monetary charge imposed by the government on
persons, entities or property, levied to yield public revenue”.

Thomas Cooley defines taxes as: “Money that you have to pay to the
government so that it can pay for public services”. “Monetary charge
imposed by the government on persons, entities or propparty, levied to yield
public revenue”. “Enforced proportional contributions from persons and
property, levied by the state, by virtue of its sovereignty, for the support of
government and All public needs.”

In simple terms, tax is a compulsory contribution levied by a sovereign power

on the incomes, profits, goods, services, or properties of individuals and
corporate persons, trusts, and settlements. Such taxes, when collected,, are
used for carrying out governmental functions, such as maintenance of law
and order, provision of infrastructure, health and education of the citizens, or
as a fiscal tool for controlling the economy.

The process of levying and collection of tax from taxpayers is known as

taxation.

2.2.1 DIGITAL ECONOMY

The digital economy is an economic system that uses digital technologies to

support business, social, cultural, and economic activities. It’s characterized
by online transactions and connections between individuals, businesses,
devices, data, and operations. The digital economy differs from a traditional
economy because of its reliance on digital technology, online transactions
and its transformative effect on traditional industries. Digital innovations
such as the internet of things (IoT), artificial intelligence (AI), virtual reality,
blockchain and autonomous vehicles all play a part in creating a digital
economy.

Don Tapscott first coined the term digital economy in his 1995 bestselling
book The Digital Economy: Promise and Peril in the Age of Networked
Intelligence. The digital economy is increasingly becoming the economy
itself. International borders are closing in and distance is no longer a barrier
to sealing business deals.

The essential elements of the digital economy include:

[Link] and intensive use of information and communication

technologies (ICT);

[Link] of knowledge;

[Link] of information into commodities; and

[Link] ways of organizing work and production.

2.2.2 TAXATION OF THE DIGITAL ECONOMY

Taxation of digital transactions has become a herculean task for tax

authorities all over the world because digital transactions require little or no
physical presence of the parties to which income accrues, in the jurisdiction
of the consumer. It is usually challenging to determine whether tax on cross
border transactions should be paid to the jurisdiction where value is created
or consumed. Moreover, the general rule for taxing income of foreign
enterprises in a given jurisdiction is by establishing that the entity is
physically present or has a permanent establishment in such a country. Thus,
profits derived from foreign jurisdictions might end up not being taxed in the
jurisdiction of the consumer where money was parted with.

The Organisation of Economic Cooperation and Development (OECD) and the

European Union (EU) have offered certain recommendations to address
incidences of non-taxation of income arising from digital transactions. These
include the introduction of a digital service tax and the concept of a virtual
permanent establishment to help determine the incidence of permanent
establishment for tax purposes.

Nigeria seems not to have made significant progress in the taxation of digital
transactions although myriads of digitalized transactions are carried on in
Nigeria daily. Although the Nigerian tax authorities are working towards
ensuring digitalization of the tax collection process, this digitalization has not
been extended to cover effective monitoring and collection of taxes from
digital transactions.

2.2.3 PRINCIPLES OF DIGITAL TAXATION

Just as with other areas of tax policy, it is important to evaluate digital taxes
using principles of sound tax policy: simplicity, transparency, neutrality, and
stability. Many digital tax policies fail to adhere to these principles by design.

A. Simplicity

Tax codes should be easy for taxpayers to comply with and for governments
to administer and enforce, Digital tax policies fail the simplicity test when
they leave important definitions unclear or add unnecessary. Compliance
challenges for businesses that are trying to understand how much tax they
owe. This arises in unclear standards for identifying in-scope business
elements for virtual permanent establishments and digital services taxes.
Though the broad designs of some digital taxes are conceptually simple, the
complexity arises in the practical details of identifying relevant users and
revenues, sometimes without clear guidance on how to do so. Governments
will also face challenges evaluating whether a digital company has paid the
correct amount of tax, especially for digital tax policies that rely on the
location of users.

B. Transparency
Tax policies should clearly and plainly define what taxpayers must pay and
when they must pay it. Disguising tax burdens in complex structures should
be avoided. Digital taxes are sometimes designed as thinly veiled proxies for
other taxes (either consumption or corporate taxes) rather than pure
extensions of those existing policies. Additionally, digital services taxes and
gross-based withholding taxes usually have low statutory rates, but because
they apply to revenues rather than income the tax burden is effectively
much higher than the rate implies.

C. Neutrality

The purpose of taxes is to raise needed revenue, not to favor or punish

specific industries, activities, and products. Some digital taxes work to create
neutrality betwe digital business models and other businesses. Extending
consumption taxes to include digital products and services can result in
neutral treatment of consumption. Expanding permanent establishment rules
to create equivalent virtual permanent establishments in line with clear
market connections can also improve neutrality. However, targeted digital.
Services taxes and preferences for hi-tech firms create unequal tax
treatment based on a business’s industry or sector

Stability

Taxpayers deserve consistency and predictability in the tax code,

Governments should avoid enacting temporary tax laws, including tax
holidays, amnesties, and retroactive changes. Many digital tax policies are
designed to be temporary, with some timelines tied to international
agreements on changes. Temporary tax policy creates. Uncertainty and
challenges for both administration and compliance. Additionally, digital taxes
often target specific business activities that are constantly evolving as the
digitalization of the economy continues. Policies. Should not be designed to
rely on definitions of business activities that are subject to change in a
dynamic economy.

2.3 Permanent establishment

A permanent establishment (PE) is when a business has an ongoing and

stable presence in a country or state outside of its home base and is,
therefore, liable to taxes imposed by that jurisdiction. In short, a PE is a
corporation that creates a taxable presence outside of its territory.

The basic treaty definition of “permanent establishment” is “a fixed place of

business through which the business of an enterprise is wholly or partly
carried on”. That definition incorporates both a geographical requirement
(i.e. that a fixed physical location be identified as a permanent
establishment) as well as a time requirement (i.e. the presence of the
enterprise at that location must be more than merely temporary having
regard to the type of business carried on). In order to be able to conclude
that part or the whole of the business of an enterprise is carried on through a
particular place, that place must be at the disposal of that enterprise for
purposes of these business activities. The treaty definition of permanent
establishment provides, however, that if the place is only used to carry on
certain activities of a preparatory or auxiliary character, that place will be
deemed not to constitute a permanent establishment notwithstanding the
basic definition.

The basic definition of permanent establishment is supplemented by a rule

that deems a non- resident to have a permanent establishment in a country
if another person acts in that country as an agent of the non–resident and
habitually exercises an authority to conclude contracts in the name of the
non- resident.

2.4 Base Erosion and profit shifting

Base Erosion

Base erosion is the use of financial measures and tax planning to reduce the
size of the company’s taxable profits in a country. It is often achieved by
structuring income to have more favourable tax treatment or by finding ways
to write off certain expenditure against taxable income. This has the effect of
reducing a company’s tax payment below what it would otherwise has been.

Profit shifting

Profit shifting involves making payment to other group companies in order to

move profit from high-tax jurisdictions to lower-tax regimes. This serves to
increase the overall profits available to the group shareholders. Often, this
intra-group payments take the form of royalties and interest payments, as
these expenses can be deducted from pre- tax profits. Another issue with
these types of payment is that some jurisdictions have lower tax rates on
them when received as income by other persons.

Essentially, base erosion and profit shifting (BEPS) refers to corporate tax
planning strategies used by multinationals to “shift” profits from higher-tax
jurisdictions to lower-tax jurisdictions, thus “eroding” the “tax- base” of the
higher-tax jurisdictions.

2.5 Significant economic presence (SEP)

The Finance Act, 2019 (“the Finance Act”) introduced the concept of
significant economic presence (SEP) to expand the scope of Nigerian tax on
foreign companies deriving income from their activities in Nigeria which were
hitherto not captured in the tax net. Consequently, the Companies Income
Tax (Significant Economic Presence) Order, 2020 (“the Order”) was issued by
the Federal Government of Nigeria. This order was signed by the Honourable
Minister of Finance (HMoF), Budget and National Planning.

Significant Economic Presence is provided for in section 13(2) of CITA is the

Nigerian companies’ income tax legislation that provides the basis for which
a non-resident company will be liable to tax in Nigeria. The section provides
nexus and profit attribution rules

Under the SEP Order, a foreign entity operating a digitized business model
will be deemed to have SEP in Nigeria, for taxation, where such entity:

[Link] gross turn over or income of more than N25 Million Naira or its
equivalent in Other currencies from carrying out the following:

a. Streaming or downloading of digital content to any person in Nigeria

b. Transmission of data collected about Nigerian users, generated from

their use of a Digital interface.

c. Provision of goods or services directly or indirectly through a digital

platform to Nigeria.
d. Provision of Intermediation services through digital platforms that link
suppliers and customers in Nigeria.
1. Uses a Nigerian domain name (.ng) or registers a website address in
Nigeria; or
2. .Has a purposeful and sustained interaction with persons in Nigeria
by customizing its digital page or platform to target persons in
Nigeria, such conduct will include the display of prices for goods and
services in Nigerian currency.

By the provisions of the SEP Order, activities carried out by

connected persons (associates or Affiliates) shall be aggregated to
determine whether the N25m threshold has been met. A Business
will be considered as an associate of another where one person
participates directly Or indirectly in the management, control, or in
the capital of both businesses.
Also, the Act makes exempt entities covered under any multilateral
agreement to which Nigeria is a party, stipulating that such an
entity will be treated in accordance with the agreements. This
provision envisages the coming into effect of a coordinated
international treaty with respect to the subject.
For services, a foreign entity providing technical (including training,
advertising, the supply of personnel), professional, management or
consultancy services shall have a SEP in Nigeria in any accounting
year, if it earns any income or receives any payment from a person
resident in Nigeria or a fixed base or agent of a foreign entity in
Nigeria. However, the following payments are exempted from this
provision, i.e payment made:
a. to an employee of the person making the payment under a
contract of employment.
B. for teaching in an educational instituting or teaching by an
educational institution; or
c. foreign fixed base of a Nigerian company to my
Digital service tax
Digital services taxes are gross revenue taxes with a tax base that
includes revenues derived from a specific set of digital goods or
services or based on the number of digital users within a country.
Nigeria has become one of the few countries to comply with the
OECD 137-country agreement to renegotiate global taxing rights,
and has acted unilaterally at the start of 2022 by introducing a 6%
Digital Services Tax. This comes as OECD Pillar 1 agreement waivers

2.3 THEORETICAL REVIEW

2.3.1Ability to pay theory of Taxation

Kendrick (1939) propounded this theory which states that taxes

should be levied on individuals and companies according to their
ability to pay. This implies that tax burden should be placed on
companies and individuals with higher income. He stated that
money for public expenditure should come from

“him that hath” instead of “him that hath not”.

This implies that more tax burden should be placed on companies
and individuals with higher income. In other words, individuals and
companies (including SSCs) should pay taxes according to what
they earn. Someone who earns more should pay more tax while an
individual who earns less should pay less tax. For the purpose of
digital companies(foreign companies )that have significant
economic presence in Nigeria , taxes should be charged based on
the revenue gotten from [Link] is in line with progressive
taxation principle, fairness and equity.

The ‘ability to pay’ theory, as outlined by economists like Slade

Kendrick, Stuart Mill, and Harry Gunnison Brown, centres on the
idea that taxation should be proportionate to an individual’s
financial Capability. Kendrick simplifies this notion by stating that
those with greater financial resources should Bear a heavier tax
burden compared to those with less. Mill adds depth by suggesting
that taxes should Ensure a fair sacrifice relative to one’s financial
status, hinting at a preference for progressive taxation To account
for the declining value of money for the wealthy. Brown echoes this
sentiment, advocating For taxes to align with one’s income or
wealth to prevent undue financial strain. This is indeed the basis of
‘progressive tax,’ as the tax rate increases by the increase of the
taxable amount. This principle is indeed the most equitable tax
system, and has been widely used in industrialized economics. The
usual and most supported justification of ability to pay is on
grounds of sacrifice.

2.3.2 The Benefit theory of Taxation

The benefit approach was developed by two Swedish economists-

Johan Knut Wicksell and Erik Lindahl. They concluded that the state
should levy taxes on individuals according to the benefit conferred
on them. The principle stands that the greater the benefits an
individual accrues from state activities, the greater their
contribution should be to government pockets. Many scholars have
proposed varying interpretations of the Benefit Theory of taxation;
To Mr Neill, the Benefit Theory holds that the taxes which an agent
pays should reflect the benefit that he receives from the mix of
goods and services supplied by the state.

To Rahman, the benefit theory states that the taxes should be

based on the benefit received Rather than the income received as
those who receive higher benefits must pay accordingly. For
Example, commuters must pay for roads, library patrons must pay
for libraries, students must pay for Education, etc. To Lindsay, the
benefit theory evaluates tax burdens in light of the benefits
received By the taxpayer from the state. The underlying idea to her
is that of reciprocity: a fair taxation scheme Is one in which taxes
owed by a taxpayer bear the proper relationship to the benefits that
the taxpayer Receives from the state.

This implies that small digital companies (locally or

internationally)should honor their tax obligation to the relevant tax
authority based on the benefit they derived from the payment of
taxes, the higher the benefit they derived from the payment of
taxes, the more they pay subsequent taxes. This theory in the
subject of our study predicts that, the income generated by digital
companies depends on the benefit they derived from the
government by honoring their tax obligation.

2.3.3 Modernization theory

Modernization theory was primarily propounded by Walt Whitman

Rostow. His book “The Stages of Economic Growth: A Non-
Communist Manifesto” outlined the key stages of modernization
theory, suggesting that all countries move through a set of stages
to reach a modern, developed state.

Modernization theory is a theory used to explain the process of

modernization that a nation goes through as it transitions from a
traditional society to a modern one. The theory has not been
attributed to any one person; instead, its development has been
linked to American social scientists in the 1950s.

This theory is significant to the subject of our study as Taxation in

Nigeria is no longer based on only companies that have permanent
establishment in Nigeria yuhbut also digital companies i.e
companies which do not have permanent establishment but there is
a significant economic presence in that country.

This has led to modernization of tax policies which also helped to

increase the tax net that results to increase in revenue for the
government

2.4Empirical review
This section reviews previous studies that have been done as they
relate to this study. It also reviews policy proposals needed for the
study.

A) Policy proposals from OECD and their implications in African

countries.

B) Policy Proposals from the European Union.

C) Arguments against the OECD & EU policy proposals.

D) Recommendations by the United Nations and their implications

in African countries.

E) Recommendations from Individuals.

2.4.1 Policy proposals from OECD and their implications in

African countries

The OECD/G20 Inclusive Framework on Base Erosion and Profit

Shifting (BEPS) has reached a two-pillar agreement to address tax
challenges brought about by the digital economy. Pillar 1 focuses on
multinational enterprises (MNEs) with global revenue exceeding 20
billion euros and a profitability rate of 10% or more, which may be
reduced to 10 billion euros if certain conditions are met. The
framework outlines a special purpose nexus rule allowing for
revenue allocation to market jurisdictions when the MNE earns at
least 1 million euros, or 250,000 euros for smaller jurisdictions with
GDP under 40 billion euros. The framework aims to minimize
compliance costs and allocate 25% of residual profits to market
jurisdictions based on revenue allocation (OECD, 2021). The second
pillar of the OECD/G20 Inclusive Framework on Base Erosion and
Profit Shifting, known as the Global Anti-Base Erosion Rules (GloBE),
consists of two domestic regulations that work together: the Income
Inclusion Rule (IIR), which requires a parent company to pay
additional tax on the low-taxed income of a subsidiary, and the
Undertaxed Payment Rule (UTPR), which denies tax deductions or
requires an adjustment for low-taxed income not taxed under the
IIR. Additionally, there is a treatybased rule called the Subject to Tax
Rule (STTR) that allows the source country to impose limited source
taxation on certain payments to related parties that are taxed
below a minimum rate. This tax will be credited as a “covered tax”
under the GloBE rules (OECD, 2021).

The Two-Pillar Solution will ensure MNEs are taxed at a minimum

rate of 15% and will allocate the profits of the largest and most
profitable MNEs to countries around the world. The goal of Pillar
One is to create a fairer distribution of profits and taxing rights
among countries for the largest MNEs, the winners of globalization.
Tax certainty is a key feature of the new rules, including a
mandatory and binding dispute resolution process for Pillar One, but
with a provision for developing countries to opt into a more lenient
approach in certain circumstances. The profit allocation under Pillar
One also includes the elimination of Digital Services Taxes and
similar measures, ending trade tensions, and providing a simplified
approach to the arm’s length principle, particularly for low-capacity
countries. Pillar Two sets a minimum standard for corporate income
tax competition through the introduction of a global minimum tax
rate of 15% that countries can use to protect their tax bases (the
GloBE rules). Tax competition is not eliminated but has agreed
limitations, and incentives for economic activity are accommodated
through a carve-out. The STTR in Pillar Two protects developing
countries’ right to tax certain base-eroding payments (like interest
and royalties) when they are taxed below a minimum rate of 9%
(OECD, 2021).

Pillar 1 seeks to change the tax system by reallocating and

extending the revenue base between or within nations. It makes
three policy recommendations: user participation, marketing
intangibles, and significant economic presence. The concept of user
participation suggests giving a percentage of earnings from highly
digitalised firms to regions with an active user base, regardless of
physical location. Marketing intangibles are concerned with
allocating uncommon revenue to market jurisdiction depending on
associated risks. When a non-resident firm has continuous and
intentional contact with a jurisdiction via digital technology,
significant economic presence recommends assigning earnings to
that jurisdiction. To provide a uniform strategy to taxing the digital
sector, the OECD has scaled back these ideas and suggested a
Unified strategy under Pillar 1. The OECD’s four key concerns are:
redistributing taxing authority in favor of market jurisdiction,
introducing a novel nexus regulation that does not rely on physical
presence, simplifying the tax system beyond the arm’s length
notion, and improving tax certainty

However, according to Latif, Ongore & Adegboye (2022), there is a

concern that the consensus solution may be driven by the interests
of individual members rather than sound economic principles. This
may prevent underdeveloped governments, notably those in Africa
with developing ICT sectors, from successfully using internet data
to tax revenue generated by digital business models. The authors
explained that the OECD suggests two forms of taxable profits
under Pillar 1: Amount A and Amount B. Amount A seeks to
establish a new taxing right to reflect profits connected with
qualified enterprises’ active and continuous participation in the
market jurisdiction. Using a formulaic approach, a percentage of the
residual earnings would be attributed to the market jurisdiction.
Amount B, on the other hand, provides a fixed return for basic
marketing and distribution services performed in the market
jurisdiction in accordance with the arm’s length principle. But there
are worries regarding how these taxation powers will be
implemented, particularly in African countries. Amount A is
allocated based on a €1 million threshold in the jurisdiction, which
may favor rich nations. Smaller countries, notably African states,
have a lower €250,000 barrier. It is unclear whether these residual
gains will generate enough money for African market countries.

The OECD's policy approach appears to lag behind Africa in terms of

technicality and access to financial data required to calculate the
share of residual profits subject to tax. The implementation of a
Qualified Domestic Minimum Top-Up Tax (QDMTT) under Pillar 2
may benefit African countries by putting a minimum tax into
domestic law. This could help in calculating the residual profit under
Pillar 1 for African market states (Latif et al., 2022). According to a
2023 Vanguard news, when a multinational business (MNE) group
has yearly revenue of more than €750 million in at least two of the
four years prior to the test year, the Model Rules and the 15%
minimum corporate tax rate are in effect. Only 23 of the 140
African nations are currently a part of the OECD effort, raising
questions about how the arrangement treats the interests of
emerging countries (Olakanye, 2023).

Many African nations, notably Nigeria, contend that the Pillar Two
regulations unfairly favor wealthy nations because the G7 and EU
are slated to get the majority of the cash, while lowerincome states
are only expected to receive a small amount. Additionally, many
MNEs in Africa with merely a digital presence find the €750 million
threshold to be too high, making the restrictions less effective for
these nations (Olakanye, 2023). Nigeria has its own strategy to tax
non-resident businesses based on their economic activity and sales
in Nigeria by enacting Significant Economic Presence (SEP)
guidelines through the Finance Act of 2019. This enables Nigeria to
tax numerous MNEs, but the implementation of the Model Rules
may eliminate some tax incentives that draw foreign investment,
discouraging multinational corporations from investing in Nigeria
(Olakanye, 2023). The author suggests that Nigeria and other
African countries participate in the OECD/G20 Inclusive Framework
on BEPS in order to establish a comprehensive strategy that takes
into account the special circumstances of developing economies.
Although the tax base has been widened by Nigeria’s current
corporate tax structure and SEP regulations, the Model Rules—with
the necessary modifications—might prove to be more
advantageous in the long term for ensuring equity and generating
revenue (Olakanye, 2023). Also, according to a BusinessDay
release, for emerging nations, the minimum tax regime brings both
opportunities and difficulties. Although it is anticipated to boost
corporate income tax receipts, it might discourage multinational
corporations from making investments in these nations. Tax
incentives are frequently used by developing countries to entice
investors, and certain governments, like Nigeria, Kenya, Pakistan,
and Sri Lanka, have not yet ratified the pact (Omorogbe, 2022).
There is no information on how much of the anticipated $150 billion
boost in global tax income will go to underdeveloped nations. It is
unclear whether tax revenue will offset a possible decline in foreign
investment brought on by the minimum tax (Omorogbe, 2022). The
author concluded that the minimum tax system is a step in the
right direction toward addressing Base Erosion and Profit Shifting by
multinational corporations, but the OECD/G20 should take into
account the Issues stated by developing nations, such as
implementation costs and decreased investment inflows. Since
international capital input is essential to developing countries’
progress, they should be free to negotiate tax accords that serve
their interests.

2.4.2Policy Proposals from the European Union

In response to the possibility of unilateral actions, the European

Commission presented two proposals in March 2018 aimed at
promoting fair and effective taxation of the digital economy. The
first proposal introduced a temporary 3% digital services tax (DST)
to be applied to the revenues generated from specific services
provided by companies with global revenues from those services
exceeding €750 million and EU taxable revenues of €50 million. The
tax would be collected by the member states where the users of
the services reside, based on a distribution of global taxable
revenues among countries using specific allocation keys. This
interim solution was intended to be temporary until the
comprehensive reform proposed in the second proposal could be
implemented (Szczepański, 2021). In the long term, updating the
idea of a permanent establishment to include a significant digital
presence is necessary. A company will be considered to have a
significant digital presence in a member state for tax purposes if
they meet one or more of the following criteria in a taxable year:
earning at least €7 million annually in the member state, having
over 100,000 national users, or having more than 3,000 digital
services contracts with national business users (European
Commission, 2018). The proposal calls for a unified reform of
national corporate income tax systems and the implementation of
rules for allocating profits to digital companies. The goal of the
proposed EU-wide approach is to prevent hindrances to start-ups,
scale-ups, and SMEs, minimize market fragmentation, and reduce
any negative impacts on investment, innovation, and growth
(European Commission, 2018).

2.4.3 Arguments against the OECD & EU policy proposals

According to Olbert & Spengel (2019), the main objective of the two
proposals is to assign tax jurisdiction to the country where the users
are located. They argue that transfer pricing methods can be
adapted for data-driven businesses, similar to traditional
businesses, as there are businesses that specialize in data mining
processes. De Wilde (2018) noted that all the proposed tax reforms,
both at an international and European level, are moving away from
the current international tax system. They aim to assign the tax
base to market jurisdictions, even though there is no clear
agreement on switching from an origin-based model to a
destination-based model. However, the author pointed out that the
proposed measures have analytical difficulties, with the exception
of a complete overhaul of the current system and the introduction
of a new destination-based taxation model based solely on sales.
The short-term tax proposals aim to target the technology industry
or certain parts of it, such as those that create value for users. This
includes taxes like the equalization levies based on turnover,
suggested by France, India, the OECD, and the European
Commission, withholding taxes on digital products and services,
taxes on revenue from collecting digital data, taxes on digital
advertising, and taxes on digital marketplaces/platforms, as
proposed by the European Commission and Hungary (De Wilde,
2018).

De Wilde (2018) argues that the proposed taxes aimed at the tech
sector, referred to as “digitaxes,” are misguided and infeasible.
Attempting to isolate a portion of the economy for tax purposes is
not feasible and would result in multiple taxation, inequities, market
distortions, legal uncertainty, and red tape. Regardless of the legal
criteria and definitions used, these taxes would bring trouble for
both tax authorities and taxpayers. Additionally, it would be
challenging to determine if these taxes could be credited against
corporate taxes, deducted as a cost from the targeted firms, or
applied equally to both domestic and cross-border business
operations. The proposed digitaxes have several drawbacks and
limitations, regardless of their political feasibility. It is important to
remember that growth and job creation can be hindered if the
benefits of digitalisation are taxed away. Digitalisation accelerates
growth, and we should not let taxes put a damper on this positive
impact (Olbert & Spengel, 2017). The political viability of these
taxes should not be the sole focus, as their negative effects on the
economy should be considered as well (De Wilde, 2018). The
current definition of permanent establishment is focused on
determining tax jurisdiction in the country where a business
originates, while the proposed changes involving a turnover-based
approach aim to establish tax jurisdiction in the country where the
business operates (De Wilde, 2018). The author, however, proposed
a company tax system based on the destination of the company’s
activities, rather than its origin, on the basis of analytical reasoning.
The idea of isolating the digital economy from the rest of the
economy for tax purposes is flawed. All the current tax reform
proposals, including the turnover-based equalization levies and
withholding taxes, are trying to separate tech companies and their
transactions from non-tech companies and their transactions. This
approach would cause market disruptions, inequities, unpredictable
taxation, tax cascading, legal ambiguities, and bureaucratic hassle.
De Wilde suggests that instead of trying to fix the broken
international tax framework with quick fixes, it might be worth
exploring genuine corporate tax reform. The literature offers
various suggestions for reform, such as global profit-splitting
systems, formulaic systems, and destination-based cash flow taxes
(De Wilde, 2017).

2.4.4 Recommendations by the United Nations and their

implications in African countries

In 2020, the United Nations Tax Committee released a proposal for

the taxation of payments for digital services. The proposal is a draft
for a new article 12B, which will be added to the U.N. Model
Taxation Convention, created by a group of 13 developing states. In
October 2020, the U.N. released a revised draft of the new article
12B. This proposal, like the OECD’s Pillar One, provides source
countries the right to tax automated digital services. However, the
U.N. Proposal is structured as a gross income tax, while the OECD’s
is a net income tax. Companies would have to pay the Article 12B
tax either by withholding a portion of their gross income or by
paying a net income tax on a portion of their profits from
automated digital services. The “qualified profits” are considered
30% of a company’s net income from automated digital services,
and the rate is determined by the source state’s domestic law.
Unlike Pillar One, the U.N. Proposal does not recommend a new
nexus or require the application of thresholds (Harpaz, 2021).

Another recommendation is the principle–based approach from the

UN FACTI Panel which is in favor of a global tax system that is
legitimate, accountable, transparent, and equitable. It considers
these ideas to be crucial factors in promoting financial integrity.
FACTI Panel advises creating specific institutions to ensure the
application and enforcement of these financial principles because
they cannot operate in a vacuum. In order to support stronger laws
and institutions required to facilitate greater transparency and
stronger international cooperation for enacting a minimum
corporate tax and taxing digital giants, it suggests an independent
agreement toward the establishment of a Global Pact for Financial
Integrity for Sustainable Development (Latif et al., 2022). This
approach would entail information and data sharing among
countries in order to establish a clear tax nexus. According to Latif
et al., 2022, It complements the work done under BEPS and
highlights the need for inclusive and equitable taxing rights based
on financial data availability. It is possible to move the OECD BEPS
Action 1 on Pillars 1 and 2 into this Global Pact so that each UN
Member State can actively engage in framing the nexus and profit
allocation rules at the UN General Assembly through discourse and
debate as opposed to lobbying and consensus-building. Although it
has a limited membership, the Global Forum on Transparency and
Flow of Information already offers a venue for the financial flow of
data between states and multinational digital enterprises. The
various requirements and capabilities of African states are not
considered. This threatens the validity of the global tax system,
which can be protected by the UN (Latif et al., 2022).

In conclusion, building capability is necessary for tax authorities in

Africa to track financial data and identify the gains earned by digital
multinationals to apply BEPS (Base Erosion and Profit Shifting).
Since the OECD does not offer a platform for resources containing
transparent financial data, coordination through the UN is required.
It could be required to create a new intergovernmental organization
for tax-related issues. To protect their taxing privileges and avoid a
race to the bottom, African governments should negotiate new
nexus and profit allocation rules under a UN Tax Convention. Large
firms in the financial services and extractive industries should be
included, as their exclusion from the definition of multinational
enterprises could result in considerable losses in tax income. The
informal economy and parallel markets in Africa make it difficult to
track financial and transactional information. It is required to
upgrade the infrastructure and management of digital data. The
overall capacity in this area remains low, despite significant
progress. If BEPS laws are implemented without improving financial
integrity, tax income may be lost. The FACTI Panel’s suggested
Centre for Monitoring Taxing Rights can aid in data collection and
analysis to address this problem.

2.4.5 Recommendations from Individuals

Daniel Bunn, Elke Asen & Cristina Enache’s

Recommendations

Bunn et al. made the following points concerning the taxation of

digital services and products:

Consumption tax expansion: Including digital services and

products in consumption taxes results in a fair and neutral tax base.
Countries should strive for a broad consumption tax base that
treats digital and physical enterprises equally and minimizes
compliance costs.

• Digital Services Taxes (DSTs): They advocate reducing taxes

on digital services to avoid negative economic consequences. Clear
timetables for the abolition of DSTs should be established, and
regulations should prevent double taxation and relieve firms from
paying taxes on the same income twice.

• Tax preferences for digital businesses: A level playing field is

created when these companies receive preferential treatment.
Countries should think about whether these choices actually
encourage innovation or only offer tax advantages. It is advised to
avoid giving intangible assets special treatment and to treat all
investments in capital assets equally.

• Rules for Digital Permanent Establishments (PE): It is

difficult and risky to doubletax businesses by changing PE criteria
for digital enterprises. Countries should reject unilateral strategies
that could lead to double taxation and impede coordination in favor
of multilateral dialogue to resolve the issue of taxing digital
business income

. • Gross-based withholding taxes: It is not advised to tax digital

enterprises using gross-based withholding taxes on digital services.
They shouldn’t take the place of consumption or income taxes
because they are ineffective and unclear.
Lucas-Mas & Janquera Varela (Creation of a New Global
Internet Tax Agency)

Lucas-Mas & Janquera Varela (2021) have suggested the

establishment of a Global Internet Tax Agency (GITA) to deal with
the lack of an international tax legal system and global tax
authority. In the digital world, different countries have different
views on tax rights, which can cause the erosion of tax bases in
other countries. This proposal is a response to the need for a unified
approach to tax administration in the digital economy.

GITA would provide technical support and information to countries

that choose to implement a digital data tax (DDT) in their
territories. With the global nature of the digital economy and
internet users, national tax authorities need access to information
on digital transactions to properly administer the tax. GITA would
provide information and technical expertise to assist in tax
administration, particularly in low-tax-capacity countries where
such resources may be limited. The decision to introduce DDT
would still be made at the national level.

The DDT would be levied on all internet users with a significant

digital presence (SDP) in a country, capturing both the domestic
and international digital economy. It would be based on contracted
internet bandwidth and allocated to market jurisdictions based on
their volume of internet data inflow (World Bank Group, 2021).
However, according to Ogidan, 2021, this uproar and the
practicalities of a new international tax organization set the world
back by at least ten years.

LITERATURE GAP

While the literature extensively discusses tax policy proposals at

the OECD and EU levels, there is a notable gap in addressing the
unique challenges and requirements of developing countries,
particularly in Africa. These countries often have limited resources
and technical capabilities to implement complex tax policies for the
digital economy.

Some proposals, such as the minimum tax rate under Pillar 2 of the
OECD’s BEPS framework, raise concerns about potential negative
impacts on foreign investment in developing economies. However,
the literature lacks an in-depth analysis of how these policies may
affect investment inflows and economic growth in these countries.
This study aims to address this gap by conducting a thorough
analysis of proposed international tax policies for the digital
economy, taking into account their applicability in developing
countries, and their impacts on these countries, especially Nigeria.