The growth of the digital economy has posed a significant challenge to tax authorities globally. The current global tax system, premised on the Permanent Establishment model (‘PE’), only recognizes entities with physical presence in an economy for tax purposes. The digital economy was not considered, and this has caused concerns for countries, as digital entities earn from operations in their economies but do not pay tax in those economies. This has become a global issue, and talks of addressing it are in advanced stages.
The global discussion around taxing Multi-National Enterprises (MNE’s) having digital presence in various jurisdictions is dynamic, but two issues take centre stage: defining digital presence in an economy, and determining profit once the presence is established.
The Organisation for Economic Co-operation and Development (‘OECD’) identified the need for a multi-national approach to redefining PE, and proposed some models under their Base Erosion and Profit Sharing Projects (‘BEPS’).
Various other nations, including Nigeria, have sought to redefine PE in their economy, in order to establish the significant economic presence (‘SEP’) of an entity, which forms the basis of their taxation.
The current model aids tax avoidance, and gives foreign digital companies advantage over local competitors being taxed, having physical presence in an economy. It defeats the current PE scope, which is limited to physical presence in determining the minimum degree of presence of a non-resident in a country, necessary for determining their tax obligations.
OECD and the global debate
OECD’s Base Erosion and Profit Sharing Report of 2015 identified the need to create a system to define digital presence in an economy and to determine profits of digital businesses. In 2019, the OECD came up with the following recommendations in arriving at a fair determination of the issues: new criteria for determining Significant Economic Presence and an increased user participation which includes soliciting for information from the MNEs to determine their profit.