Taxation of the Digital Economy: An Appraisal of the Effectiveness of the OECD Tax Deal on Low-and-Middle Income Countries

Abstract

The emergence of the covid-19 pandemic left an indelible mark on the world economy, with the world bank’s report estimating that over 100 million people fell into extreme poverty. The IMF in addition reported that low-and-middle income countries (LMICs) will require over $500 billion until the year 2025 to fully catch up with advanced economies’ progress in terms of GDP growth. The emergence of the Pandemic virus on the other hand spurred the growth of digitalization, and consequentially the digital economy. Through digital innovations, the emergence of e-commerce and digital services like streaming, transportation, etc., has turned the world into a global market, fostering economic growth and globalization. The preceding points subtly highlights the need for revenue generation by LMICs, and also the challenges faced by traditional tax system to bring the new world i.e. the digital economy within the tax bracket. Efforts made by international organizations like the OECD have been criticized on its ability to cater to the needs of Low-and-middle income countries who suffer from corporate tax competition and Base Erosion Profit shifting the most. This essay examined the multilateral approach implemented by international organizations, and unilateral approaches made by LMICs in combating the tax challenges posed by the digital economy.

The doctrinal research methodology was adopted in this essay, and it also made use of both primary and secondary sources. With the primary sources drawing from case laws & statutes of the National Assembly like the Finance Acts, CAMA, CITA, etc., and also from secondary sources like books, journal articles, reports, newspaper publications, research papers, Linkedin posts, etc.

Having examined the effect of the OECD’s multilateral approach for LMICs, research discovered that despite the approach solving critical issues like physical establishment and the issue of nexus, it has a limited impact on LMICs. It also places their sovereignty over issues of international taxation in jeopardy. On the other hand, Unilateral approaches adopted by both LMICs, namely Nigeria and Kenya has in fact achieved the goal of bringing certain multinationals and Non-resident within the tax bracket. Research showed that these countries can generate more with an increased percentage for the digital economy. In spite of the growth, these countries run a risk of trade sanctions from high-income countries over their choice of unilateral approach.

Conclusively, commendable efforts are being made on all fronts to effectively commit the digital economy within the tax bracket, without necessarily violating other core tax concepts like double taxation of Multinationals. As such, this essay recommends that the current tax deal should be redesigned to take into consideration, concerns and interests of LMICs in the deal. Lastly, that a United Nations tax convention should be implemented in order to foster neutrality in the Tax deal, hence taking away OECD’s unilateral control of international taxation.