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Nigeria’s Tunde Fowler: Digital tax solution must work for everyone

Nigerian revenue authority leader Tunde Fowler has emphasised the importance of coming up with a digital taxation solution that works for both developing and developed countries, as well as the business community.

Fowler, who is executive chairman of the Nigerian revenue authority (FIRS) and council chairman of the African Tax Administration Forum (ATAF) spoke to International Tax Review following a speech at the Institute of Directors (IoD) in London. He shared his views on value creation, indirect tax, transfer pricing and lessons to learn from the advertising industry.

“If the African continent is losing $50 billion and $250 billion is lost in other continents, including in developed countries, we have to come up with a solution that is available to everybody,” he said in response to questions about how to tax the digital economy.

“We are trying to come up with a global solution that will be acceptable to all. Acceptable to the developing countries, the developed countries, and to business. You can’t only think of revenue; you have to think of business,” Fowler said, referring to the work being done by of the UN International Experts Committee on Tax Matters, where he is the first vice chairman.

The scale of the problem is well known to those familiar with tax. The structure of companies like Facebook, Amazon and Google mean they pay little tax in most countries where they offer their services. Cash-strapped governments, often under public pressure, are licking their lips at the prospect of taxing their revenues.

While the OECD is planning a coordinated approach to the problem of taxing the digital economy, many countries plan to implement, or have already implemented, measures to grasp what they see as their fair share of digital revenue. This risks a patchwork of regulation which will see companies struggle to comply, and perhaps end up ‘geoblocking’ – withdrawing their services from consumers in certain jurisdictions.

“In Thailand, the tax authority sent a draft bill to the minister of finance to seek approval for banks to withhold 5% tax from foreign companies providing digital services,” said Fowler, who ITR named as one of the 50 most influential people in the world of tax in 2017.

Fowler further mentioned measures underway in Saudi Arabia, Taiwan, Israel, the UK and the US.

“The Italian tax authority is considering a 5% withholding tax on the basis of a virtual PE, based on significant digital presence,” continued Fowler. “The Taiwanese tax authority is also considering a withholding tax for digital services. The Turkish tax authority, in 2016, proposed a law imposing tax on payments made through an electronic [service] because of online activities.”

“Every country is coming up with different measures, and before you know it, it will affect businesses. They are taking percentages regardless of whether there is profit to those activities or not.”

However, he remains optimistic of a solution – an optimism not often shared by businesses, but commonly found among policymakers.

“I believe that if we can come together with a collective solution that will be amenable to businesses, developing and developed countries, then we [the UN] will have met our mandate.”

“We’ve looked at this topic and going back two or three years it was a topic that was discussed, but right now it is a serious issue because just about everything is going digital,” he said, talking about his work with the UN. “We cannot find where value is being added or how to share in the profits or share in the tax revenue. It is becoming a problem.”

Value creation

The topic of value creation is central to the digital taxation debate.

“The question we haven’t asked yet is where value is created,” said Fowler. “Is it where the service or product is invented? Where it is assembled? Where it is consumed?”

To add to the question, he spoke about his experience in the advertising industry.

“When I was in school in the [US] I had an internship at an advertising company in New York. I wondered why they sent me there. The officer said I would learn something. What I did learn, which I’ve never forgotten, is that they explained their rule, and their rule can be put into the words of AIDA. As an advertising company, your job is to draw Attention to your product, raise Interest, then Demand, and then finally Action – a purchase.”

“In terms of their value chain, they only add value where there is a purchase; a reaction.”

“What we’re talking about in taxation is where value is added. One tends to believe that the area where those services are consumed is not adding value. You’ll find out that in most cases it is the consumption side that plays a major role.”

Returning to this anecdote at the close of his IoD speech, he said: “My experience in New York was a long time ago. I had more black hair. But, then, the advertising company said: ‘Value is created when an item is sold.’ Quite frankly, I don’t think much has changed. With no consumption, there can be no value. They have a product on the shelf that is not being sold or purchased.”

Building capacity in indirect tax

“Part of the issues that we’re looking at is that on one issue in discussion, development, we’re describing possible ways forward and also suggesting measures and drafting provisions related to the digitalisation of the economy with regards to income tax, double tax treaties, value-added tax and other indirect tax[es].”

VAT, Fowler asserted, is becoming more important the world over. There are few remaining countries which do not have a national VAT or GST, and most of those which do rely on it for far more of their tax revenue than corporate taxation.

“In the last three years between 2015 and 2017 [VAT revenue] increased by 25%, year-on-year,” said Fowler, referencing his native Nigeria. “I think in 2018 it will increase another, maybe, 30%.”

This increase, and the notable increase he expects to see in 2018, come as a result of increased capacity and focus by the tax authority, as well as other factors.

“We have engaged a lot more stakeholders, letting them know the importance of paying tax both at the federal and state levels. At the same time, we have improved our monitoring efforts and, if the need arises, importance.”

Increasing capacity is a key aim for ATAF, he explained.

“What ATAF basically is doing is trying to build capacity on the African continent. [It also wants to be] a point where ideas can be exchanged, experiences can be exchanged. We want to ensure we’re in a position to effectively maximise our own tax revenues.”

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