Significant Economic Presence - matters arising on new tax nexus for multinational entities

A sketch of Digital Economy used to illustrate the story (etradeforall)
  • Nigeria, like other countries, is proposing to adopt the concept of Significant Economic Presence (SEP) to tax business profits of multinational enterprises (MNEs) based on the 2019 Finance Bill.
  • The SEP principle means that the country can tax a MNE where a virtual presence can be proved based on yet-to-be-determined revenue threshold and possibly other thresholds such as the existence of a user base, billing, and collection in a local currency sustained marketing and sales promotion activities either online or otherwise to attract customers.
  • Adewale Ajayi, Partner & Head Tax Energy, and People Services Practice at KMPG in Nigeria, writes on the proposed introduction of the SEP principle in Nigeria.


Undoubtedly, the digital economy has created some challenges for tax administrators globally. The digital companies pay little or no tax in the countries where they derive their profits. This practice is not illegal as it is based on the generally accepted principle that a multinational enterprise (MNE) can only pay tax in a country where it has some form of physical presence. In other words, where there is no such presence, the companies do not have any obligation to pay tax. This rule has, therefore, proved insufficient in this era of globalization and digitization as the source countries are seeking new rules to tax the profits generated from their jurisdictions by MNEs even where there is no physical nexus. This is the genesis of the phrase: fair amount of tax.

The Organization for Economic Cooperation and Development (OECD) has sought to address these challenges through its Base Erosion and Profits Shifting (BEPS) project. It realizes that a consensus-based approach, rather than a unilateral move that will lead to retaliatory measures, is required. It has,therefore, identified three profit allocation proposals for the purposes of reallocating a proportion of an MNE’s profits to the market jurisdiction. These proposals are based on user participation, marketing intangibles and significant economic presence. The OECD plans to present a unified approach this year.


Nigeria, like other countries, is proposing to adopt the concept of Significant Economic Presence (SEP) to tax business profits of MNEs based on the 2019 Finance Bill, which the President is yet sign into law. This simply means that the country can tax a MNE where a virtual presence can be proved based on yet-to-be determined revenue threshold and possibly other thresholds such as existence of a user base, billing and collection in local currency, sustained marketing and sales promotion activities either online or otherwise to attract customers. Once the Bill becomes law, any MNE that has significant economic presence in the country and to which profits can be attributable will be liable to tax in Nigeria. In addition, Nigeria is proposing to tax any MNE whose business comprises the furnishing of technical, management, consultancy or professional services outside Nigeria to a person resident in Nigeria and to the extent that it has SEP in Nigeria to which profits can be attributable.

This article’s focus is on the matters arising from the proposed introduction of the SEP principle in Nigeria. These are issues that the Honorable Minister for Finance (MoF) should take into consideration to arrive at a coherent and practical definition of SEP while avoiding or minimizing retaliatory measures from our trading and treaty partners.

Matters Arising

Some countries have already adopted unilateral tax measures that are targeted at mainly American companies and these have triggered retaliatory response from the US. For example, France has approved for a 3% tax on revenue generated by digital companies where such companies earn €750million of revenue worldwide and €25million of revenue in France. In response to this, the US has approved for tariffs of up to 100% on French imports like cheese, wines, handbags, soap and make-up products. This simply means that a consensus-based approach is the key to resolving the challenges posed by the digital economy. Nigeria has signed double tax treaties with some countries. These treaties are based on the principle of residence for allocating taxing rights. Since the treaty provisions are superior to domestic tax laws, it is logical for the latter to align with the former. Therefore, Nigeria would have to consult and agree with its treaty partners before it can implement the SEP principle. Alternatively, it may wait for the global consensus to be reached on this matter. Failure to do either of these may trigger retaliatory measures from its treaty and trading partners.

Nigeria also needs to determine what the revenue thresholds should be for triggering SEP. Since the concept will allocate taxing rights where revenues are generated on a sustained basis, would the revenue threshold be sufficient for this purpose? Won’t other factors, especially time threshold, be relevant? The Federal High Court (FHC) has held, in the case between the Federal Inland Revenue Service v Gasprom, that carrying on business means ’to conduct, prosecute or continue a particular vocation or business as a continuous operation or permanent occupation. The repetition of acts may be sufficient.’ The question therefore, will be what time threshold will be sufficient to indicate a sustained involvement in the country. With respect to revenue, should it be one threshold for all countries, considering that the country also deals with smaller countries. The MoF, therefore, needs to consult and agree on how the revenue threshold will be calibrated to address this concern. The Income Tax (Country by Country) Regulations 2018 prescribes a minimum worldwide revenue of N160 billion for Nigerian-headquartered MNEs to submit country by country reports. Would this be the same revenue threshold for SEP?


Perhaps, the major issue is determining the profits attributable to the activities that will trigger SEP. The SEP concept may be erroneously interpreted to mean that the entire income attributable to activities giving rise to a SEP is taxable in the country though the operations of such activities may be performed outside Nigeria. To avoid ambiguity, there needs to be a clear determination of how profits will be attributed to SEP in Nigeria. Should the MNE’s profits be based on consolidated financial statements? How should the profit be split between business lines or regions? What proportion of deemed residual profits would be taxed in Nigeria? How do we ensure that there is no double taxation on the same income? Will the country apply the current deemed profit rate of 20% to the business profits of the MNEs? Under the Finance Bill 2019, withholding tax is being proposed as the final tax for technical and related services provided by a MNE outside the country to a Nigerian resident.

How can Nigeria ensure enforcement and compliance for collecting the tax from MNEs that have no physical presence in the country? The Finance Bill anticipates the possible use of withholding taxes for only technical and related services. Does this mean that only medium to large companies can deduct and collect those taxes bearing in mind that small business with annual revenues below N25million are not required to pay taxes based on the Finance Bill. At a time, consideration was being given by the FIRS to the possibility of Banks making such deductions. However, this may only be possible where Nigerian-issued cards are used for payments. Perhaps, the only way out may simply be to require such companies with SEP to register and pay tax in the country.

Currently, there are numerous transfer pricing disputes that are being addressed. With the introduction of SEP, these disputes will increase exponentially especially if the details surrounding the qualifying thresholds for SEP are not agreed with the treaty partners. Therefore, the importance of an effective dispute resolution mechanism cannot be over emphasized. This, perhaps, justifies the reason to wait for the unified approach being considered by the OECD before implementing SEP.


There is no doubt that a new nexus rule for taxing MNEs is required, especially given the significant revenues being sourced by MNEs from Nigeria. However, there needs to be a consistent and effective framework for achieving this objective, given that there are many issues that the MoF will need to consider before issuing any regulations on SEP. Though there is tremendous pressure to grow our tax revenues to finance our budget deficit, a unilateral approach may result in unintended consequences that will do us no good. It may, therefore, be advisable to wait for and align with the consensus-based approach being championed by the OECD to avoid any adverse implications. In fact, one of the measures being considered by the OECD is the introduction of a global minimum tax to prevent the shifting of profits to low-tax jurisdictions, which Nigeria will benefit from. Clearly, the implementation of stand-alone nexus provisions will most likely prove ineffective.



Adewale Ajayi (@walesj1967) is a Partner & Head Tax Energy and People Services Practice, KPMG in Nigeria.


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