Unitary Taxation of Multinational Enterprises for a Just Allocation of Income: Nigeria As a Case Study of Africa’S Largest Economies
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Unitary Taxation of Multinational Enterprises for a Just Allocation of Income: Nigeria as a Case Study of Africa’s Largest Economies. By Alexander Ezenagu Faculty of Law McGill University Montreal, Quebec, Canada April 2019 A Thesis submitted to McGill University In partial fulfilment of the requirements of the degree of Doctor of Civil Law © Alexander Ezenagu, 2019 1 LIST OF ABBREVIATIONS ACMT Alternative Corporate Minimum Tax AfCFTA African Continental Free Trade Agreement ALP Arm’s Length Principle APA Advance Pricing Agreement ATAF African Tax Administration Forum AU African Union BEPS Base Erosion and Profit Shifting BEPS Project BEPS Project of the OECD CAMA Companies and Allied Matters Act CbCR Country-by-Country Reports CCCTB Common Consolidated Corporate Tax Base CFC Controlled Foreign Corporation CUP Comparable Uncontrolled Price ECOWAS Economic Community of West African States EOI Exchange of Information EU European Union FDI Foreign Direct Investment FIRS Federal Inland Revenue Service FPI Foreign Portfolio Investment GVCs Global Value Chains GPNs Global Production Networks GWCs Global Wealth Chains HLP High Level Panel IFF Illicit Financial Flow IMF International Monetary Fund MLI Multilateral Instrument MNE Multinational enterprise OECD Organisation for Economic Co-operation and Development OECD MTC OECD Model Tax Convention on Income and on Capital 2 PCT Platform for Collaboration on Tax PE Permanent Establishment PSM Profit Split Method SDGs Sustainable Development Goals TIWB Tax Inspectors Without Borders TNMM Transactional Net Margin Method TP Transfer Pricing TPGs Transfer Pricing Guidelines UN United Nations UN MTC UN Model Double Taxation Convention between Developed and Developing Countries UNECA United Nations Economic Commission for Africa UNHRC United Nations Human Rights Council US$ United States Dollar WP6 OECD Working Party 6 3 SHORT TABLE OF CONTENTS List of abbreviations Short table of contents Table of contents 1 Introduction- Setting the Stage 2 Tax Avoidance and Enablers of Tax Avoidance in Africa 3 Simplified Alternatives to Transfer Pricing and Global Efforts at Addressing Tax Avoidance 4 Unitary Taxation of Multinational Enterprises in Nigeria and within the AfCFTA Framework 5 Reforming the Tax Law Treatment of Multinational Enterprises in Nigeria 6 Conclusion Appendix I: Data Request Template Appendix II(a): Populated Template for Nigeria Appendix II(b): Populated Template for Uganda Bibliography 4 TABLE OF CONTENTS Chapter 1: Introduction- Setting the Stage Table of Contents 1.1 Executive Summary of the Thesis 1.2 Objectives of the Thesis 1.3 Methodology 1.4 Outline of the Project 2. Background to the Thesis 3. Understanding the Right to Tax 3.1 Fiscal Sovereignty Theory 3.2 Ability to Pay Principle 3.3 The Cost and Benefit Theory 3.4 Economic Allegiance Theory Chapter 2: Tax Avoidance and Enablers of Tax Avoidance in Africa 1. Introduction 1.1 Executive Summary of the Chapter 1.2 Objectives of the Chapter 1.3 Outline of the Chapter 2. Tax Avoidance: Facts, Numbers and Myths 3. Addressing the Separate Entity Principle 3.1 The Separate Entity Principle 3.2 The Salomon vs Salomon case 5 3.3 Piercing the Corporate Veil 3.3.1 Fraud 3.3.2 Agency 3.3.3 Tax evasion 3.3.4 Single Economic Unit Theory 4. Arm’s Length Principle 4.1 Description of the Arm’s Length Principle 4.2 The Limitations of the Arm’s Length Principle 5. Analysis of Transfer Pricing and Particular Limitations 5.1 Legal Construction of Transfer Pricing 5.2 Application of Transfer Pricing 5.3 Challenges of Transfer Pricing Methodologies 5.4 Linkage between Transfer Pricing and Tax Avoidance Chapter 3: Simplified Alternatives to Transfer Pricing and Global Efforts at Addressing Tax Avoidance 1. Introduction 1.1 Executive Summary of the Chapter 1.2 Objectives of the Chapter 1.3 Outline of the Chapter 2. Simplified Measures used by Countries 2.1 Safe Harbours 2.2 Alternative Corporate Minimum Tax 2.3 Fixed Margin System 2.4 The Sixth Method 6 2.5 Use of Secret Comparables 2.6 Advance Pricing Agreements 3 Reforming the Present System of International Taxation 3.1 The OECD’S BEPS Project and 2017 Transfer Pricing Guidelines 3.2 The UN’s Reforms 3.3 The EU’s CCCTB 3.4 Reform Efforts by the African Tax Administration Forum (ATAF Reforms) 4 Other Collaborative Efforts at Reforming the Present System of International Taxation 4.1 International Monetary Fund’s Papers 4.2 Independent Commission for the Reform of International Corporate Taxation’s Papers 4.3 BEPS Monitoring Group’s Reports 5 Conclusion Chapter 4: Unitary Taxation of Multinational Enterprises in Nigeria and within the AfCFTA Framework Table of Content 1. Introduction 1.1 Executive Summary of the Chapter 1.2 Objectives of the Chapter 1.3 Outline of the Chapter 7 2. Background, Definition, Attributes and Origin of Unitary Taxation 2.1 Background to this Chapter 2.2 Definition and Attributes of Unitary Approach 2.3 Historical Discussion of Unitary Taxation 2.4 Debates and Controversies Surrounding the Application of Unitary Taxation 3. Treating Multinational Entities as Unitary Firms 3.1 OECD’s Insistence on Transactional Approach and Comparability Analysis 3.2 Legal or Economic Control 3.3 Selection of the Factors and Weighting Formula 3.4 Tax Sovereignty and Tax Cooperation 4. Support for the Unitary Approach 4.1 The EU’s Common Consolidated Corporate Tax Base 4.2 Theoretical Soundness of the Unitary Approach 4.2.1 Theory of FDI and MNE 4.2.2 The Global Economy Perspective 5. Conclusion Chapter 5: Reforming the Tax Law Treatment of Multinational Enterprises in Nigeria Table of Content 8 1. Introduction 1.1 Executive Summary of the Chapter 1.2 Objectives of the Chapter 1.3 Outline of the Chapter 2. Tax Law Treatment of Multinational Entities in Nigeria 2.1 The Constitutional Framework for Tax in Nigeria 2.2 Treatment of Multinational Entities under the Companies Act and the Companies Income Tax Act of Nigeria 2.3 Treatment of Multinational Entities under the Nigerian Model Tax Treaty 2.4 Proposed Reforms 3. Application of the Unitary Taxation of Multinational Entities in Nigeria 3.1 Nigeria’s Federal Structure and Implication for Unitary Taxation 3.2 Trading Blocs as Testing Grounds for Unitary Taxation and Nigeria’s Role as a Key Stakeholder in ECOWAS and the AU 3.3 Suggesting a new Tax Law Treatment of MNEs Model 4. Political Support Needed to Reform the Tax Law Treatment of Multinational Enterprises 4.1. Bringing Tax Avoidance under the Scope of Illicit Financial Flows 4.2 Leveraging National and International Efforts at Addressing Illicit Financial Flows Chapter 6: Conclusion 9 ABSTRACT This thesis makes a case for the tax law treatment of multinational enterprises (MNEs) as unitary firms by Nigeria and other African countries under the recently negotiated African Continental Free Trade Agreement (AfCFTA). MNEs strategically exploit their legal structures in order to shift their global profits to low or no tax jurisdictions and away from the countries where their real economic activities occur. Treating MNEs as unitary firms has the potential to significantly curtail these tax avoidance practices. Doing so is particularly important for African countries because they are more dependent on corporate income tax revenues for their national budgetary needs. Most of the corporate tax revenue in these countries must come from foreign-owned firms as these firms dominate the large revenue-generating sectors of their economies, such as oil and gas, mining, agriculture and manufacturing. Two of the main obstacles to the adoption of unitary taxation for MNEs are the corporate legal structures that divide companies across legal jurisdictions, followed closely by the lack of consensus on a workable strategy to implement unitary taxation on a global scale. This thesis answers both of these challenges by providing theoretical and doctrinal support for the unitary approach and by showing the practical aspects and impacts of such adoption through the use of a case study. The thesis accomplishes the first task by revisiting the theories and principles guiding the international tax system and their limitations in today’s global and integrated economic environment. Using Stephen Hymer’s theory of foreign direct investment (FDI) and the single enterprise theory, the thesis demonstrates that treating related entities in MNEs or subsidiaries and their parent companies as unitary firms is both legally and economically coherent despite the traditional view of the corporation as an entity separate from its owners. 10 The thesis then uses Nigeria’s experience in taxing MNEs as a case study to demonstrate how unitary approach would significantly reduce tax avoidance and protect the domestic tax base. It extends its recommendations to other African countries as the AfCFTA comes into effect. 11 Résumé Cette thèse plaide en faveur d'un traitement fiscal des entreprises multinationales (EMN) en tant qu'entreprises unitaires par le Nigéria et d'autres pays africains dans le cadre de l'accord AfCFTA (African Continental Free Trade Agreement). Les entreprises multinationales exploitent les structures juridiques de manière stratégique afin de transférer leurs profits globaux aux juridictions à faible imposition ou sans imposition fiscale, et hors des pays où leurs activités économiques sont réellement exercées. Traiter les entreprises multinationales comme des entreprises unitaires pourrait potentiellement limiter considérablement ces pratiques d’évasion fiscale. Cela est surtout important pour les pays africains, qui dépendent particulièrement des impôts sur les sociétés pour répondre à leurs besoins budgétaires nationaux. La majeure partie des recettes fiscales des sociétés dans ces pays doit provenir d'entreprises étrangères, qui dominent les grands secteurs générateurs de revenus de leur économie, tels que le pétrole et le gaz, les mines, l'agriculture et l'industrie manufacturière. Deux obstacles principaux empêche l’adoption d’une fiscalité unitaire pour les entreprises multinationales: soit des structures actuelles qui permet la division des entreprises entre régions juridiques, ainsi que l’absence de consensus sur une stratégie viable pour mettre en œuvre la fiscalité unitaire à l’échelle mondiale.