Economy
What Nigeria’s Signing of OECD’s Multilateral Instrument Means for Taxpayers
By Seun Adu and Olanrewaju Alabi
Consider this puzzle. It takes 5 machines 5 minutes to manufacture 5 widgets. How many minutes will it take 100 machines to manufacture 100 widgets? If you answered this in a hurry, you probably said 100. This is wrong. The correct answer is 5. But what does this have to do with the Multilateral Instrument (MLI)? I will come back to this in a bit.
When the international community agreed there was a need to fix the international tax rules through the BEPS project, one of the problems they had to address was how to ensure that the recommendations from the project could be quickly implemented by everyone that was involved.
Implementing the BEPS recommendations would require countries to make several changes to (a) their local tax legislation; and (b) the avoidance of double taxation agreements (DTA) that they had with other countries. Making changes to DTAs was clearly the more challenging issue because of the time and resources required to do so.
Participants in the BEPS project realized that if the old way of updating DTAs was used to implement the BEPS actions, it would take many years before the BEPS recommendations would become fully effective in most countries. This would defeat the purpose of the project.
The Multilateral Instrument (MLI) was developed to deal with this challenge.
What is the MLI?
In its full form, it is called the OECD’s Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (Multilateral Instrument or MLI). The MLI is a single agreement between many countries. It allows a country to make concurrent changes to all or some of the DTAs that it has with other countries.
Quick overview of DTAs
Countries that do a lot of trade with one another usually sign agreements for the avoidance of double taxation to ensure that tax, in particular double taxation, does not become an obstacle to their trade activities. DTAs help to reduce the incidence of double taxation in several ways including: specifying which country has a right to tax a certain type of income, providing for reduced taxes on certain categories of income, etc.
DTAs usually follow a standard template or model. The two most used models are the OECD and UN models developed by the OECD and UN respectively. These models were first developed in the 1920s and are updated from time-to-time to deal with new tax issues.
Whenever a model is updated to address a particular tax issue, countries that follow the model try to make the changes to each of their DTAs to ensure that they can also address the issue.
Updating DTAs is not easy
The process of negotiating DTAs and ratifying them into law is usually long and difficult. Even after an agreement has been reached, it can still take many years before it takes full effect. For instance, the DTA between Nigeria and South Africa only came into force in 2008 even though the original agreement was signed in April 2000.
Negotiations for updating DTAs would typically not take as long as the negotiations for new agreements, but they still take a lot of time and resources. As a result of this, many countries do not update their DTAs as often as they should. This means that many DTAs are outdated.
For the BEPS project to be successful it was necessary to overcome this challenge since implementing the recommendations would require each country to update all of its DTAs. If countries followed the old way of having one-on-one negotiations with their existing treaty partners it would take many years for all the negotiations to be concluded and many more years for the agreements to be ratified by each country.
Such a delay would defeat the whole purpose of the BEPS project.
How the MLI solves the problem
The MLI removes the need for treaty partners to renegotiate the terms of existing DTAs one after the other making it possible to update the provisions of several double tax treaties with the relevant BEPS updates at the same time. It also makes it possible to pursue the domestication of the changes to all the treaties at once.
This is possible because the changes to be adopted through the MLI were based on collective negotiations between the countries that developed the instrument.
Some of the treaty changes are compulsory (these are the minimum standards) for all parties to the MLI while others are optional. Both the compulsory and optional changes have been standardized. The good thing about this is that the areas that will require one-on-one negotiations are not so many and these negotiations will be limited to choosing between several standardized options.
The process requires each country to submit an MLI position to the OECD. The MLI position is a document that contains details of the changes (based on the provisions of the MLI) that a particular country would like to make to each of its DTAs. This is then compared to the MLI positions of its other treaty partners.
Where the MLI positions of the parties to a particular treaty are the same, it means that an agreement has been reached on the specific provisions that match. The parties can then engage each other to discuss and agree on any positions that are different.
The effect is that a country can potentially renegotiate and ratify many of its tax treaties in almost the same time that it would normally have taken to re-negotiate one agreement. If I go back to my earlier puzzle for a second, the reason it takes only 5 minutes for the 100 machines to manufacture the 100 widgets is because they work simultaneously. This is pretty much how the MLI works.
What has Nigeria done so far?
Nigeria signed the MLI on 17 August 2017. Nigeria has also submitted its MLI position. This means that it is already possible to tell the changes that Nigeria plans to make to all of its existing double tax treaties.
In its MLI position, Nigeria listed DTAs with 19 treaty partners for amendment. These include the agreements that are already in force and those that are not yet in force (e.g. DTAs with Korea, Mauritius, United Arab Emirates etc.)
Also, of the 19 agreements, 13 treaty partners (including Belgium, Canada, China, Netherlands, and the United Kingdom) have all listed their DTAs with Nigeria for amendment under the MLI. This means that one can already check what treaty positions match and tell the changes that will likely be made to these DTAs.
The next steps will be for Nigeria and its treaty partners to agree on any parts of their proposals that do not match. Subsequent to this, each partner will then need to undertake the local domestication process to ensure that the changes become law. All of this could happen a lot quicker than we are used to.
Final thoughts
These are some of the changes that taxpayers need to be aware of due to the potential implications for their tax affairs. One of the changes is the introduction of the Principal Purpose Test (PPT) for tackling treaty shopping. Another important one is the amendments to the definition of Permanent Establishments in the treaties.
Nigerian resident taxpayers who currently enjoy treaty benefits should consider how the MLI will affect them. In addition, companies who plan to set up new structures that will allow them get treaty benefits will need to be mindful that the MLI could reduce the effectiveness of those structures.
Although the MLI position submitted by Nigeria on August 17 is provisional and subject to change, there is already a lot that one can deduce about how taxpayers will be impacted when the proposals finally become law.
Seun Adu is an Associate Director and Transfer Pricing Leader at PwC Nigeria. He is a regular writer and public speaker on tax and transfer pricing matters.
Olanrewaju Alabi is a Senior Associate with PwC Nigeria’s Transfer Pricing practice.
By Adedapo Adesanya
Seplat Energy Plc will revive hundreds of Nigerian oil wells laying fallow after completing the acquisition of Mobil Producing Nigeria Unlimited (MPNU) from ExxonMobil.
The company said it aims to lift oil output to about 200,000 barrels a day, a move that will help boost Nigeria’s oil production levels, as it aims to reach 2 million barrels per day next year.
The transaction, according to Seplat, “is transformative for Seplat Energy, more than doubling production and positioning the company to drive growth and profitability, whilst contributing significantly to Nigeria’s future prosperity.”
The completion of the Seplat-ExxonMobil deal has created Nigeria’s leading independent energy company, with the enlarged company having equity in 11 blocks (onshore and shallow water Nigeria); 48 producing oil and gas fields; 5 gas processing facilities; and 3 export terminals.
Recall that the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) in October approved the deal as part of a series of approvals, while it blocked Shell’s asset sale of up to $2.4 billion to the Renaissance consortium.
The acquisition of the entire issued share capital of MPNU adds the following assets to the Seplat Group: 40 per cent operated interest in OML 67, 68, 70 and 104; 40 per cent operated interest in the Qua Iboe export terminal and the Yoho FSO; 51 per cent operated interest in the Bonny River Terminal (‘BRT’) NGL recovery plant; 9.6 per cent participating interest in the Aneman-Kpono field; and approximately 1,000 staff and 500 contractors will transition to the Seplat Group.
MPNU adds substantial reserves and production to Seplat Energy; 409 million barrels of oil equivalent (MMboe) 2P reserves and 670 MMboe 2P + 2C reserves and resources as at 30 June 2024 and 6M 2024 average daily production of 71.4 kboepd (thousand barrels of oil equivalent).
Business Post reports that Seplat will be part of the payment this year, and will defer some to next year,
Speaking on the transaction, the Chairman of Seplat Energy, Mr Udoma Udo Udoma commended President Bola Tinubu for supporting this transaction and appreciated the support and diligence of the various ministries and regulators for all the work to reach a successful conclusion.
“We are delighted to welcome the MPNU employees to Seplat Energy. We are excited to begin our journey in a new region of the country, and we look forward to replicating the positive impacts we have achieved within our communities in our current areas of operations.
“Seplat’s mission is to deliver value to all our stakeholders, and we treasure the good relationships we have developed with the government, regulators, communities and our staff.”
On his part, the chief executive of Seplat Energy, Mr Roger Brown, described the acquisition as a major milestone, adding, “I extend my thanks to the entire Seplat team for their hard work and perseverance to complete this transaction.
“MPNU’s employees and contractors have a strong reputation for safety and operational excellence, and I welcome them to the Seplat Energy Group.
“We have acquired a company with one of the best portfolios of assets and related infrastructure in a world-class basin, providing enormous potential for the Seplat Group. Our commitment is to invest to increase oil and gas production while reducing costs and emissions, maximising value for all our stakeholders.
“MPNU is a perfect fit with our strategy to build a sustainable business that can deliver affordable, accessible and reliable energy for Nigeria alongside attractive returns to our shareholders”.
By Adedapo Adesanya
The National Pension Commission (PenCom) is projected to close the year with over N22 trillion in pension assets impacted by challenges like inflation and monetary policies.
This is according to PenCom Director-General, Mrs Omolola Oloworaran, at a press conference in Abuja on Thursday.
She said as of October 2024, the Contributory Pension Scheme (CPS) had 10.53 million registered contributors and pension fund assets worth N21.92 trillion.
Speaking at the conference-themed Tech-driven Transformation Shaping the Pension Landscape, which showcased PenCom’s strategic commitment to innovation, she said that the numbers reflected the agency’s unwavering commitment to fund safety, prudent management, and sustainable growth.
She explained that the pension environment was impacted by the wider economic challenges facing the country, noting that the sector battled multi-year high inflation, Naira devaluation, and the lingering effects of unorthodox monetary policies by the Central Bank of Nigeria (CBN).
Business Post reports that the apex bank hiked interest rates by 875 basis points this year alone to tackle persistent inflation which peaked at 33.8 per cent as of October.
She said that these challenges eroded the real value of pension funds and impacted contributors’ purchasing power.
“To address these issues, the commission has initiated a comprehensive review of its investment regulations.
“It is focusing on diversifying pension fund investments into inflation-protected instruments, alternative assets, and foreign currency-denominated investments.
“The goal is to safeguard contributor savings and ensure resilience against future economic volatility,” she said.
She restated the commission’s commitment to expanding pension coverage, particularly through the advanced micro-pension plan designed to encourage participation from the informal sector using technology.
“This initiative will make it easier for everyday Nigerians to save for retirement, aligning with our vision of inclusive growth and financial stability for all.
“The backlog in retirement benefits for retirees of the Federal Government’s Ministries, Departments, and Agencies (MDAs) will soon be settled.
“The federal government recently disbursed N44 billion under the 2024 budget to settle approved pension rights.
“We are collaborating with the Federal Government to institutionalise a sustainable solution to ensure retirees receive their benefits promptly, eliminating delays,” Mrs Oloworaran said.
She said that PenCom’s technology-driven transformation aimed to make the CPS more accessible, reliable, and sustainable.
“From data management to seamless contributions and regulatory supervision, we are paving the way for a future where the pension industry serves all Nigerians effectively,” she said,
Mrs Oloworaran also said that the e-application portal for pension clearance certificates has replaced the manual processes and enhanced the ease of doing business in the sector.
“Since its deployment, 38,528 pension clearance certificates have been issued. This initiative ensures compliance and secures the future of Nigerians working in organisations that interact with the government,” she said.
By Adedapo Adesanya
The NASD Over-the-Counter (OTC) Securities Exchange closed flat on Thursday, December 12 after it ended the trading session with no single price gainer or loser.
As a result, the market capitalisation remained unchanged at N1.055 trillion as the NASD Unlisted Security Index (NSI) followed the same route, remaining at 3,012.50 points like the previous trading session.
However, the activity chart witnessed changes as the volume of securities traded at the bourse went down by 92.5 per cent to 447,905 units from the 5.9 million units transacted a day earlier.
In the same vein, the value of securities bought and sold by investors declined by 86.6 per cent to N3.02 million from the N22.5 million recorded in the preceding trading day.
But the number of deals carried out during the session remained unchanged at 21 deals, according to data obtained by Business Post.
When trading activities ended for the day, Geo-Fluids Plc remained the most active stock by volume (year-to-date) with 1.7 billion units sold for N3.9 billion, Okitipupa Plc came next with 752.2 million units valued at N7.8 billion, and Afriland Properties Plc was in third place with 297.5 million units worth N5.3 million.
Also, Aradel Holdings Plc remained the most active stock by value (year-to-date) with 108.7 million units worth N89.2 billion, followed by Okitipupa Plc with 752.2 million units valued at N7.8 billion, and Afriland Properties Plc with 297.5 million units sold for N5.3 billion.
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