Global tax reform deal: What it means for Africa?

Prosper Ndlovu, Analysis

AFTER several years of intensive negotiations, 130 country members of the Inclusive Framework have agreed to overhaul the global tax system, a bold move that seeks to ensure that big companies “pay a fair share” of revenue in countries they operate from.

According to the Oganisation for Economic Co-operation and Development (OECD), the crux of the historic two-pillar negotiators is the global backing of the proposed minimum corporate tax rate of at least 15 percent, which could unlock about US$150 billion in tax revenues per year.

Pillar One demands adherence to the concept of net taxation of income, avoiding double taxation and simplifying tax administrable as possible. In layman’s terms, the OECD has determined that most big tech companies are not paying enough tax in jurisdictions where they have market-facing activities. Pillar TWO on one hand seeks to establish a minimum level of taxation on multinational companies doing business around the world.

Taxation of international technology companies such as Facebook, Google and Amazon, who are dominant players in the digital economy, has been a source of tension between countries, with developing states including Africa feeling shortchanged.

A detailed implementation plan of the global deal, together with remaining issues is set to be finalised by October 2021, according to statement signed by 130 out of 139 countries and jurisdictions involved in the talks. The supporting countries represent more than 90 percent of global economy.

The countries have also signed up to new rules on where the biggest multinational companies are taxed. The move is expected to see taxing rights on more than $100bn of profits shift to countries where profits are generated, rather than where a business might have its headquarters, the BBC reported following conclusion of the latest talks.

Through the African Tax Administration Forum (ATAF), the sole regional tax lobby organisation, Africa has welcomed the achievement of this new milestone although it does not fully capture the continent’s interests. From an African perspective, a global consensus on the tax challenges arising from the digitalisation of the economy is of paramount importance. For now, more than ever, cooperation and multi-lateralism are required in developing solutions that will assist all countries in rebuilding their economies in a post-Covid-19 environment.

As things stand, corporate income tax represents a higher share of tax revenues and GDP in developing countries than in rich countries. On one hand tax levies on companies are higher in most African countries, averaging 16 percent of total tax revenue compared to nine percent in OECD countries, said ATAF.

African countries have been trying to enhance tax yield from corporates by introducing new measures such as robust measures to stop aggressive transfer pricing schemes by multinational enterprises, measures to strengthen mining regimes and new policies on tax incentives.

However, digitalisation of economies has created new challenges as many African countries are not able to tax highly digitalised businesses due to the current international tax rules.

“Therefore, the development of global tax rules is a key part of the tax policy considerations for Africa in the post Covid-era. Obtaining an Inclusive Framework agreement on effective and equitable Pillar One and Pillar Two rules is, therefore, of vital importance to African countries,” said ATAF.

“There is still further work that needs to be done to finalise the new rules and even when finalised we consider there is still much more work to be done to ensure a more equitable tax allocation and to stem Illicit Financial Flows from Africa.”

ATAF, which has been providing technical support to its members to try and ensure that the new Pillar One and Pillar Two rules meet the needs of African countries, has said it was delighted that some of its concerns have been recognised.

“We are pleased to note that the new Pillar One proposals reflect many of the proposed changes that ATAF made on the Blueprint pillar one proposals released in October 2020, which we and our members considered were far too complex and resulted in a very modest amount of profits being reallocated to market jurisdictions,” said the organisation in its response.

“Due to the adoption by the Inclusive Framework of a number of the measures set out in the ATAF proposal, the new Pillar One rules are far simpler than the Blueprint proposals and will ensure that no member of the Inclusive Framework will be excluded from receiving its reallocation of profit under the so-called Amount A.

“The Pillar One rules are a step in the right direction in starting to address the issue of the current imbalance in the allocation of taxing rights between source and residence countries, which deny source countries such as African countries of much-needed revenue.”

However, ATAF insists that much more should be done to further redress the imbalance and, in partnership with the African Union, has called for the Inclusive Framework to undertake further work on the tax allocation issue.

Further, Africa is of the view that the proposed rules in the Blueprint also appear to create an unlevel playing field as to where a business has a taxable presence in the market jurisdiction such as through a distribution activity.

“That jurisdiction will have taxing rights under the arm’s length principle resulting in many cases in part of the routine profit of the MNE being taxed in that jurisdiction and in some cases some of the MNE’s residual profit,” said ATAF.

“We, therefore, proposed that the re-allocation of profits would be calculated as a portion of the MNEs total profits instead of its residual profit.

“The quantum to be reallocated would be a return on market sales based on the global operating margin of the MNE group, whereby the higher the global operating margin of the MNE, the higher the reallocation.”

ATAF has said this approach has an effect of reducing complexity in determining the allocable profits of in scope MNEs and secondly, would result in a more level playing field between businesses with a current taxable presence in market jurisdictions and those with no such current presence.

As such, Africa has expressed disappointment that the Inclusive Framework has decided not to adopt this approach but noted the agreement to allocate between 20 percent and 30 percent of residual profit, defined as profit in excess of 10 percent of revenue, to market jurisdictions. The continent would have wanted at least 35 percent of residual profit and has vowed to continue lobbying.

ATAF has also criticised the Inclusive Framework for agreeing to give consideration to having an elective binding dispute resolution mechanism. Both ATAF and the African Union had earlier stated on many occasions to the Inclusive Framework meeting that there should be no form of mandatory binding dispute resolution mechanisms for transfer pricing and permanent establishment disputes included in the Pillar One rules.

Concerning the new Pillar Two rules, ATAF has said these were a step in the right direction in stemming Illicit Financial Flows out of Africa by multinational enterprises (MNEs) through artificial profit shifting.

“We welcome the introduction of a global minimum tax rate that aims to ensure all of an MNE’s global profits are taxed at least at the minimum effective tax rate,” it said.

“However, as we and the African Union have stated on several occasions, the minimum effective tax rate should be at least 20 percent if it to be effective in protecting African tax bases and stem IFFs by reducing profit shifting by MNEs.

“We note that the Inclusive Framework has agreed that the minimum tax rate will be at least 15 percent, and we will continue to work with our members to try and get an agreement at the Inclusive Framework to a rate of at least 20 percent.”

Africa has also stated, among others, that a source-based rule such as the Undertaxed Payments Rule (UTPR) or Subject to Tax Rule (STTR) should be the primary rule under Pillar Two to assist in redressing the prevailing imbalance in the allocation of taxing rights between residence and source jurisdictions.

Despite the noted loopholes, ATAF has vowed to continue supporting the work of the Inclusive Framework given its importance to restoring stability to the international tax system.