With the Organisation for Economic Cooperation and Development (OECD) announcing last Thursday that negotiators from 130 countries backed the proposed minimum tax rate of 15 per cent to ensure that big companies pay a fair share of taxes wherever they operate, African continent which has been at the receiving end of a lopsided tax system can look forward to improved revenue earnings from taxes, reports Ibrahim Apekhade Yusuf
Arthur Vanderbilt, famous American lawyer, law school professor and partisan political leader, said of the benefit of taxes, “Taxes are the lifeblood of government and no taxpayer should be permitted to escape the payment of his just share of the burden of contributing thereto.”
Vanderbilt’s wisecrack comes close to endorsing the new policy regime on taxes which could see many big businesses hitherto failing to meet in their tax obligation now being compelled to do so, all thanks to the proposed minimum corporate tax rate of at least 15 per cent.
The devil is in the details
According to the Organisation for Economic Cooperation and Development (OECD) 130 countries and jurisdictions have joined a new two-pillar plan to reform international taxation rules and ensure that multinational enterprises pay a fair share of tax wherever they operate.
The 130 countries and jurisdictions, representing more than 90% of global GDP, joined the Statement establishing a new framework for international tax reform. A small group of the Inclusive Framework’s 139 members have not yet joined the Statement at this time. The remaining elements of the framework, including the implementation plan, will be finalised in October.
The framework updates key elements of the century-old international tax system, which is no longer fit for purpose in a globalised and digitalised 21st century economy.
The two-pillar package – the outcome of negotiations coordinated by the OECD for much of the last decade – aims to ensure that large Multinational Enterprises (MNEs) pay tax where they operate and earn profits, while adding much-needed certainty and stability to the international tax system.
Pillar One will ensure a fairer distribution of profits and taxing rights among countries with respect to the largest MNEs, including digital companies. It would re-allocate some taxing rights over MNEs from their home countries to the markets where they have business activities and earn profits, regardless of whether firms have a physical presence there.
Pillar Two seeks to put a floor on competition over corporate income tax, through the introduction of a global minimum corporate tax rate that countries can use to protect their tax bases.
The two-pillar package will provide much-needed support to governments needing to raise necessary revenues to repair their budgets and their balance sheets while investing in essential public services, infrastructure and the measures necessary to help optimise the strength and the quality of the post-COVID recovery.
Better revenue prospects
Under Pillar One, taxing rights on more than USD 100 billion of profit are expected to be reallocated to market jurisdictions each year. The global minimum corporate income tax under Pillar Two – with a minimum rate of at least 15% – is estimated to generate around USD 150 billion in additional global tax revenues annually. Additional benefits will also arise from the stabilisation of the international tax system and the increased tax certainty for taxpayers and tax administrations.
Justification for new tax regime
In the view of the OECD Secretary-General Mathias Cormann, “After years of intense work and negotiations, this historic package will ensure that large multinational companies pay their fair share of tax everywhere.”
Pressed further, he said, “This package does not eliminate tax competition, as it should not, but it does set multilaterally agreed limitations on it. It also accommodates the various interests across the negotiating table, including those of small economies and developing jurisdictions. It is in everyone’s interest that we reach a final agreement among all Inclusive Framework Members as scheduled later this year.”
Timeline of conclusion of negotiations
Interestingly, participants in the negotiation have set an ambitious timeline for conclusion of the negotiations. This includes an October 2021 deadline for finalising the remaining technical work on the two-pillar approach, as well as a plan for effective implementation in 2023.
Implications for Africa’s tax revenue
In the view of the African Tax Administration Forum (ATAF), an international organisation which provides a platform for cooperation among African tax authorities, the proposed new tax regime is an indeed a milestone.
In a statement signed on behalf of the Secretariat by Mr Logan Wort, ATAF’s Executive Secretary, he said 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 members considered were far too complex and resulted in a very modest amount of profits being reallocated to market jurisdictions.
“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, there is still much more that needs to be done to further redress that imbalance, and in partnership with the African Union, we are calling upon the Inclusive Framework to undertake further work on the tax allocation issue.”
As ATAF noted in its Pillar One proposal in May this year, the illustrative profit allocation thresholds of a 10% routine profit and the allocation of 20% of the residual profit to the so-called Amount A used in the OECD Economic Impact Assessment Report published in October 2020 appears to lead to only a low level of profit reallocation, in particular, to smaller markets jurisdictions.
“We have also been 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. Under the Pillar One proposals, the jurisdiction may receive additional taxing rights under Amount A.”
ATAF, Wort stressed, “Proposed that the reallocation 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.
“In our view, this approach provided two advantages; firstly, it would reduce complexity in determining the allocable profits of in scope MNEs; and secondly, it 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.”
The ATAF boss however expressed disappointment that the Inclusive Framework has decided not to adopt this approach but note that it has agreed to allocate between 20% and 30% of residual profit, defined as profit in excess of 10% of revenue, to market jurisdictions. “In our view, to result in a meaningful reallocation of profits to market jurisdictions under the proposed approach, at least 35% of residual profit defined as profit in excess of 10% of revenue should be allocated to market jurisdictions. We will continue to support our members to try and achieve as meaningful reallocation of profits to market jurisdictions as possible.”
How new tax regime will stem IFFs
ATAF further said, it also consider the new Pillar Two rules to be 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. However, as we and the African Union have stated on several occasions, the minimum effective tax rate should be at least 20% if it to be effective in protecting African tax bases and stem Illicit Financial Flows (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%, 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%.”
Conclusively, the ATAF team noted matter-of-factly that 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.