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New perspectives: Inside new global tax reform trends

Obituaries
The G20 noted that international tax rules were enacted in the 1920s (100 years old) yet the business environment is changing, including the growing importance of intangibles, data and the digital economy.

BY LEARNMORE NYAMUDZANGA 

On October 30 and 31, 2021, G20 leaders met in Rome and among other things, endorsed the final political agreement as set out in the statement on a two-pillar solution to address the tax challenges arising from the digitalisation of the economy.

They also endorsed the implementation plan released by the Organisation of Economic Co-operation and Development (OECD/G20) Inclusive Framework (IF) on Base Erosion and Profit Shifting (BEPS) on October 8, 2021 hoping to establish a more stable and fairer international tax system.

This meeting came after heavy criticism of the IF by different tax justice organisations and progressive movements.

Some of these organisations include Zimcodd, Tax Justice Network, AFRODAD, Tax Justice Network Africa, Alternative Information and Development Centre (AIDC), African Tax Administration Forum, African Centre for Tax and Governance, ActionAid and Oxfam.

On October 26, I had the opportunity to present on “A Critical Overview of Global Reform” during the event co-hosted by AIDC and TJNA in Johannesburg, South Africa, which forms the basis of this article.

Just to give you a brief background.

The G20 noted that international tax rules were enacted in the 1920s (100 years old) yet the business environment is changing, including the growing importance of intangibles, data and the digital economy.

In September 2013, the G20 and OECD came up with the BEPS Action Plan with 15 action plans of which action one (1) was on digital economy.

In September 2016 they established an inclusive framework on BEPS.

This was followed by resumption of work on Pillar 1 and 2 proposals on taxing the digital economy in 2019.

In 2020 we saw the publishing of blueprints of the IF followed by consultations.

In January 2021 USA’s new administration (Joe Biden) took the show through its new tax proposal.

This was then followed by the announcement of the G7 proposal in June 2021.  On 1 July 2021, 130/139 members of OECD IF endorsed the G7 proposal.

On 8 October 136/140 countries of the Inclusive Framework (excluding Kenya, Nigeria, Pakistan, and Sri Lanka) agreed to enforce the two-pillar system which was then endorsed by G20 on the 30th and 31st of October 2021 during the G20 Leaders’ Summit.

It is important to note that for almost a decade, the OECD have been struggling to come up with concrete solutions to deal with BEPs, including taxing the digital economy.

There are a number of reports and leaks that can support this, such as the High level panel report (2015 Mbeki), Panama Papers (2016), Paradise papers (2017), UNCTAD 2020 report on Illicit Financial Flows (2020) and the recent Pandora papers (2021).

So what is the current pillar one and two?

Pillar one

This pillar gives market jurisdictions the right to tax 25 % residual profits (Amount A) which are profits in excess of 10% profit margin.

These profits will be based on financial accounting subject to minimal adjustment and carry forward of losses.

An estimated 100 Multinational Enterprises (MNEs) with global sales of 20 billion euro will be affected by this pillar.

To tax these MNEs they must meet at least 1 million euro in your country/jurisdiction or 250 000 euro if your jurisdiction’s GDP is less than 40 billion euro.

In return, the nation must sign the Multilateral Convention (MLC) which require all parties to remove all digital services taxes and other relevant similar measures with respect to all MNEs, and to commit not to introduce such measures in the future.

The MLC, through which Amount A is implemented, will be developed and opened for signature in 2022, with Amount A coming into effect in 2023.

Simplification and streamlining of application of arm’s length standard to routine marketing and distribution (Amount B) of all business is expected to be completed by 2022.

Pillar one does not include the extractive sector and financial service like insurance.

Tax disputes on residual profits (Amount A) will be resolved through mandatory dispute resolution except for few jurisdictions that have no or low levels of Mutual Agreement Procedure (MAP) disputes.

Pillar two

This pillar also known as Global Anti-Base Erosion — GloBE rules seeks to address tax competition, race to the bottom, profit shifting and remaining BEPS issues through minimum effective tax rate (ETR) of 15%.

This applies to all MNEs generating a revenue above 750 million euro.

Pillar two  gives jurisdictions the right to ‘tax back’ where other jurisdictions have not exercised their primary right or income subject to low rate of tax [Undertaxed Payment Rule (UTPR) and Subject to Tax Rule (STTR)].

It also proposes a “top-up tax” to minimum ETR to provide a level playing field for jurisdictions and taxpayers (Income Inclusion Rule).

It’s optional to change domestic laws and this pillar does not apply to: Government entities, international organisations, non-profit organisations, pension funds and MNEs in the initial phase (five years) that have a maximum of EUR 50 million tangible assets abroad and that operate in no more than 5 other jurisdictions.

Analysis of Pillar one

Yes, it is a positive baby step as rich nations and MNE have acknowledged that markets contribute to profits and MNEs are unitary businesses.

However, the OECD/G20 inclusive framework is too complex and unfairly allocates tiny profits to source jurisdiction.

Why most profitable MNEs? why excess of 10%? Why only 25% (which is too low) of residual profits?

Some MNEs like Amazon may not be taxed as their profits are less than 10%, and we should expect under estimation of sales or over estimation of expenses to remain below 10% profit margin.

Nations will have to give up tax sovereignty to charge unilateral digital sales tax and other form taxes they had devised to tax to tax digital economy like in the case of Nigeria which was now using a significant presence.

Though mandatory binding arbitration African states will lose sovereignty of their courts and that happens then they are doomed.

Singing the Multilateral Convention is signing a blank cheque or choosing between a bad and worse deal.

Some nations are just signing because they just want to be part of the international community otherwise the deal is a package with some sugar coated bad things.

How many companies have left our countries because we were charging unilateral taxes?

Other nations are just supporting the spirit of multilateral against unilateral taxes and have fear of unknown, criticism, sanctions and fear of losing allies.

This is more of entering into a forced marriage hoping that things will be better in future.

Analysis of Pillar two

It is a positive step towards stamping extreme tax havens and helping many African nations to deal with harmful tax incentives that are being given on political grounds without proper evaluation.

However, 15 % is too low statutory CIT for Zambia and Sudan is 35% and the average of Africa’s CIT is estimated to be 27.46% (KPMG 2021) so profits shifting is still possible and this may lead to a race to the minimum tax of 15%.

To some countries 15% is already an incentive on its own and some CSOs have been advocating against such incentives.

If organisations were proposing the following ICRICT-25% US -21%, ATAF- 20%, G7-15%, G20/OECD-12.5% so who would have won?

Frankly speaking, the USA and few rich countries will benefit substantially who are the capital exporters and headquartered most MNEs.

African countries will not benefit much and might even lose revenue bearing in mind that CIT plays a significant role in Africa estimated to contribute 16-19% and is progressive in nature.

In concluding the Inclusive Framework does not favour the market jurisdictions, and is dominated by Rich countries (OECD/G7/20).

Efforts by the OECD in setting rules is commendable but critics have raised concerns about the influence of developed nations in setting standards for international taxation as benefiting MNEs are headquartered in these developed countries.

Africa must continue to advocate for a global tax body under the auspices of the UN in a bid to provide more legitimacy, equity, and inclusiveness.

*Nyamudzanga is an independent economist, tax consultant, ZES member, and holder of a Master’s in Tax Administration and Tax Policy. Email: lnyamudzanga@gmail.com. These weekly articles are coordinated by Lovemore Kadenge, independent consultant, past president of Zimbabwe Economics Society and past president of the Chartered Governance and Accountancy Institute in Zimbabwe. Email; kadenge.zes@gmail.com. Mobile No. +263 772 382 852 Nyamudzanga is an independent economist, tax consultant, ZES member, and holder of a Master’s in Tax Administration and Tax Policy. Email: lnyamudzanga@gmail.com.

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