The African Tax Administration Forum (ATAF) has issued a statement on what the OECD/G20 Inclusive Framework (IF) on Base Erosion and Profit Shifting (BEPS) two-pillar solution to address the tax challenges arising from the digitalization of the economy means for Africa.
The ATAF, in its statement, welcomed this milestone and acknowledged the fact that a global consensus on the tax challenges arising from the digitalization of the economy is of great importance since cooperation and multilateralism are required in developing solutions that will assist all countries in rebuilding their economies in a post-COVID-19 environment.
In order to ensure that all developments by the IF relating to taxation of the digitalized economy meet the needs of African countries, the ATAF has been providing technical support to its members and actively participated in the ongoing discussions, for example, in the recent release of its proposal on Pillar One on 12 May 2021.
The key issues in the ATAF's statement are summarized below.
Pillar One
The ATAF welcomes the fact the new Pillar One proposals reflect many of their proposed changes that were made to the IF blueprint report released for public consultation in October 2020. The ATAF and its members considered that the proposals in the blueprint were far too complex and resulted in insufficient profits being reallocated to market jurisdictions.
The ATAF proposed that the reallocation of profits be calculated as a portion of multinational enterprises (MNEs)') total profits instead of its residual profits. This is because of the likely unequitable distribution of profits especially for businesses that do not have a taxable nexus in the market jurisdiction such as digital businesses. In this regard, the quantum to be reallocated would be a return on market sales based on the global operating margin of the MNE group. This proposal was not adopted by the IF according to the statement issued on the two-pillar solution.
The IF agreed to allocate between 20% and 30% of residual profit - Amount A (profit in excess of 10% of revenue) to market jurisdictions. But in order to result in an equitable and meaningful reallocation of profits to market jurisdictions, the ATAF is of the opinion that at least 35% of residual profit should be allocated to market jurisdictions.
The ATAF also recommended that the IF consider implementing an elective binding dispute resolution mechanism to be made available to African countries with limited capacity and no or a low level of mutual agreement procedure (MAP) disputes. According to the statement of the IF, there is a proposal to only consider giving an elective binding dispute resolution mechanism for issues related to Amount A for developing economies that are eligible for deferral of their BEPS Action 14 peer review and have no or low levels of MAP disputes.
Pillar Two
Much as the ATAF has welcomed the introduction of a global minimum tax rate by the IF, the ATAF together with the African Union continue to advocate for a higher rate of at least 20% instead of the proposed 15%. In their view, a higher rate will be more effective in protecting African tax bases and stem Illicit Financial Flows (IFFs) by reducing profit shifting by MNEs.
The ATAF welcomed the agreement by the IF on the inclusion of the Subject to Tax Rule (STTR) as a minimum standard. Since the suggestions by the ATAF to make source-based rules (i.e. the Undertaxed Payments Rule (UTPR) or STTR) primary rules under Pillar Two so that they have priority over the Income Inclusion Rule have received a lot of resistance from most developed countries, as a minimum standard, developing countries can now require the inclusion of the STTR in bilateral tax treaties with other IF members that apply nominal corporate income tax rates below the STTR minimum rate. The ATAF is, however, calling on the IF to widen the scope of the STTR to cover payments of interest, royalties, capital gains and all service payments instead of only interest, royalties, and a defined set of payments as agreed upon by the IF.
In conclusion, the ATAF recognizes the need for further work to be done in order to finalize the new Pillar One and Pillar Two rules in order to ensure a more equitable tax allocation and to stem IFFs from Africa and also raises concerns on how these new rules will impact countries that are not members of the IF or on any IF members that choose not to adopt the new rules. ATAF suggests that countries should join the IF at will and no form of political pressure should be exerted on any country to join. Currently, of the 54 African countries, only 24 are members of the IF and four of these countries (i.e. Angola, Congo (Dem. Rep.), Kenya and Nigeria) have not yet joined the new two-pillar plan to reform international tax rules.