Will the Global Minimum Tax be a good or bad thing for Africa?
The G7 leaders are proposing the adoption of a global minimum tax rate of 15%. This can be viewed as a “global race” to combat tax avoidance and obliteration of tax havens, with the essence to prevent multinationals from shifting profits to jurisdictions with lower tax rates.
This is a thing that has been fondly coined and pitched as “preventing a race to the bottom”. The idea behind it is seen as a stroke of genius, as it aims to reduce base erosion and profit shifting (BEPS) in major capital-intensive sectors of the economy. There is however a bone of contention. How much tax should a multinational company minimally pay? Secondly, where exactly should it be paid?
The Organization for Economic Co-operation and Development (OECD) has come up with two crucial action plans, categorized as Pillar 1 and Pillar 2, to address the underlying concerns. Briefly, Pillar 1 seeks to address the concept of non-resident companies with no permanent or physical establishments to pay taxes where they generate their sales or derive revenue (Market countries/revenue sourcing). It seeks to re-allocate some taxing rights to the market countries by proposing that a residual profit should be taxed in the jurisdiction where the revenue is sourced or generated. However, this tax is capped to “the largest & most profitable” MNE’s with a global annual turnover of €20 billion, and profitability above a 10% margin.
As for Pillar 2 of the proposal, MNE’s are subjected to a minimum corporate tax rate of 15% regardless of where they are headquartered. This is to ensure that multinational enterprises will not shift profits or shop for countries with lower tax rates. This pillar allows countries to implement additional “taxation rights” – the right to “tax back” if other jurisdictions have failed to exercise their primary taxing rights or have a lower level of effective taxation.
Be that as it may, there is one salient question that keeps on surfacing, one that entails whether the global minimum tax will deliver an equitable outcome for developing countries. To kick start this conversation, it’s an inescapable truth that developing countries are dependent on foreign investments, hence have to put in place tax incentives to harbor more MNE’s or their subsidiaries. It has been suggested under the OECD Action plans, that in the event the proposal is adopted, then countries will have to repeal unilateral tax incentives in their domestic laws and investment agreements in order to affect the global minimum tax rate.
The long-standing debate as to whether the proposals will benefit developing countries appears to have no right or wrong answers – as they are majorly political. Nonetheless, it has shaped the global debate and called for more equality in allocation of the taxing rights for African countries.
From my personal standpoint, some of the proposals that I deliberately take flight and depart from are as follows:
First, to effect Pillar 1, developing countries have been requested to repeal the Digital Services Tax (DST). You will note the controversy around the application of DST in Kenya, which was meant to tax any revenue generated from a digital market place. Currently, subject to the new Income tax amendments, it is provided that income accruing from business carried out over the internet or electronic network, including a digital marketplace, will be chargeable to income tax. However, DST is only chargeable to income earned by non-resident persons. In the event we rescind on this law, it means there will be no tax revenue collected from the digital market places like Amazon. This ultimately reduces tax revenues in developing countries.
This also means that residual profits of MNEs not falling within the proposed scope of €20 Billion, but generates a substantial amount of revenue, will not be allocated to market jurisdiction where they generate revenue.
Secondly, the OECD proposes a mandatory and binding dispute resolution mechanism for issues arising under Pillar 1. This infringes on the national laws and sovereignty of developing countries. In fact, it has been argued that the same will result to non-transparent outcomes and unnecessary arbitration costs.
Another issue is that the average corporate income tax rates in developing countries ranges between 25-35%. As such, a rate of 15% would be detrimental for smaller economies, as it reduces their respective corporate income revenues.
Additionally, the revenue under Pillar 2 would be allocated to countries in which the MNE’s are headquartered, which is usually in the big economies (Global North) whereas, the developing countries will not fully benefit, as they will only apply taxes under Pillar 1 which again, is capped to only “the largest and most profitable companies”. The proposal also gives priority to the home countries of the MNE’s to tax undertaxed profits, despite the host-countries being the “source” of these undertaxed profits. This is unfair to developing countries.
In summary, whether the deal is better or flawed for developing countries depends on what the African Continent and other Global south countries shall negotiate for. However, these divergent views can only be used as an opportunity to reform international tax regime for the benefit of all countries in an equitable manner, and not to deny revenue for countries that wholly depend on corporate tax revenue.
Therefore, my two cents would be as follows: In order to ensure that developing countries benefit under Pillar 1, it is important to lower the threshold so that many MNE’s with presence in Africa can fall within the scope of the deal.
My next article will touch on the alignments that Kenya has made in its Tax laws to accommodate this global debate.