Africa: New Global Tax Rules Will Address Tax Revenue Imbalances
All but four of the OECD’s G20 Inclusive Framework members, including South Africa, have signed an agreement that will reform the global tax system. Two African countries – Kenya and Nigeria – have yet to sign the agreement. The new two-pillar system will provide for a reallocation of taxing rights as well as an overall minimum tax rate for certain organizations. These changes are expected to resolve global tax revenue imbalances, which should benefit African countries.
Key points to remember
- One hundred and thirty-six of the 140 members of the OECD’s G20 Inclusive Framework, including South Africa, have agreed on a new global two-pillar tax system. Two African members, Kenya and Nigeria, have yet to sign the agreement.
- The OECD’s first pillar changes allow market jurisdictions to levy income tax on a portion of the profits of large multinational enterprises (MNEs) operating within their borders.
- The first pillar will apply to multinationals whose turnover exceeds 20 billion euros and which generate a net profit greater than 10% (profit before tax / turnover).
- Amount A is set at 25% of the residual profit of a multinational enterprise (i.e. a profit greater than 10% of turnover).
- This will be allocated to market jurisdictions with a sufficient link, using an income-based allocation key – i.e. income of at least 1 million euros from that jurisdiction (or at least 250,000 euros for jurisdictions with a GDP less than 40 billion euros).
- No agreement has been reached on the implementation and design of the B-amount, which aims to simplify the arm’s length principle for basic marketing and distribution activities.
- The second pillar proposes a new network of rules that will reallocate taxing rights under a new global minimum tax regime of 15%, aimed at ensuring a minimum effective net tax rate in all jurisdictions.
- It will apply to all companies generating a turnover exceeding 750 million euros.
- Countries now have until 2023 to implement the new tax rules.
- The OECD has said it will ensure that the rules can be administered effectively and efficiently.
One hundred and thirty-six of the 140 members of the OECD’s G20 Inclusive Framework, including South Africa, have agreed on a new set of global tax rules that will reform the global tax system. Notably, two African countries that are members of the Inclusive Framework have not yet joined the agreement – Kenya and Nigeria. The two-pillar system will be presented to the G20 leaders’ summit at the end of October 2021. It will result in a reallocation of tax rights from residents to the countries of origin of certain multinational enterprises (MNEs), if thresholds are reached, in plus a global minimum tax rate of 15% for some organizations, implemented from 2023. The agreement aims to correct global tax revenue imbalances and is expected to benefit developing economies in Africa.
According to African policymakers, a multilateral approach to tax collection has many advantages for the continent. Small economies like those in Africa are more dependent on corporate income taxes than large economies. The African Tax Administration Forum (ATAF) previously noted that 16% of total tax revenue in African countries comes from corporate taxes, compared to 9% in OECD countries. African countries have increased their revenue collection methods and put in place punitive measures to crack down on tax evasion measures, as the revenue collected is of the utmost importance for the stability of their economies. But current tax rules have meant that African countries cannot collect tax revenue from multinationals, even if they operate profitably in their countries.
The OECD’s first pillar changes allow market jurisdictions to levy income tax on a portion of the profits of large multinational companies operating within their borders. It will reallocate the taxing rights of their countries of residence to the markets where they operate and generate profits, regardless of their physical presence in that country. The first pillar will apply to multinationals whose turnover exceeds 20 billion euros and which generate a net profit greater than 10% (profit before tax / turnover). Amount A has been confirmed at 25% of the residual profit of a multinational enterprise (i.e. profit greater than 10% of turnover) and will be allocated to market jurisdictions with a sufficient link to the ‘using an income-based allocation key – i.e. an income of at least EUR 1 million from that jurisdiction (or at least EUR 250,000 for jurisdictions with a GDP of less than EUR 40 billion). No agreement has yet been reached on the implementation and design of Amount B, which aims to simplify the arm’s length principle for basic marketing and distribution activities, but the intention is that this be completed by 2022.
The second pillar proposes a new network of rules that will reallocate taxing rights under a new global minimum tax regime of 15%, aimed at ensuring a minimum effective net tax rate in all jurisdictions. It will apply to all companies generating a turnover exceeding 750 million euros. Model rules for integrating the second pillar into national legislation will be introduced in 2022 and will enter into force in 2023.
On the African front, ATAF submitted proposals to the OECD on the new agreement and announced in October 2021 that many of its proposals were integrated into the first pillar, including expanding the agreement to include all sectors. , but excluding the extractive sector. The ATAF said that resource-rich African countries price their minerals on their “inherent characteristics” and not on “market intangibles”, and as such, the rights to tax should go to the country. resource producer.
ATAF further noted that its request for further simplification of certain rules had also been incorporated. Specifically, the link threshold has been reduced to € 1 million, from € 5 million, with a lower threshold of € 250,000 for smaller jurisdictions with a GDP below € 40 billion and without “Plus factors”. ATAF also secured an elective binding dispute resolution mechanism, as opposed to the existing mandatory dispute resolution process, for eligible developing countries.
ATAF also welcomed the fact that the Tax Liability Rule (STTR) would be a minimum standard that developing countries can demand for inclusion in bilateral tax treaties with members of the inclusive framework, and that the STTR would cover interest, royalties and a defined set of other payments. However, there was a disappointment that the deal only affected 25% of residual profit to market jurisdictions below the A amount – ATAF had advocated that this be 35%.
African countries now have until 2023 to implement the new tax rules, facing difficulties in tax implementation due to capacity issues and issues related to the impact of the rules on countries that are not. members of the Inclusive Framework. However, the OECD has said that it will ensure that the rules can be administered effectively and efficiently and that they will provide full support for building the capacity of countries that need them. Overall, global tax changes are good news for the continent and are expected to result in increased tax revenues for African countries at a time when capital is critical for post-pandemic recovery.
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