As of July 2021, over 130 countries and jurisdictions, including many African countries, have joined a new two-pillar plan to reform global tax rules and ensure that multinational corporations (MNCs) pay their fair share of taxes irrespective of where they operate.
Pillar One of the agreement on base erosion and profit shifting (BEPS) seeks to ensure a fairer distribution of profits and taxing rights among countries with respect to the largest multinationals including digital companies, while Pillar Two introduces a global minimum corporate tax rate that has the effect of protecting the tax bases of countries and putting a floor on tax competition amongst jurisdictions.
This article examines the potential of the BEPS pillars in Africa and the measures through which they can be utilised by African tax administrators for the purpose of maximising tax revenues and solving the numerous developmental challenges on the continent.
Harnessing the BEPS potential
Today, many African countries are unable to tax highly digitalised businesses as a result of current international tax rules, which only allocate taxing rights to a country where non-resident businesses create sufficient physical presence in that country. With taxing rights of over $100 billion in multinational profits expected to be reallocated to market jurisdictions annually under Pillar One, ATAF argues that the rules will be effective measures that can be used to address 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 tax revenue.
The global minimum corporate tax rate of 15% under Pillar Two is also seen as a significant step towards addressing the race to the bottom and other harmful tax practices. If properly implemented, it provides an opportunity for African governments to generate revenue and restore crippled economies on the continent, as well as encouraging African countries to compete on positive bases.
According to the OECD, the global minimum corporate tax rate is estimated to generate around $150 billion in additional global tax revenues every year. It therefore has the potential to boost corporate income tax revenues in African countries, while also reducing the incentives for shifting profits to low-tax jurisdictions by MNCs. By setting a global minimum tax rate, African countries will have the chance to protect their tax base and prevent further erosion by multinationals without causing much damage to corporate activity. Additional benefits are also expected to arise from the stabilisation of the international tax system and the increased tax certainty for taxpayers and tax administrations in Africa.
Action points for African governments and tax administrators
The BEPS pillars will no doubt provide an opportunity for African governments to tackle the various tax challenges arising from the digitalisation of economies in Africa. To harness the potentials of BEPS Pillar One and Pillar Two, it is essential for African countries to fully participate in the ongoing negotiation process to ensure that their challenges are addressed and that the international tax rules that emerge from this process is favourable to African countries.
Research shows that more than 50% of African states are not actively involved in the global tax reform process. It is imperative that African governments participate in their numbers in order to champion a common African position during negotiations and protect their tax bases. Those participating have been represented by the intergovernmental Group of Twenty-Four (G24) and the ATAF, which coordinate the positions of members that are taking part in the negotiation process. In addition to participation, African states must take into consideration the fact that their tax challenges are quite different from those of developed countries, and must therefore ensure that their final solutions are suitable and unique to the realities of their local economies.
While the new Pillar Two rules are considered to be ‘a step in the right direction’ in curbing illicit financial flows and profit shifting out of Africa by MNCs, there is a need for African tax administrators to push for a global minimum tax rate that would prove effective in protecting African tax bases and significantly improving tax revenues for governments in Africa. Since most African states have corporate income tax rates of 25-35%, tax justice campaigners and experts have argued that the 15% minimum corporate rate under Pillar Two is too low and cannot lead to a significant reduction in profit shifting in Africa.
It has been observed that in light of the implications of adopting a global minimum tax rate on the continent, there is a need for African tax administrators to rethink their tax incentives framework in order to avoid losing revenues to other countries and jurisdictions. The African Union (AU) is also expected to play a critical role in providing leadership and political support on the ongoing negotiations, while also engaging other global political organs such as the United Nations in developing measures to redress the current imbalance in the allocation of taxing rights between the source and residence states. It is also essential for African governments and tax administrators to focus on developing internal capacities to reduce the evolving challenges of taxing digital businesses. According to the AU, this can be partly achieved through support by ATAF, which is already building capabilities of many tax administrations in Africa.
A unique opportunity
There is no doubt that the COVID-19 pandemic has revealed a pressing need for African countries to address fair and effective taxation of multinationals that can finance the fulfilment of economic growth and development on the continent.
The BEPS pillars offer a unique opportunity for African governments to address the various tax challenges arising from increased digitalisation of economies, as well as maximise tax revenues and solve developmental problems.
To utilise this opportunity, African governments and tax administrators must work diligently towards providing policy direction and political support to ensure that the new rules under Pillar One and Pillar Two promote Africa’s interests and ensure equitable taxing rights for the continent.