All about global tax reforms and what Africa is doing

By Donasia Massambo

In an ever-evolving world, technology has made it possible to trade as if you reside in the same village.

To this reality, physical distances have been reduced making it easier for goods, information, and capital to move around.

While Governments have enjoyed spurred economic growth, the intricacies of such growth are worth pondering from the taxation of cross-boarder transactions, which typically results to double taxation or double non-taxation.

To curb these practices, international taxation policy makers have developed policies to ensure each country gets its fair share of tax revenues from cross-boarder transactions.

Speaking from the current international taxation landscape, one must admit that our policies and tax systems covering cross boarder transactions were designed and developed based on the traditional ways of doing business, which entailed the physical movement of goods, information, and capital.

The game has changed. Some of these policies and systems have become obsolete due to the evolving business landscape.

For example, the emergence of digital employees, delivery of services via virtual platforms, performance of economic activities by corporations in another country via briefcase offices (without having a physical office or fixed place of business), to name but a few.

Over the years, these practices have created opportunities for aggressive tax planning by Multinational Enterprises (MNEs), leading to erosion of the domestic tax base and profit shifting to low tax countries.

Digesting the ongoing global tax reforms

The G20 countries through the Organization for Economic Cooperation and Development (“OECD”) embarked on a project in 2013 to develop a modern international tax framework in order to catch up with the ever-evolving business environment.

This project was known as the BEPS project (Base Erosion and Profit Shifting) and the idea was to ensure profits are taxed where an economic activity and value creation occur.

To buttress the BEPS project, the OECD further established an Inclusive Framework as a global tax governance network to facilitate implementation of its BEPS initiative.

In order to create an equal playing field, the Inclusive Framework allows participating States to engage in an inclusive dialogue on an equal footing to directly shape standard setting and monitoring processes.

This newly proposed international tax framework intends to be adapted by member States of the Inclusive Framework and other non-member countries who may find the proposals aligning with their economic goals.

The BEPS project was undertaken in two phases known as BEPS 1.0 and BEPS 2.0, which have been summarized below:

BEPS 1.0

BEPS 1.0 was completed in 2015, with the introduction of 15 Action reports, providing immediate solutions and recommendations to minimise tax avoidance by MNEs.

Many countries implemented these measures by introducing new legislations or new provisions in their existing legislations to address loopholes for tax avoidance schemes.

BEPS 2.0

BEPS 2.0 was approved in 2021 and aimed to provide long term solutions, through a two Pillar framework.

Pillar One proposed measures for taxing the digital economy and Pillar Two proposed measures for eliminating global tax competition.

It is worth noting that Pillar Two has introduced a global minimum effective tax rate of 15%, with the intention of eliminating tax competition through profit shifting to tax havens and creating a level-playing field.

This means, if all countries implement Pillar Two, tax havens like Mauritius, British Virgin Islands, Luxembourg to name a few, shall no longer attract investments based on their low corporate tax rates.

The overall impact of Pillar Two estimated by the OECD is a substantial increment in global tax revenues.

Now, the question is, since these rules are prepared and proposed by the G20, do they favour and benefit developing countries like those in Africa?

What is Africa doing?

The Inclusive Framework formulated by the OECD has a total of 147 countries, with about 27 countries from Africa.

These include South Africa, Angola, Namibia, Kenya, Nigeria, Egypt, to name but a few. Tanzania is not a member of the Inclusive Framework.

Under BEPS 1.0, several African countries (including non-members of the Inclusive Framework) introduced measures to counter the risk of BEPS in line with OECD’s recommendations.

These were implemented through the support received from various international tax policy organisations, which many African countries are reaping benefits from.

Under BEPS 2.0, countries including those in Africa, are still debating and doing impact assessments to see how they will benefit especially from Pillar Two proposals.

African countries are mostly capital importers and are therefore exposed to the risk of illicit financial flows by MNEs through artificial profit shifting.

While Pillar Two intends to eliminate this, there are concerns that Africa was invited late to the table by the OECD and need to reassess its economic benefits from an African perspective.

The United Nations is also another body that protects the interests of developing countries and has formulated an ad-hoc intergovernmental tax committee to develop a modern international tax framework that is fair and inclusive for developing countries.

It is still unknown whether the UN will reinvent the wheel or align OECD’s proposals with the developing world realities.

Despite the above, countries like South Africa, Kenya and Mauritius who are members of the Inclusive Framework have recently introduced in their legislations the minimum domestic top-up tax which is part of the Pillar Two solution.

Zimbabwe is not a member of the inclusive framework but has also introduced a domestic minimum top-up tax in its legislation.

The slogan used in the newly proposed tax framework under Pillar Two is “If you do not tax, I tax”. Therefore, for those countries that do not intend to implement Pillar Two, face the risk of losing their fair share of tax revenues as the big multinationals operating in their countries will need to pay this top up tax somewhere, to meet the minimum global effective tax rate of 15%.

What is Tanzania doing?

Tanzania is not a member of the Inclusive Framework; however, the local legislations and bilateral tax treaties have been prepared in alignment with the OECD and United Nations model taxation frameworks. Under BEPS 1.0, Tanzania introduced various measures to counter BEPS including but not limited to the following:

Revisiting the definition of equity under Section 12 of the Income Tax Act, 2004 in alignment with Action 4.

Revisiting the definition of Permanent Establishment inline with Action 7.

Repealing the 2014 transfer pricing regulations and guidelines and replacing them with the 2018 transfer pricing regulations and 2020 transfer pricing guidelines to align with Actions 8 to 10.

Under BEPS 2.0, it is still unclear on what Tanzania is going to implement so far, however, a Digital Services Tax was introduced in 2022 as a unilateral measure to tax B2C electronic services.

As we approach the budget season, the possibilities are endless especially with our neighbours Kenya proposing a minimum top-up tax in their Finance Bill for 2024.

According to the OECD’s statistics, an estimated 37% of global profits are taxed at effective tax rates below 15%, while countries with tax rates above 15% account for more than half (56.8%) of all global profits currently taxed below 15%.

With these statistics, the global minimum tax rate of 15% introduced under Pillar Two is anticipated to increase global tax revenues and ensure profits are appropriately allocated where there is creation of economic value.

The discussion around BEPS and OECD will continue taking stage and as we know, tax is very technical and complex. The new rules have made tax even more complicated, necessitating corporations to incur significant amount of compliance costs.

Donasia Massambo is Director-Transfer Pricing Services at Coretax Africa