MNEs taxation: Africa demands single global threshold

TO what extent will last weekend’s landmark G7 tax deal be successful in forcing multinational (MNE) companies to pay their fair share of tax?

This has been the big debate since finance ministers from wealthy G7 nations pledged to commit to a global minimum corporate tax of at least 15 percent, rallying behind a US-backed plan.

The historic deal is aimed at getting MNEs, especially tech giants, to pay more into government coffers, which have been severely hit during the Covid-19 pandemic.

The meeting in London has since resolved to battle tax avoidance by making companies pay more in the countries where they do business.

Further, the G7 leaders have agreed in principle to the global minimum corporate tax rate to avoid countries undercutting each other.

The new regulations on making multinationals pay taxes where they operate, known as “pillar one” of the agreement, are expected to apply to global companies with at least a 10 percent profit margin, the BBC reported.

Under the “second pillar” of the agreement, governments commit to a global minimum corporate tax rate of 15 percent to avoid countries undercutting each other. But how does the deal affect Africa and what is the continent’s position on this?

Africa’s position has been that of a single inclusive framework. Led by the African Tax Administration Forum (ATAF, the sole regional tax lobby organisation, the continent has submitted revised “pillar one” proposals to help African governments achieve the desired tax outcomes.

The proposals are aimed at significantly simplifying the rules and addressing several of the inequities in the current proposal to the Organisation for Economic Co-operation and Development (OECD) Inclusive Framework.

“ATAF proposes the adoption of a single global threshold rule to cover all MNEs that generate global sales revenue above a certain amount,” wrote ATAF.

“The new rule would apply to all such MNEs irrespective of their business activities. However, it would retain the current exclusions in the pillar one blueprint and the pillar one domestic revenue exclusion.

“This proposal is similar to some of the features of the recent US proposal, which echoes ATAF’s concerns that the pillar one blueprint proposals are too complex.

“Both the ATAF and US proposal aim to greatly simplify the Pillar One rules by bringing all business sectors into the scope of Amount A except the current proposed exclusions in the pillar one blueprint.

“Both proposals also remove the current Automated Digital Services (ADS) and Consumer Facing Business (CFB) concept and propose no differentiation in profit allocation between ADS and CFB including the removal of the use of the so-called plus factors. Both proposals would mean no or minimal business segmentation.”

Turning to the amount of the MNE’s profit to be reallocated to market jurisdictions, ATAF said the US has estimated that its proposal would lead to approximately the same level of profits being reallocated as under the blueprint proposals.

However, ATAF said it does not consider the estimated level of profits re-allocated under the blueprint as adequate and says this needs to be increased.

“ATAF further proposes that the reallocation of profits, which we refer to as ‘Amount D’, would be calculated as a portion of the MNEs total profits instead of its residual profit,” it said.

“The quantum of Amount D would be a return on market sales based on the global operating margin of the MNE group using a tiered approach whereby the higher the global operating margin of the MNE the higher Amount D would be.

“Amount D would be allocated to a market jurisdiction to the extent it exceeds the arm’s length profits reported in the market jurisdiction for that period.”

Governments have long grappled with the challenge of taxing global companies operating across many countries and this has grown with the boom in huge tech corporations like Amazon and Facebook.

Under the new proposed rules, such tech giants are among those likely to be heavily affected.

The G7 summit was attended by counterparts from Canada, France, Germany, Italy, Japan, and the United States.-chronicle.l.zw