New global tax rules may see African countries losing out, again

A NEW system of taxation imposes a top-up tax on profits arising in a jurisdiction whenever the effective tax rate is less than 15 percent.

African countries need to act quickly or they will lose their right to collect corporate income tax to other potentially richer countries under the new global tax rules.

Several countries will start enacting the Global Anti-Base Erosion (GloBE) Rules in 2024 – a new system of taxation that imposes a top-up tax on profits arising in a jurisdiction whenever the effective tax rate is less than 15 percent.

The Organisation for Economic Cooperation and Development (OECD) led the process under which key elements of the international tax system were updated as they were no longer appropriate in a globalised and digitalised economy.

Minimum tax level in 2021 the Pillar Two Model Rules were released with the aim of ensuring that large multinational enterprises pay a minimum level of tax on the income arising in each jurisdiction in which they operate.

Companies affected by these new rules are those with revenue of more than €750 million and an international footprint. They will have to calculate their effective tax rate for each jurisdiction in which they operate, and pay top-up tax for the difference between their effective tax rate per jurisdiction and the minimum rate of 15 percent.

In terms of the rules, the top-up tax is generally charged in the headquarter (resident) country and not in the source country (where the revenue is generated).

Given the sometimes ‘excessive’ tax incentives given by African countries to large multinational companies to attract investment, these countries stand to lose out on substantial tax collections.

Getting Africa’s share

The African Tax Administration Forum (ATAF) has been an active participant in the negotiations (on behalf of developing countries) in the Inclusive Framework platform of the OECD. Thulani Shongwe, international tax manager at ATAF, says there is a mismatch between the tax collected (in Africa) from large multinationals and their global profits.

This is exacerbated by the global move to digital economies. ATAF has been trying to swing the new tax rules in favour of developing countries. ATAF technical advisor Lee Corrick says the introduction of a domestic minimum top-up tax (DMTT) is a useful first step.

In terms of the rule, the DMTT preserves a country’s primary right of taxation over its own income. It reverses the rule order to give priority taxing rights to the source rather than the resident country.

The domestic top-up tax is then fully creditable against any liability under the GloBE rules. Opt-in countries Countries that will be enacting the GloBE rules include all 27 European Union member states, as well as Jersey, Liechtenstein, Norway, Switzerland, the United Kingdom, South-East Asian countries, New Zealand, Australia, Canada, the Bahamas, Columbia, Mauritius, and South Africa.

The question is how much tax African countries stand to collect because of the new tax rules. Without the introduction of the DMTT African countries will lose out since there are very few countries, except for South Africa, Nigeria and Kenya, that have large multinational headquartered companies.

Corrick says ATAF has drafted model DMTT legislation that could act as a toolkit for African countries to develop their own legislation. The domestic legislation will have to be peer reviewed to qualify as a domestic minimum top-up tax since it must be aligned with the global rules.

Domestic legislation

ATAF executive secretary, Mr Logan Wort, says particularly low-income tax countries with huge tax incentives stand to lose if they do not develop their own DMTT. If a multinational company is operating in an African country without a DMTT and its effective tax rate is five percent the resident country (where its headquarters is) will collect the top-up tax of 10 percent.

Mr Wort notes that the economic growth rate of some African countries ranged between 8 percent and 9 percent pre-Covid-19. However, post-Covid-19 the average growth rate has been below 4 percent and growth projections for the next two years remain below 4 percent.

“This will put heavy pressure on domestic budgets. Boosting revenue will be an important instrument to deal with climate change [and] the debt and energy [crises] facing many countries on the continent,” he said during a media briefing on progress regarding the adoption of the GloBE rules.

Corrick added that in the absence of a DMTT there will be no fair allocation of corporate income tax between African countries and those that implement the new global tax rules.

– Bloomberg