This blog first summarises the global deal. It highlights why some African countries are yet to agree to the agreement, drawing from national experiences. It also shares some expertise on international tax that can guide African countries as they plan their approach to taxation of the digital economy. Finally, it proposes a partnership between UNDP and African governments and stakeholders on Domestic Resource Mobilisation.
The 'Historic' Global Minimum Corporate Tax Deal
On 30 October, the leaders of the world's twenty major economies- the G20-endorsed the implementation of a two-pillar blueprint to address the tax challenges arising from the digitalisation of the economy. Notably, the agreement includes partial reallocation of taxing rights to market jurisdictions and a 15% global minimum tax for multinational enterprises (MNEs). Pillar One will apply to MNEs with global turnover above 20 billion euros and with a profit margin above 10%, whereas Pillar Two will apply to MNEs with global turnover above 750 million euros.
It is worth noting that only 23 African states are among the 137 countries and jurisdictions set to implement this global deal - less than half of all the countries on the African continent. Two of the main issues for African countries as their economies become increasingly digitalised going forward are i) options for better nexus and profit allocation rules mainly as source jurisdictions; and ii) opportunities for policy and administrative support to deal with Illicit Financial Flows (IFFs). Therefore, it is crucial to fully assess the current momentum around a worldwide tax reform deal from an African perspective. To ascertain how it can improve our understanding of the African context while promoting a more unified African voice on international tax cooperation and global tax governance for sustainable development.
The deal is an outcome of a series of consultations and negotiations, as part of the Organization for Economic Co-operation and Development (OECD)/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS), to find the best approaches to tackle tax avoidance and evasion, and ensuring that multinationals are taxed fairly. Only twenty-five (25) African countries are members of the Inclusive Framework, meaning that over half of the continent did not participate in the standard-setting process. Thanks to the deal, some 137 countries and jurisdictions have so far have joined the two-pillar plan to reform international taxation rules and ensure that multinational enterprises pay a fair share of tax wherever they operate. The global minimum tax or "GloBE," as it is commonly known, is calculated based on rules around the taxation of income of MNEs and provisions within tax treaties that countries have to govern cross-border taxation.
As the world continues to be driven and transformed by technology and by digitalisation, many MNEs have used this as a means to adopt tax planning strategies that exploit gaps and mismatches in tax rules and regulations to pay little or no tax in jurisdictions where they operate. For example, doing business and earning profits in a high tax jurisdiction but shifting them to a low tax jurisdiction and declaring them there for tax purposes. The basic idea around the new deal is that inter-state tax competition and a race to the bottom will be limited, as countries would not reduce or eliminate taxes such as corporate income tax below 15%. As a result, governments will generate more profits from the largest MNEs wherever they operate. The high-level endorsement of a global tax deal is a significant step in the right direction toward generating much-needed tax revenue for countries. In the present context, it can significantly help combat the socio-economic effects of the Covid-19 pandemic.
Africa's Largest Economies Not Sold on the Deal
Two of Africa's largest economies, Kenya and Nigeria, joined the negotiations but did not agree to the outcome. These two countries are reluctant to accept the deal as they have already taken unilateral measures to tax digital companies in their respective jurisdictions. For example, Kenya introduced a Digital Service Tax ("DST") in 2019 and is now collecting taxes from 89 companies. Implementing the global tax deal stipulates that countries would have to remove all unilateral DSTs and other related similar measures on all companies. Meaning, Kenya would only collect DST from 11 companies that fit the requirement of global turnover and pre-tax profit before tax.
Furthermore, they also expressed concern that the arrangements on binding dispute prevention and resolution mechanism requirements may make taxing nations lose their sovereignty by resolving tax issues in the corporations' home countries.
Evidence and Perspectives from Africa on the Global Minimum Corporate Tax Deal
African countries are trying to address the lack of resources and technical tools to support significant increases in tax revenues in a complex international finance landscape. Hence the renewed focus on accelerating Domestic Resource Mobilisation (DRM). Under these circumstances, greater technical and political support is needed on the continent, to ensure that the new rules under the two pillars are a good fit for Africa.
African governments and stakeholders can use the momentum to highlight efforts that have been ongoing on the continent to push for Africa's taxing rights. These could include continuing to support home-grown solutions to address structural issues such as tax loopholes; IFFs; and devising innovative systems that facilitate trade and reduce inefficiencies associated with cross-border payments and settlements. For example, the African Union - which brings together all 55 African states - is advocating for a Common African Position on the current global debate on international tax rules that African countries can champion in future. This common position would give more taxing rights to African countries and provide options for addressing the issue of IFFs with less administrative complexities for implementation at the country level. In addition, the African Tax Administration Forum (ATAF) has already proposed an approach to drafting legislation on Digital Sales Tax Services that African countries can consider, which takes into consideration the specific challenges they face. The ATAF approach further aims to build public confidence in the tax system's fairness and encourage tax compliance in African countries.
By proactively participating in and committing to continental frameworks such as the ATAF, African countries will have a greater political voice and access to the technical support necessary to analyse how the global deal works for them.
UNDP supporting Domestic Resource Mobilisation Efforts in Africa
UNDP supports African governments in their efforts to finance the 2030 Agenda. The UNDP Regional Bureau for Africa is rolling out a regional tax-for-SDG initiative entitled Domestic Resource Mobilisation (DRM) for a renewed Social Contract in Africa.
This initiative will highlight the vital role of taxation and fiscal policies, including providing financing for public goods and services, redistribution, and representation. More importantly, the initiative recognises that the link between individuals and the state is still evolving in many African countries. Thus, a progressive and fair tax system must strengthen this relationship and foster good governance. However, a more profound social contract requires changing how people perceive taxation – not as an obligation but as a partner in governance - can only happen if tax systems are equitable and seen to be fair, including linking tax revenues to development outcomes.
UNDP will continue to engage governments and stakeholders in Africa to develop tax and fiscal policy initiatives, including knowledge products that inform discussions on key tax issues in Africa and contribute to strengthening Africa's voice on international taxation.