31 JANUARY, PRETORIA, SOUTH AFRICA –
ATAF has been actively participating in the work being done by the OECD Inclusive Framework on revising the global tax rules to address the tax challenges arising from the digitalisation of the global economy to ensure that the new global tax rules are fit for purpose in Africa.
Many African countries have reported concerns about the tax challenges they face as their economies become increasingly digitalised. That digitalisation enables multinational enterprises (MNEs) to carry out business in African countries with no or very limited physical presence in the country. This makes it difficult for African countries to establish taxing rights over the profits the MNE is making from the business activities it carries out in the country.
We believe that fundamental changes are needed to the two key underlying principles of the international tax rules, that is the nexus rules and the profit allocation rules (which determine how the MNE’s global profits are allocated between jurisdictions, primarily using transfer pricing rules).
However we are very concerned that the political and technical complexities of the Inclusive Framework proposals and the timing of the process that aims for a global agreement by the end of 2020 means it is extremely challenging for many of our members to fully participate in the Inclusive Framework process and to ensure the new rules are fit for purpose for African countries. We are concerned that these complexities may mean some countries may commit to new rules without a full understanding of the revenue and investment implications for them.
ATAF is therefore providing technical support and advice to our members to assist them in analysing the proposals being put forward by the Inclusive Framework and the implications for their tax base and investment climate.
We have for example published four Technical Notes for our members that provide technical analyses of the various Inclusive Framework proposals and will shortly be publishing a fifth Technical Note.
We have formed an ATAF Technical Committee consisting of some of the top international tax experts in African tax administrations to discuss the proposals and are also holding public consultations with relevant stakeholders in Africa to obtain their input and views on the proposals. We are also carrying out in-depth data collection and analysis work with our members to assist them in assessing the impact of the proposals.
ATAF is determined to ensure that the changes made to the global tax rules as the outcome of the work of the Inclusive Framework address the needs of African countries and are fit for purpose in Africa. In this regard, ATAF is working with the African Union and its Economic Affairs Commission to seek a broader African consensus.
ATAF and 18 African countries attended the Inclusive Framework meeting held on 29th and 30th January 2020 to discuss the latest proposals to address the tax challenges from the digitalisation of the economy. This followed the ATAF Technical Committee meeting in Pretoria South Africa 23rd and 24th January to discuss the OECD Secretariat’s Unified Approach proposals on Pillar One and the work being done on Pillar Two.
The outcomes of the Technical Committee discussions were shared with all of the African delegates participating in the Inclusive Framework meeting to assist them in making their interventions at that meeting.
At the meeting, the Inclusive Framework members reaffirmed their commitment to reach a consensus-based solution by the end of 2020. The next step is a July meeting of the Inclusive Framework where it is hoped to reach agreement on key policy issues that would form the basis of a political agreement.
Unified Approach proposal
At the meeting the Inclusive Framework agreed that the Unified Approach will be the basis for a new nexus and new profit allocation rules. The Unified Approach endorsed by the Inclusive Framework is largely based on the Unified Approach proposed by the OECD Secretariat in October 2019.
A key discussion at the meeting was the U.S. safe harbour proposal which would mean that multinational enterprises could elect whether to be subject to the new nexus and profit allocation rules. Many countries expressing concerns about the feasibility of such an approach, but the IF agreed that the final decision will be taken after other elements of the consensus-based solution have been agreed upon. The Inclusive Framework members will carry out further work on the feasibility of the proposal.
ATAF supports the Unified Approach objective of revising the allocation of taxing rights between residence and source jurisdictions by allocating more of an MNE’s taxable profits to the market jurisdictions.
ATAF supports the proposals in the unified approach to introduce rules that go beyond the arm’s length principle with more simplified approaches to profit allocation to market jurisdictions. African tax administrations often report that the complexities in the application of the arm’s length principle make it extremely challenging to stop artificial profit shifting by abusive transfer pricing practices. Simpler rules should enable African tax administrations to protect the tax base from artificial profit shifting and provide greater tax certainty for both governments and taxpayers.
In particular, we strongly support the proposal under Amount B to allocate a fixed remuneration for tax purposes to routine marketing and distribution activities taking place in a market jurisdiction and reflecting an assumed baseline activity. This will address many of the current transfer pricing disputes taking place in Africa over the appropriate level of returns to such market and distribution activities where that return is determined using the arm’s length principle.
ATAF is in favour of Amount B being a fixed minimum return rule as this will reduce transfer pricing disputes and increase tax certainty for both tax administrations and taxpayers in Africa. ATAF has stressed to the Inclusive Framework the need to develop a clear definition of what constitutes routine marketing and distribution activities. This will be needed if this rule is to be effective in achieving these objectives.
We are therefore pleased to see the proposal acknowledges the need for a clear definition of the activities that qualify for Amount B.
Our primary concern with the proposal is the wish of some countries that all Inclusive Framework members commit to mandatory binding dispute resolution mechanisms to deal with transfer pricing and other related disputes.
We recognise the need for effective dispute resolution mechanisms to eliminate protracted disputes and double taxation. However, we do not support the proposal for the global adoption of mandatory binding arbitration. Many of our members are strongly opposed to mandatory binding arbitration as they consider it impinges on their sovereignty.
We have made our views on this matter very clear in the Technical Notes we have published and to the Inclusive Framework.
Pillar Two – Minimum Tax Rule proposal
ATAF have noted that the current proposal states that the extent of the taxing rights under the GloBE proposal would be limited to a top up to the minimum effective rate. In our view for the GloBE rule to be effective in stemming artificial profit shifting through excessive base eroding payments by African taxpayers to related parties in no or low tax jurisdictions, the minimum effective tax rate must be set at a high enough rate to remove the incentive for such profit shifting. Statutory corporate income tax rates vary across African countries, but most African countries have rates between 25% and 35%. If the minimum effective rate is substantially below these rates, we consider it is unlikely to lead to a change in taxpayer behaviour in respect of such profit shifting.
The proposals for the GloBE rule include different options of blending .
The majority of ATAF members are of the view that blending should be jurisdiction blending not global blending to limit tax planning opportunities. In addition, we consider that the greater the level of blending allowed under the GloBE rule the greater the rationale for a higher-level minimum effective tax rate to limit these tax planning opportunities.
On the issue of the ordering of the Income Inclusion Rule and Tax on Base Eroding Payments Rule our current view is that the Undertaxed Payment Rule should be applied first. This will assist in stemming the very substantial loss of tax revenues in Africa through base eroding payments but also assist in addressing the current imbalance in the allocation of taxing rights, which inappropriately favour residence jurisdictions to the disadvantage of low income countries, which are usually source jurisdictions.
However, there is a view from the Inclusive Framework that this may create significant compliance burdens and difficulties in the design and implementation of the GloBE rules. If that is the case, the Subject to Tax Rule must be applied first and must be mandatory for all Inclusive Framework members in the proposed Multilateral Instrument. This rule ordering will help to address the current imbalance in allocating taxing rights between residence and source jurisdictions, as it will grant rights to the source jurisdiction to tax payments made from that jurisdiction, which have been taxed in the recipient jurisdiction at a rate below the minimum effective rate.
The majority of ATAF members do not support the proposals for an MNE threshold such as the EUR 750 million revenue threshold as this potentially means there will not be full protection against base eroding payments out of African countries.
Some of our members are concerned that many of their taxpayers may be subsidiaries of MNE groups with turnover of less than 750 million Euros and will therefore lose vital tax revenue if the threshold is set at that level. We also note that no such threshold applies in the GILTI rules in the USA rules.
Technical Assistance to ATAF members
From 2016 through to 2019 bi-lateral transfer pricing/international tax programmes have been provided by the ATAF/OECD/WBG partnership on a demand led basis to 14 member countries.
The programmes are producing tangible results and has assisted members assess additional tax of over USD1.1 billion and to date collect nearly USD300 million tax.
It has also assisted most of those countries to introduced new legislation on areas such as transfer pricing and interest deductibility.
Blending refers to the ability of taxpayers to mix high-tax and low-tax income to arrive at a blended rate of tax on income that is above the minimum rate.
The African Tax Administration Forum is an organisation which was established by African revenue authorities in 2009, in order to improve the performance of tax administrations in Africa. The tax administrations of 38 countries in Africa are members of ATAF, i.e. 75% of tax administrations on the continent, making it the premier body on tax matters in Africa.
ATAF believes that better tax administration will enhance economic growth, increase accountability of the state to its citizens, and more effectively mobilise domestic resources. Now in its 10th year of existence, ATAF has positioned itself as Africa’s homegrown solution to improving revenue collection, advancing the role of taxation in governance and state-building and providing a voice for the continent on international tax issues.
For more information:
African Tax Administration Forum (ATAF)
Mr Thulani Shongwe – Manager : Domestic Resource Mobilisation
Tel: +27 (0) 12 451 8808
Cell : +27 (0) 66 487 9635
Source taxation means that the income is taxed in the country in which it arises no matter where the recipient is tax resident