The increased digitalisation of the economy has further exacerbated the situation since MNEs can remotely make sales in various jurisdictions without creating a taxable presence as the current international tax rules require such a physical presence. Also, digitalisation has enabled MNEs to develop and exploit new value streams which are not recognised by the current profit allocation rules. Thus, there has been an ogoing global debate on how to address tax challenges arising from digitalisaiton of economy. From our perspective the debate should also aim to address the current imbalance in the allocation of taxing rights between source and residence states.
Throughout the debate on taxing the digitalised economy, the OECD unified approach has brought about criticisms and compliments at the same time. The efforts to align a large and complex programme of work is no mean feat but are there gaps present, and were these overlooked? Especially when you look at emerging markets. The challenge is more evident in that Pillar One of the Unified Approach deals with both highly digitised companies or automated digital service (ADS) and consumer-facing business (CFB). The main issue here is to develop new tax rules for establishing sustained and significant economic presence of multinational enterprise in a jurisdiction (new nexus) instead of relying on physical prenses test as currently is the global standard, and to revise the current profit allocation rule to ensure more profits are allocated to market jurisdictions. On the other hand, Pillar 2 aims to address remaining BEPS issues by ensuring that all of the global profits of an MNE are taxed at least at a minimum effective tax rate.
Whilst the Inclusive Framework continues to steer the discussions under Pillar 1 and Pillar 2, critics continue to voice their concern that there is limited economic impact assessment of these proposals hence many countries struggle to determine the benefits and effectiveness of the proposals. As a result of these concerns, the OECD Secretariat is in the process of conducting impact assessment for both Pillar 1 and Pillar 2. This economic impact assessment of the proposals focus on impact on tax revenue as well as on broader economic issues such as levels of trade and investment.
The question of the economic impact assessment is becoming more important as the technical design work on the proposals under both Pillars continues. African countries need to understand what the implications of the proposals will be to facilitate the political negotiations of the new taxing rights or even enhance profit allocations. A lot is at stake and many Inclusive Framework members are taking strategic positions. These positions should be guided by analysis of technical designs of the proposals as supported by data to assess the impact of those design issues. Thus, without a proper data set, it becomes more challenging to determine for instance, whether Amount A has a massive revenue benefit for African countries. This assessment is vital in determining whether African countries should accept the proposed mandatory and binding dispute resolution mechanism for Amount A and Amount C or whether to focus their attention on Amount B which may not come with those conditions. These questions are complex to answer without data..
The African Tax Administration Forum is reviewing data collected from some member countries. The data set will assist technical experts in the organisation in determining the best position for African countries in relation to the ongoing debate of consensus-based solution for taxing the digitalised economy. Moreover, the analysis will consider aspects of base eroding payments from the African countries. Such analysis will prove essential when determining the types of policies to introduce as well as providing an indincaiton of where countries are losing tax revenue through poor treaties, which could be exploited by multinational enterprises.
ATAF is aware that there is limited publicly available data on African companies that may be used to conduct economic impact assessment of the proposals. Thus, analysis of impact of those proposals from African perspective may be relying on extrapolation of levels of multinational enterprise transactions in Africa as opposed to having comprehensive data of those transactions. This outcome is caused by a range of factors including the legal framework across African which does not compel companies (both private and public) to file financial statements and annual reports with companies registry as well as limited access to this information by the commercial database building companies. Additionally, digital transactions such as advertising fees from a country, purchase of digital content such as movie, online game, payment of fees and commissions to use digital platforms are important revenue streams for assessment of impact of Pillar 1. Whilst it is acknowledged that there are challenges in tracking this transactions, we would encourage African countries to leverage on modern technologies to enhance their capacity to track and quantify these transactions. Possible options may include using the payment gateways or requiring MNEs receiving these revenue streams to disclose the same as part of local filing requirements and/or VAT file rules.
Notwithstanding the challenge of digital transactions as explained above, we consider it necessary for African countries to obtain information currently available and necessary, for the economic impact assessment of the proposals to facilitate effective assessment of appropriate positions for Africa. In this regard, we designed a Data Collection Template and an Online Data Collection Platform which contains data points for information which is available in the tax returns and financial statements of taxpayers. ATAF will use this data set to assess the tax revenue impact of Amount B of Pillar 1 proposal. Thus, the required information should be collected from taxpayers, who are members of MNE group, and are engaged in marketing and distribution activities.
ATAF in its series of Technical Notes on the ongoing global discussions on development of consensus-based solution to tax challenges of digitalisaiton of economy, has consistently indicated that Amount B may be beneficial to the continent as the level of marketing and distribution activities is high yet MNEs conducting these activities continue to engage in aggressive transfer pricing schemes leading to very little tax payments or in some cases accumulation of significant tax losses. As Amount B proposes the use of a fixed return for remuneration of the in scope activities, MNEs engaged in these activities would be required to declare a certain amount of profits leading to elimination of tax losses. Additionally this approach gives MNEs tax certainty and significantly reduces the number of transfer pricing disputes on these matters.
To demonstrate the expected benefits of Amount B, ATAF has analysed some of the data received from some ATAF member countries in respect of MNEs conducting marketing and distribution activities. The results of this analysis show that a properly designed Amount B would have a direct impact of increasing tax revenues in the countries sampled. The additional tax revenue is generated from taxpayers who reported tax losses but after implementation of Amount B, those taxpayers will be required to report a certain level of operating profit based on the quantum of the sales and the fixed return applied. In one of the countries analysed, the additional tax revenue from the sampled taxpayers is in excess of USD 200 Million over the period 2016-2018; if the fixed return for Amount B was set at 5% of the sales. In another country, the results showed that the additional tax revenue from the sampled taxpayers was in excess of USD 290 Million over the perird 2016-2018; if the fixed return for Amount B was set at 5% of sales
Whilst the above results show that Amount B is beneficial to Africa, , ATAF is concerned that the current design of Amount B needs to broad to cover most of the MNE transactions and arrangements. For instance, Amount B should not only apply the traditional limited risk distributors excluding sales agency arrangements and other distributors who may have a different functional profile from the limited risk distributors. Additionally, a narrow scope of Amount B will create opportunities for tax planning as taxpayer may opt in or out of Amount B to achieve certain objectives such as having an opportunity to report losses. As there are various technical design issues, ATAF would like to have more data on level of in-scope activities in Africa to facilitate assessment of possible impact of the various design aspects such as the quantum of Amount B ( as measured by various fixed return rates).
From a broader perspective, the data about the base eroding payment is also critical as this data will enable ATAF quantify the level of tax risk associated with these payments. This information is of critical important in influencing tax policy considerations of countries on aspect of tax treaties and applicable domestic withholding tax rates. With regards to Pillar 2, this data will be critical in assessment of revenue impact of Subject to Tax rule. The Subject to Tax Rule will deny tax treaty benefit and impose withholding tax or any other source tax where it is established that the payment did not suffer the minimum level of taxation as will be set by the Inclusive Framework for the purposes of Pillar 2.
Through our collaborative effort as member countries, we are certain that an extensive data collection will be ideal for decision making. The time has come for Africa to be at the forefront of presenting its own realities and telling its own story. The data collection exercise is designed to ensure that African needs are catered for in the global standard setting agenda. Additionally, the data will be useful in influencing tax policies as well as tax treaty considerations across the continent. Therefore, ATAF calls upon all interested African countries to participate in this important exercise by submitting their anonymised data though ATAF’s African Tax Outlook (ATO) data portal.