Arbeitsgemeinschaft für Entwicklung und Humanitäre Hilfe
Kommentar der Anderen
Changing attitudes towards taxation can only happen if citizens are engaged in shaping tax policy making and if tax systems are seen to be equitable, including appropriate taxation of large corporations as well as linking tax revenues to development outcomes like improved infrastructure, healthcare and education
A comment by Luckystar Miyandazi & Orria Goni1
On 30 October 2021, the leaders of the world's 20 largest economies, the G20, endorsed a two-pillar blueprint to address the tax challenges arising from the digitalization of the economy. The agreement includes partial reallocation of taxing rights to market jurisdictions which are the states and territories in which the buyers of products or the users of digital services are located. A reallocation of taxing rights to market jurisdictions is important for countries of the Global South with big consumer markets. The agreement further includes a 15 percent 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 percent, 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 continent. Two of the main issues for African countries as their economies become increasingly digitalized 2 are i) the allocation of taxing rights between residence and source jurisdictions (to which marketing jurisdictions belong) i.e., the current rules are skewed too heavily in favour of the residence jurisdictions, while African countries are generally source countries and tax on a source basis (where the main profit generating activities take place); and ii) opportunities for policy and administrative support to deal with illicit financial flows (IFF), where some MNEs artificially shift profits to jurisdictions where the profits are subject to little or no tax. Assessing the current momentum around the worldwide tax reform deal can improve our understanding of the African context while promoting a more unified African voice on international tax cooperation and tax governance for sustainable development.
The deal is an outcome of a series of consultations and negotiations as part of the Organisation for Economic Co-operation and Development/G20 Inclusive Framework on Base Erosion and Profit Shifting, to find the best approaches to tackle tax avoidance and evasion and ensure that multinationals are taxed fairly. Only 25 African countries are members of the Inclusive Framework, meaning that over half of the continent did not participate in the standard-setting process.
Under the new deal, some 137 countries and jurisdictions have so far joined the two-pillar plan to reform international taxation rules and ensure that multinational enterprises pay a fair share of tax wherever they operate.
As the world continues to be driven and transformed by technology and by digitalization, many MNEs have adopted 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, profit shifting refers to doing business and earning profits in a high tax jurisdiction but shifting the profits 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 will be limited to prevent a “race to the bottom”. As a result, governments will generate more revenues from the largest MNEs, wherever they operate. The high-level endorsement of a global tax deal is an important step in the right direction towards 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.
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 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 similar measures. This means Kenya would only collect DST from 11 companies that fit the requirement of global turnover and pre-tax profit.
Furthermore, they also expressed concern that the binding dispute prevention and resolution mechanism requirements may make taxing nations lose their sovereignty by compelling them to resolve tax issues in the corporations' home countries.
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 mobilization (DRM).3 Under these circumstances, greater technical and political support is needed on the continent, to ensure that the new rules 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 building support for home-grown solutions to address structural issues such as tax loopholes and illicit financial flows; 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 position 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 illicit financial flows with less administrative complexities for implementation at the country level. In addition, the African Tax Administration Forum (ATAF) has 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 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 Mobilization 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. The initiative recognizes that the link between individuals and the state is still evolving in many African countries. 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 personal stake in governance. This can only happen if tax systems are seen to be equitable, including appropriate taxation of large corporations and 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.
1 This text was first published by the United Nations Development Programme (UNDP): Luckystar Miyandazi & Orria Goni: 'The global corporate tax deal - an African perspective' (United Nations Development Programme (UNDP), 5 January 2022).
2 See also: The African Union: Briefing for the Ministers for taxing the digital economy and the global tax debate (01.-04.12.2020).
3 Domestic resources are the revenues raised by a state, mainly through taxation. Mobilizing more of these resources is particularly relevant for countries of the Global South, due to their substantial financing needs, for example for public infrastructure or social services. Domestic resources are also the most reliable and sustainable source of finance for most of countries in the global South.
Alvin Mosioma (Tax Justice Network Africa): Africa's Pathway towards Structural Transformation (15.12.2021), veröffentlicht auf der Website des Vienna Institute for International Dialogue and Cooperation.
Global Responsibility, Vienna Institute for International Dialogue and Cooperation (07.10.2021): Letter to Austrian Ministry of Finance with a statement on the Two-Pillar Solution including proposed amendments (in German)
Luckystar Miyandazi is a Tax Specialist with UNDP’s Africa Finance Sector Hub based in South Africa. At UNDP, she coordinates the tax-for-SDG initiative, focusing on "Domestic Resource Mobilization for a Renewed Social Contract in Africa". Luckystar has several years of experience working with various organisations on international tax policy research and analysis, advocacy and campaign initiates on fair Taxation. Luckystar holds a Master of Science (MSc) in Taxation from the University of Oxford, United Kingdom and a master’s degree from the Università Cattolica del Sacro Cuore, Italy.
Orria Goni is the SDG Finance and South-South Cooperation Advisor at UNDP’s Africa Sustainable Finance Hub, based in South Africa, where she leads the support to Sub-Saharan African countries to find innovative financing solutions for SDG implementation, putting the SDGs at the heart of the financing systems, and promoting south-south and triangular cooperation partnerships. Orria has 20 years of experience working on governance, human rights and MDG/SDG strategic development planning and financing. Orria holds a Law degree from the Universidad de Navarra and a Master´s degree in International Development from the Universidad Complutense de Madrid, Spain.
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