Global tax reforms currently being thrashed out aim to address challenges arising from the digitalisation of the world economy, particularly the problem of large multinationals paying low levels of tax.
But the proposed Two Pillar Solution might not be that beneficial for African nations, with some even losing tax revenues.
Countries are likely to consider what amount of tax they can collect if they implement their own digital tax regime compared to what they will get in terms of the Pillar One and Pillar Two agreement, says Taiwo Oyedele, PwC’s Africa tax leader. He was speaking at the firm’s African Tax and Business Symposium on Tuesday (26 July).
The Two Pillar Solution, a negotiated agreement under the auspices of the Organisation for Economic Cooperation and Development (OECD) and G20 countries, aims to align the markets of large multinational entities and where they pay tax on profits. It also seeks to reduce tax competition between countries by introducing a minimum tax rate of 15%.
Pillar One aims to ensure a fairer distribution of profits and taxing rights among countries. Pillar Two introduces a global minimum corporate tax rate of 15%.
The main reason the OECD is looking for solutions to digital tax challenges is because of the disconnect between where a multinational enterprises’s customers are, and where its revenue or profits are reported, says Archi Ramana, associate director at PwC.
Pillar One seems to cause the biggest concern, and will require political agreement between 137 countries (the Inclusive Framework members) on a common platform and principles. There are still lots of moving parts on Pillar One, she adds.
Kyle Mandy, Africa tax policy leader at PwC, says Pillar One will only impact around 100 companies and none of them are based in Africa. The bulk of the companies are US-based.
However, the US remains critical for the process and the likelihood of it implementing the measures under Pillar One appears rather slim.
The US wants any agreement to be conditioned upon a complete withdrawal of unilateral measures that have been implemented by countries. This include digital services taxes, diverted profits taxes, multinational anti-avoidance laws, digital levies and offshore receipts.
The US and Pillar One
Edwin Visser, tax policy leader for Europe, Middle East and Africa at PwC, says the chances of the US implementing Pillar One are “close to zero”. Implementation requires that the members of the Inclusive Framework sign and ratify a Multilateral Convention. The convention will establish the legal obligations of the parties to implement rules to allocate profits in a coordinated and consistent manner.
Visser says this multilateral treaty will require a two-thirds majority in the US Congress to be passed. “I would say the chance of this happening is zero.”
It remains unclear what it will mean for the entire package, since Pillar One and Pillar Two have been presented as a package to solve digital tax issues.
He adds that the rules in terms of Pillar One are “hopelessly complicated”. “I have been in tax policy for 25 years but these are the most complex set of rules I have ever seen.”
He adds that there are huge risks of double taxation and companies will find themselves in very uncertain positions.
Visser is not in favour of digital service taxes, but says a rethink of the rules is needed. “There is a real risk that because of these threats countries who have signed up not to implement a digital services tax may do so.”
Mandy notes that there are “significant countries” in Africa, such as Ghana, Tanzania and Uganda, that are not members of the Inclusive Framework.
Some countries may be sceptical about the inclusiveness of the process and some may be waiting to see what the outcome of the negotiations will be. Others may even decide to introduce their own digital service tax, as Tanzania has recently done, says Visser.
“Those who are not part [of the Inclusive Framework] can still decide, based on the outcome of the negotiations whether it will be beneficial for them to be part of the multilateral convention that is needed to implement Pillar One.”
Visser considers the two pillar solution to be a temporary measure. “They are too complex to be sustainable for the long term and the European Union and the OECD should start a fundamental rethink of how corporates are taxed.”