BY LEARNMORE NYAMUDZANGA
On June 5, 2021, the finance ministers of the G7 countries (The US, the UK, France, Germany, Canada, Italy, and Japan) announced the so-called historic global tax agreement claimed to bring the international tax system into the 21st century. While it is acknowledged that the G7 created momentum through political commitment, towards major international tax reforms, the deal is overrated, not transparent, and is neither historic nor global. This is just a political position taken by the seven countries with a population that constitutes 10% of the world’s population, estimated to get 60% of the additional revenue, leaving only 40% to the remaining 90% of the world population (Tax Justice Network). This is a power play, seven developed countries claiming to have struck a global deal on a planet with over 200 tax jurisdictions. Is that fair and global?
Just to give a brief background, in 2013 the OECD and G20 countries launched the Base Erosion Profit Shifting (BEPS) initiative. This was meant to deal with Multi-National Corporation (MNC)’s legal and illegal aggressive tax planning strategies, that exploit gaps and mismatches in tax rules, to artificially shift profits to low or no-tax countries, where there are low or no economic activities known as headquarters jurisdictions. However, there were concerns that these efforts were not inclusive as such the so-called Inclusive Framework (IF) on the BEPS was established in June 2016. Fast forward, the OECD’s IF with special focus on the digital economy has been underway since January 2019, trying to address taxing challenges brought by globalisation and the fourth industrial revolution (4IR) later exacerbated by Covid-19 pandemic.
Some of the digital MNCs accused of abusing corporate income tax (CIT) include Facebook, Amazon, Zoom, Twitter, WhatsApp, and Google etc headquartered mainly in the G7 & G20 countries. They are making profits through selling their services in high tax countries where they are not physically present, say Zimbabwe (known as the market/source jurisdiction), shifting them to and taxed in counties they are physical present say UK or US or Bermuda (known as headquarters jurisdictions).
Now coming to the gist of the analysis, what does the G7 tax agreement mean to Africa especially Zimbabwe? It important to note that G7 communique had 22 points but this analysis will focus on four commitments made under point number 16 where the G7 committed to:
Support the efforts underway through the G20/OECD Inclusive Framework to address the tax challenges arising from globalisation and the digitalisation of the economy.
Reach an equitable solution on the allocation of taxing rights, with market countries awarded taxing rights on at least 20% of profit exceeding a 10% margin for the largest and most profitable multinational enterprises (pillar one).
A global minimum tax of at least 15% on a country-by-country basis (pillar two).
Removal of all digital services taxes, and other relevant similar measures, on all companies.
It is important to note that the so-called Inclusive Framework is made up of 139 countries of which 26 are African countries and IF has two pillars in simple terms; pillar one focuses on scope & taxing rights, pillar two focuses on the minimum tax rate. Sadly, Zimbabwe is not a member of the IF but it is represented by the African Tax Administration (ATAF).
Implications to Africa
To begin with, not all countries are represented in the OECD’s IF being supported by the G7. Africa, let alone Zimbabwe, does not have the political muscle to influence the G7 and G20/OECD countries. So, we are on the table, but sadly we cannot set the agenda and some are just benchwarmers. The current international tax rules (IF) favours headquarters countries denying the source/sales/market countries such as African countries the much-needed revenue (ATAF 2021). In addition, the IF is too complex and unfairly allocates tiny profits to small and developing countries like Zimbabwe.
On taxing rights (pillar one), the focus is on the largest and most profitable MNCs instead of all profitable MNCs. African countries are expected to get taxing rights of at least 20% on tiny residual profits in excess of 10% profit margin. According to Alex Cobham, the executive director of Tax Justice Network (TJN), with this rule, about 100 MNCs will be affected, generating global additional revenue of US$5-12 billion per year, projected to be 2-5% of the estimated global annual loss of US$245 billion through CIT abuse. This commitment affects few MNCs, allocating tiny profits to African states and promotes inequalities among states as more profits are allocated to high-income countries especially the G7or G20, where most MNCs are headquartered. There are also fears that MNCs will underestimate their profit margins to remain below 10%. Africa will not benefit from profits made by Amazon since its net margin was 7.5% in the first quarter of 2021 which is below 10% and was less than 10% last year.
According to Alex Cobham, a minimum CIT of 15% will globally bring up to US$275 billion, unfortunately, 60% of all the additional revenues go to the G7 forcing Africa and the rest of the world to share the remaining 40%. G7’s minimum CIT of 15% is too low considering that in Zimbabwe CIT is 24% and reduced CIT rate for selected mining companies is 15%, CIT for Zambia & Sudan is 35% and the average of Africa’s CIT is estimated to be 27.46% (KPMG 2021). Using Africa’s average there is a difference of 12.46% which is enough (incentive) to encourage MNCs to shift their profits to jurisdiction charging 15%. To make it worse, a minimum CIT of 15% is equivalent to Mauritius’s CIT which means Mauritius will remain our African problem child (Tax Haven).
There are estimated 10 African countries including Zimbabwe charging unilateral digital service tax (DST). In 2019, Zimbabwe introduced a digital tax special flat rate of 5% on satellite broadcasting services and e-commerce with an annual income exceeding US$500 000. Furthermore, effective January 1, 2020, Zimbabwe introduced value-added tax (VAT) on the supply of electronic services such as Facebook. We long for multilateralism but the removal of DST in Africa/Zimbabwe as per G7’s proposal, will be a big blow to the much-needed tax revenue since the tax agreement does not bring much revenue to Africa.
The current tax agreement will benefit a few rich countries (G7 & G20) at the expense of many developing economies and low-income countries such as African countries. It may be a positive step in the right direction, but it does neither end the race to the bottom nor correct outdated and unfair international tax rules. Africa is in dire need of tax revenue to, among others, recover from the Covid-19 pandemic, rebuild its economy and the health sector as well as lifting her citizens out of poverty. At the moment a proposal of at least 25% by the Independent Commission for the Reform of International Corporate Taxation (ICRICT)is the best followed by US -21%, ATAF proposal of 20%, G7-15%, then lastly 12.5% by the G20/OECD IF. Maybe, though I doubt, the much-awaited July 2021 OECD talks by the G20 and other 139 will bring better results and hope by October 2021 the G20 would have made the final decision.
Join forces with many other countries and organisations calling for a new UN Tax Convention and initiation of an intergovernmental UN tax negotiation that will protect countries’ tax sovereignty and people’s human rights from corporate capture
Though MoFED & ZIMRA, have its research-based position, must issue a statement and were possible join the Inclusive Frame to amplify the voice of the existing 26 African countries in the IF
Continue to push for fair, clear, and simple taxing right as well as reasonable minimum CIT through ATAF
Nyamudzanga is an economist, tax consultant, ZES member, holder of a Master’s in Tax Administration and degree in economics. Email: email@example.com. These weekly New Perspectives articles are co-ordinated by Lovemore Kadenge, immediate past president of ZES. — firstname.lastname@example.org or mobile +263 772 382 852