BY LEARNMORE NYAMUDZANGA
On July 1, 2021, 130 (including 24 African countries) of the 139 members of the Organisation for Economic Co-operation and Development (OECD) inclusive framework (IF) endorsed the two-pillar proposed solution which seeks to address the tax challenges arising from the digitalisation of the economy.
On the same day, the Sentry, an investigative and policy team, published a report on Shadows and shells: Uncovering an offshore business empire in Zimbabwe.
These two speak about aggressive tax planning, international corporate tax abuse and private tax evasion among others. The report focuses on uncovering an offshore business empire of one of the prominent business moguls in Zimbabwe and the inclusive framework focuses on proposed solutions to these challenges.
It is now clear that Zimbabwe has individuals and companies that are using complex offshore corporate structures to build and hide wealth in tax havens like Mauritius and the Cayman Islands.
Are our authorities like Zacc, Zimra, and Financial Intelligence Unity aware of this? If yes, what are they doing about it? These tax havens are bleeding the Zimbabwean economy, as such, it is important to follow global tax reforms and where possible proffer solutions to our nation.
Counting our lost tax
According to Tax Justice Network (TJN)’s Corporate Tax Haven Index (CTHI) which is a ranking of jurisdictions most complicit in helping multinational corporations underpay corporate income tax, Cayman Islands is ranked second to the British Virgin Islands and Mauritius is the only African country in the top 15.
It is estimated that in Zimbabwe US$120 million is lost in tax every year to global tax abuse. The loss is equivalent to 3,4% of total tax revenue (estimated to be US$4 billion) which is equivalent to a loss of US$9 per member of the population (estimated to be 14 million).
This is greater than the Global Average Tax Revenue Loss of 2,6%, but less than Regional Average Tax Revenue Loss of 7%. A breakdown of tax abuse losses shows that $72 million is lost to global tax abuse committed by multinational corporations and $48 million is lost to global tax evasion committed by private individuals.
Human face of lost tax
Tax loss is equivalent to 21,35% of the health budget or 10,33% of education spending. The suffered tax loss is equivalent to paying competitive yearly salaries of 53 232 nurses in Zimbabwe.
Africa is estimated to have a total tax loss of US$25,7 billion of which US$23,2 billion is through corporate abuse and US$2,5 billion is through private abuse. This represents 52,46% of Africa’s health budget and the competitive annual salary of 10,13 million nurses.
Back to the recently endorsed OECD two-pillar inclusive framework.
In my last article, G7’s global tax agreement overrated, unfair to Africa, I tried to explain the unfairness of the G7 deal. Unfortunately, or fortunately, according to the OECD statement on 1 July 1, 2021, 130 countries and jurisdictions representing more than 90% of global gross domestic product (GDP), joined a new two-pillar plan to reform international taxation rules and ensure that multinational enterprises pay a fair share of tax wherever they operate.
Pillar one (scope and taxing rights) intends to ensure a fairer distribution of profits and taxing rights among countries with respect to the largest MNEs had few changes that include the following:
l Initially, it was covering digital companies, now covers all business sectors, with the exception of extractives and regulated financial services;
l Market jurisdictions taxing right on the residual profits (those in excess of 10% profit margin — routine profit) initially was at least 30%, now reads between 20-30% because the G7 had probed a minimum of 20%;
l For smaller jurisdictions (those with GDP less than €40 billion), as requested by African Tax Administration Forum (ATAF), is now set at €250 000; and
l Mandatory binding dispute resolution remained and consideration will be given to an elective binding dispute resolution mechanism for developing countries that have limited capacity and no or low level of mutual agreement procedure (MAP) disputes
Pillar two (minimum tax) had few changes including:
l Initially, minimum corporate income tax (CIT) was 12,5% now they endorsed the 15% proposed by G7; and
l Subject to Tax Rule (STTR) which ATAF was pushing for is only possible under multilateral instruments.
Meaning for Africa?
On the positive side, the deal is unfair, but it is a step in the right direction. At least countries with 90% of the global GDP, for the first time had a consensus.
Half a loaf is better than nothing, the deal will increase tax revenue with tiny margins and it may end extreme tax incentives (such as charging 0%), but will introduce a new race to a minimum CIT of 15%.
According to KPMG 2021, average CIT for African countries is 27,46% African states may be tempted to reduce their CIT towards 15%, in an effort to attract international investment (but studies have shown that investment is not attracted by tax incentives).
This will negatively affect tax revenue because, according to ATAF, tax levies on companies are higher in most African countries, on average 16% of total tax revenue compared to 9% in OECD countries.
However, those tiny additional tax revenues under pillar one will come at the expense of our tax sovereignty. The framework was and is still a project of the rich countries (G20), which is now being forced into a global consensus, yet the United Nations is there.
Any nation that signs the deal must remove all digital service taxes and other relevant similar measures on all MNCs. Unfortunately, the inclusive framework remains complex and not all profitable MNCs will be taxed.
In addition, Africa has no right to tax routine profits (10% profit margin) of MNC made in her jurisdictions. It is also important to note that Africa is under political pressure to sign a multilateral deal as witnessed by rigid deadlines set by the developed (OECD) counties.
African countries are afraid of sanctions if they continue to charge unilateral taxes such as digital service taxes. The G7 may have unfairly used its political muscles to influence the 130 countries. The outdated and unfair rules such as transfer pricing that treat affiliates of MNEs as separate entities and promote book paper profits in low-tax countries remain untouched. Sadly, ATAF’s proposed approach which was simpler and would level the playing ground was not adopted.
In addition, the mandatory binding dispute resolution removes sovereignty from local courts.
What will happen next?
There is a high probability that the G-20 will endorse their proposal this month (July), and more nations will join the inclusive framework in fear of sanctions. The developed countries will continue to protect their MNCs.
After addressing reservations and concerns being raised, pillar one may be finalised in October 2021, then developed and opened for signature in 2022 and come into effect in 2023. In the meantime, countries like Zimbabwe should continue charging unilateral DST (but they must be progressive) until 2023.
ATAF and G24 should continue to request for a bigger reallocation of residual profits. The minimum effective tax rate (METR) remains the best option since it reduces the complexity and uncertainty of the OECD proposal for a global minimum tax and it preserves nations’ taxing sovereignty.
The Independent Commission for the Reform of International Corporate Taxation (ICRICT) should continue advocating for a METR of 25% since it has better outcomes for developing countries. Another possible option with better results in the short term is the UN new Article 12B of the UN Tax Treaty, Income from Automated Digital Services.
In the long run, countries and organisations should continue calling for a new UN Tax Convention and the initiation of an inter-governmental UN tax negotiation that will protect countries’ tax sovereignty.
Nyamudzanga is an independent economist, tax consultant, ZES member, holdsMasters in Tax Policy and Tax Administration. Email: firstname.lastname@example.org. These weekly New Perspectives articles are coordinated by Lovemore Kadenge, independent consultant, past president of the Zimbabwe Economics Society and past president of the Institute of Chartered Secretaries & Administrators in Zimbabwe. Email: email@example.com and mobile: +263 772 382 852