PRETORIA – “African countries should review their tax incentive regimes and policies to evaluate the impact that the Pillar Two minimum tax rate rules might have on their effectiveness.” The African Tax Administration Forum (ATAF)’S Executive Secretary, Mr Logan Wort said.
Speaking at Mazars conference ‘Set for change: tax transparency, a way towards sustainability’, Mr Wort noted with concern that in most jurisdictions there exists little transparency and governance for granting of such incentives. Stating his doubts regarding whether the recent Inclusive Framework’s two-pillar solution will result in any significant additional tax for Africa, he cautioned that under Pillar 2 solution, these incentives, may actually be ceding taxing rights to the recipient country.
Leaders from corporations, NGOs, institutions, and Mazars' professionals from all over the world shared their insights on how international companies can embrace sustainable taxation.
In a thought-provoking interview, Mr Wort sat down with Erik Stroeve, Financial Services Tax Partner at Mazars, to discuss tax sustainability in Africa.
Erik: The journey of Africa, would you mind helping us by taking us on that journey? How has it been in the last few years?
Mr Wort: "The African journey over the last decade has been very much interlinked with the international cooperation journey and in particular the role of the U.S. and the EU in that cooperation journey. This is important because times have changed and continue to do at an ever increasing pace. This is as true for African countries as any other country. In 2008 the global financial crisis put great pressure on domestic economies in Europe, the US and others, including African countries. Following this crisis and the increased financial pressures on both governments and citizens in developed countries attitudes towards artificial profit shifting by multinational enterprises to low tax jurisdictions started changing, and global tax cooperation commenced work on base erosion and profit shifting by multinationals (MNEs) with the aim to safeguard this much needed revenue.
Africa also saw the need to improve Domestic Resource Mobilisation (DRM) so as to create sustainable revenue and move away from dependence on loans and aid which represented between 20 and 70% of African countries budgets. Improving DRM in Africa requires revisiting tax policies such as the granting of tax incentives, enacting more effective tax legislation and improving tax operating systems to both enable voluntary compliance and combat tax avoidance, evasion, and Illicit Financial Flows (IFFs).
Aggressive tax planning practices through artificial profit shifting by some MNEs is a well-publicised problem. This is particularly the case in Africa where corporate tax avoidance is a major contributor to IFFs , costing Africa billions of dollars in lost revenues needed for social development and to rebuild African economies decimated by the pandemic.
ATAF which is 12 years old, representing 40 of the 54 countries in Africa, works with our members to drive tax policy and operational change and improve tax administration capacity and technical skills to improve Domestic Resource Mobilisation on the continent.
Through our work we support countries to tackle such tax avoidance and that assistance has helped countries assess in excess of USD2.3 billion additional taxes and collect over USD900 million additional tax in less than six years from transfer pricing audits. ATAF is also consulting with business to improve voluntary compliance in Africa."
Erik: Are African tax systems integrated? So, what’s the level of integration among the tax systems in Africa?
Mr Wort: "Africa is not a country it is a continent of 54 independent countries all of which have their own tax policy objectives based on the particular features of their economy. Within those country specific tax policy objectives however, there is scope for more common approaches.
This is so in the area of international tax where there are global tax rules which require being taken into consideration when enacting legislation in the country. For this reason ATAF has published a number of ATAF Suggested Approaches to Drafting Legislation such as for Transfer Pricing, Interest Deductibility and Permanent Establishments. These toolkits to assist African countries in drafting legislation in these areas of international tax and provide a framework which ensures consistency . The Suggested Approaches provide effective legislation based on international best practice which both provides greater tax certainty to enable voluntary compliance, and effective rules to address artificial profit shifting. These Suggested Approaches have been used by numerous African countries and other developing countries across the globe.
On the Customs side however, the establishment of the African continental Free Trade Area ACFTA, will largely enable the countries to adopt similar policies in operationalizing this.
At the administrative level, there is limited integration across the continent. However through ATAF workshops, training, and publications there is an increase in the sharing of best practices between African tax administrations on a wide range of issues such as the taxation of high net worth individuals, the taxation of the informal sector and VAT regimes. This sharing of best practice is also contributing the operational efficiencies of tax administrations across the continent. For instance,ATAF released publications regarding the impact of the COVID-19 pandemic on the operations of tax administrations, sharing some opportunities from the use of virtual platforms and other means of greater remote working."
Erik: Is Africa, including the tax administrations, ready for these discussions? Or are there any focus points that Africa would like to focus on, important elements out of the discussions? What are your thoughts on that?
Mr Wort: "Africa’s readiness has a number of elements and I will focus on two. First, if you look at the recently concluded Inclusive Framework discussions on the tax challenges of the digitalisation of the economy, you need to ask is Africa ready for that level of technicality and pace of the conversation?
The past three years have been incredibly complex and continues to be incredibly complex. The proposed Pillar One and Pillar Two rules raise a huge range of technical design and implementation issues such as the design of a Multilateral Convention for Amount A that countries will need to sign and ratify, drafting of domestic Legislation, the creation of the so-called Review Panel and Determination Panel for Amount A and related issues, the revenue sourcing rules and tax credit rules and then a Multilateral Instrument and domestic legislation for Pillar Two. All of this will create very significant implementation challenges for African tax administrations with limited capacity.
ATAF have set up a Technical Committee ,Cross-Border Taxation Technical Committee and mobilised some of the best minds on international tax to sit and analyse what is being proposed, who looked through the Pillar One and Two Blueprints, and are assessing the potential impact on African countries.
In our view this debate, while said to be global, is in fact largely a conversation between the developed countries on the issue of taxing highly digitalised businesses with limited consideration of the developing world.
Our experience was that largely,, developed countries did not really listen to the views and issues of African and other developing countries. ATAF raised this concern with the OECD Secretariat, and while they they have been very supportive, the Pillar One and Two Blueprints published in 2020, after two years of negotiations at the Inclusive Framework reflected very little of requests by African countries and other developing countries at the Inclusive Framework. For example developing countries constantly called for simplification of the rules yet the Pillar One and Two Blueprints approximately had 250 pages each .
Consequently ATAF submitted its own Pillar One proposal to the Inclusive Framework in May 2021, and some of the elements adopted came directly from the ATAF proposal such as a comprehensive scope in terms of all business sectors except, extractives and the regulated financial services sector, being within the Amount A rules which greatly simplifies the rules by removing the concepts of Automated Digital Services and Consumer Facing Businesses that was in the Pillar One blueprint. Further, over the duration of the Inclusive Framework negotiations ATAF published seven Technical Notes to unpack the technical issues to ease decision-making.
As I explained development of tax policy in Africa has increased dramatically over the past ten years and tax is now a high-level issue on the continent . So, what are our priorities in Africa?
Artificial profit shifting is a major risk to the tax base of many African countries and this is particularly the case in terms of the behaviour and the non-transparency of some MNEs particularly in the extractive industry. That is not high on the global agenda but it is very high on Africa’s agenda. IFFs through commercial activities such as trade mispricing, under invoicing and transfer pricing are key challenges in Africa.
These are highly complex and resource intensive issues and many African countries are building capacity to fully address these issues. This is not simply human resources but also the systems and processes needed for effective exchange of information particularly Automatic Exchange of Information (AEOI) which is key to addressing the challenges of taxing high net worth individuals but requires sophisticated IT systems to capture and fully analyse the bulk data generated by AEOI. Needless to say, these challenges are leading to substantial tax losses on the continent.
Erik: You mentioned Pillar one and Pillar Two, would you agree that Pillar One will not bring the required revenue and it will not touch the apparent problems of Africa?
Mr Wort: MNEs with a revenue of more than €20 billion and a profit of more than 10% , will be in scope, and for such MNEs, 25% of the residual profit, defined as profit in excess of 10% of revenue, will be allocated to market jurisdictions with a so-called nexus using a revenue-based allocation key. According to the OECD’s own estimates the residual profit will be approximately $500 billion and therefore Amount A at 25% will be $125 billion. In view of the significant number of markets these MNEs are likely to be operating in and the relatively small size of most African markets it is highly unlikely that this will result in anything other than a very small reallocation of profits to African markets.
Indeed, some African countries are concerned at the commitment they will have to make to repeal their Digital Services Tax and other relevant similar measures as they consider the Amount A tax they receive may not be as much as the tax they collect through their DST or similar measures. African countries that have not joined the two-pillar solution or are not Inclusive Framework members which is more than 50% of African countries will not be entitled to Amount A and we underscore that political pressure should not be exerted on these countries to remove DSTs and other relevant similar measures but rather meaningful engagement and guidance should be provided to these countries on any possible economic gains they might receive from joining the solution. ATAF will provide technical support to members who are required to remove existing DSTs and other relevant similar measures, as well as relevant advice to those who have not joined the solution.
Erik: Tax incentives are seen as unsustainable, what are your thoughts about it?
Mr. Wort: Incentives can in certain circumstances attract investment and in a world where countries are competing for investment, these may be useful. However from ATAF’s work on the continent on our view is that many tax incentives are wasteful and the benefits derived from the incentives often less than the foregone tax revenue. We are very concerned that in many cases there no robust cost benefit analysis undertaken.
This issue will become even more important with the implementation of the Pillar Two rules as a minimum effective tax rate test may lead to another jurisdiction taxing the income of taxpayers who benefit from a tax incentive regime in a country.
If the Pillar Two rules lead to a reduction in the granting of such CIT Incentives this may lead to MNEs requesting that countries provide incentives relating to other taxes such as import and export duties. Countries will need to consider how they address such requests in terms of their tax policy and investment objectives. African countries should review their tax incentive regimes and policies to evaluate the impact that a minimum effective tax rate might have on their effectiveness.
It is also imperative that there is greater transparency and governance in the granting of tax incentives to ensure that real benefits are derived from such incentives. ATAF will be broadening its technical assistance work to providing support to its members that require assistance in reviewing their tax incentive regimes.
However we are aware that the granting of tax incentives is very much a political issue and we will be working closely with our partner the African Union to raise political awareness on this issue.
Erik: In your view, are there any countries in Africa leading the debate or should be leading the debate?
Mr Wort: What I can say is that there are stronger economies that are in a stronger position to try and influence the direction of the global tax debate. We are working with all the countries and the African Union to build political awareness of the importance of taxation to Africa economies and we are very excited about the sub-committee on tax and Illicit Financial Flows that the African Union has created and to which ATAF provide technical support, as this will go along way in boosting the discussions on tax on the continent.
