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Reforms to tackle new tax challenges

These two pillars will ensure African governments benefit from the global tax system

ANALYSIS | AIMÉE DUSHIME | The two-pillar plan to reform global tax offers African governments a unique opportunity to address tax challenges from digitalisation of economies and to maximise tax revenues.

To harness the potentials of base erosion and profit shifting (BEPS) Pillar 1 and 2, it is essential for African countries to fully participate in the negotiation process to ensure their challenges are addressed.

In light of the global minimum tax rate, there is need for African tax administrators to rethink their tax incentives framework to avoid losing revenues to other jurisdictions.

As of July 2021, over 130 countries and jurisdictions, including many African countries, have joined a new two-pillar plan to reform global tax rules and ensure that multinational corporations (MNCs) pay their fair share of taxes irrespective of where they operate.

Pillar One of the agreement on base erosion and profit shifting (BEPS) seeks to ensure a fairer distribution of profits and taxing rights among countries with respect to the largest multinationals including digital companies, while Pillar Two introduces a global minimum corporate tax rate that has the effect of protecting the tax bases of countries and putting a floor on tax competition amongst jurisdictions.

This article examines the potential of the BEPS pillars in Africa and the measures through which they can be utilised by African tax administrators for the purpose of maximising tax revenues and solving the numerous developmental challenges on the continent.

Harnessing the BEPS potential

Today, many African countries are unable to tax highly digitalised businesses as a result of current international tax rules, which only allocate taxing rights to a country where non-resident businesses create sufficient physical presence in that country. With taxing rights of over $100 billion in multinational profits expected to be reallocated to market jurisdictions annually under Pillar One, the African Tax Administration Forum (ATAF) argues that the rules will be effective measures that can be used to address the current imbalance in the allocation of taxing rights between source and residence countries which deny source countries such as African countries of much-needed tax revenue.

The global minimum corporate tax rate of 15% under Pillar Two is also seen as a significant step towards addressing the race to the bottom and other harmful tax practices. If properly implemented, it provides an opportunity for African governments to generate revenue and restore crippled economies on the continent, as well as encouraging African countries to compete on positive bases.

According to the Organisation for Economic Co-operation and Development (OECD), the global minimum corporate tax rate is estimated to generate around $150 billion in additional global tax revenues every year. It therefore has the potential to boost corporate income tax revenues in African countries, while also reducing the incentives for shifting profits to low-tax jurisdictions by MNCs. By setting a global minimum tax rate, African countries will have the chance to protect their tax base and prevent further erosion by multinationals without causing much damage to corporate activity. Additional benefits are also expected to arise from the stabilisation of the international tax system and the increased tax certainty for taxpayers and tax administrations in Africa.

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