On 1 July 2021, the OECD announced that 130 out of 139 countries in the Inclusive Framework have agreed to join a new two-pillar plan to reform international taxation rules,this includes all of the G20.
The Inclusive Framework on Base Erosion and Profit Shifting (BEPS) allows interested countries and jurisdictions to work with OECD and G20 members on developing standards on BEPS related issues and review and monitor the implementation of the BEPS actions.
The African Tax Administration Forum (ATAF) has welcomed the achievement of this new milestone as they harbour the view that a global consensus on the tax challenges arising from the digitalization of the economy is of paramount importance as now more than ever, cooperation and multilateralism are required in developing solutions that will assist all countries in rebuilding their economies in a post-Covid-19 environment.
The agreement covers Two Pillars: Pillar One addresses the allocation of taxing rights between jurisdictions and proposes new nexus and profit allocation rules. The intention of Pillar One is to ensure profits are distributed “fairly” and that taxing rights are properly distributed across relevant countries, in particular with respect to large multinational enterprises (MNEs). Pillar Two focuses on the imposition of a global minimum corporate tax rate of at least 15%.
In terms of Pillar one (allocation of taxing rights), ATAF proposed that the reallocation of profits should be calculated as a portion of the MNEs total profits instead of its residual profit. The Inclusive Framework decided not to adopt this approach but it has agreed to allocate between 20% and 30% of residual profit, defined as profit in excess of 10% of revenue, to market jurisdictions.
ATAF also considered the new Pillar Two rules to be a step in the right direction in stemming Illicit Financial Flows out of Africa by MNEs through artificial profit shifting. They welcomed the introduction of a global minimum tax rate that aims to ensure all of an MNE’s global profits are taxed at least at the minimum effective tax rate.
However, as ATAF and the African Union have stated on several occasions, they firmly believe that the minimum effective tax rate should be at least 20% if it is to be effective in protecting African tax bases and stem Illicit Financial Flows (IFFs) by reducing profit shifting by MNEs. The Inclusive Framework has agreed that the minimum tax rate will be at least 15%, however, ATAF has committed to continuing to work with its members to try and get an agreement at the Inclusive Framework to a rate of at least 20%.
In recognizing the need for further work to be done in order to finalize the new Pillar One and Pillar Two rules in order to ensure a more equitable tax allocation ATAF is concerned about how these new rules will impact countries that are not members of the Inclusive Framework or on any Internal Framework members that choose not to adopt the new rules.
ATAF has suggested that countries should join the Inclusive Framework at will and no form of political pressure should be exerted on any country to join. Currently, of the 54 African countries, only 24 are members of the Inclusive Framework and four of these countries (i.e. Angola, Congo (Dem. Rep.), Kenya and Nigeria) have not yet joined the new two-pillar plan to reform international tax rules.
It is important for Boards of Multi-Nationals to understand how the above will impact tax risk management and group policies. SNG Grant Thornton can assist with the review of current policies and advise if there is a need to update these.