Explained: Africa’s uncertainty over the OECD’s minimum tax plan

Kenya and Nigeria have pulled out of a global tax reform plan that prevents multinational corporations from easily shifting profits to low-tax countries. The heavyweights of the regional economy weighed on their participation in the project, led by the Organization for Economic Co-operation and Development (OECD), which envisages the introduction of a global minimum tax aimed at giving countries a partial share of tax revenue where profits are generated. . The plan was introduced in response to the increasing digitization of the global economy.

But only 23 African nations out of 136 countries in the world are participating in the reform project, including South Africa, Senegal and Egypt. This means that less than half of African countries are participating, and as the details of the project are finalized, calls multiply to find a cheaper alternative for African countries.

“Deal for the rich”

“There is a reason why this deal has been called the deal of the rich,” said Tove Ryding of the European Network on Debt and Development (Eurodad). DW. “He has very clear biases in favor of countries where multinational corporations are headquartered. It is a very unhealthy international principle that the head office country should get the lion’s share of tax revenue,” said Ryding, who has been following OECD tax reforms for years. “On top of that, there is a pretty broad agreement that there isn’t a lot of money in there for developing countries.”

The central idea of ​​tax reforms – which will be presented at the G20 summit this weekend – is perhaps best explained using a Facebook analogy: if someone in South Africa logs into the social media network and sees paid advertising on its calendar, Facebook pays income tax on its advertising revenue in Ireland, where Facebook’s head office for Africa is located. Until now, a rate of 12.5 per cent has applied in Ireland, plus numerous exemptions.

The OECD plan proposes that from 2023, part of the tax revenue be distributed among the countries where the profits were made. This is the first pillar of the tax reform plan. In the above scenario, South Africa would benefit from the advertising revenue. The second pillar of the tax reform plan would ensure that the largest companies pay a tax rate of 15 percent. If a country charges less than 15%, the rest will go to company headquarters.

Devil in detail

“The general idea that there should be a minimum tax is good, but we think the amount is very low,” said Alvin Mosioma, executive director of Nairobi-based Tax Justice Network Africa. “We are convinced that European and American jurisdictions will benefit the most from this. There is not much that developing countries get out of it, let alone African countries,” Mosioma said. DW.

There are many restrictions: the minimum tax only applies to companies with an annual turnover of at least 750 billion euros (872 billion dollars). The distribution scheme would only affect around the 100 largest companies in the world – and only a quarter of tax revenue above a certain threshold needs to be redistributed.

“I think the solutions widely presented by the OECD will generally not work for many African countries or developing countries,” Mosioma said. He fears that many countries are under pressure to lower their corporate taxes to 15%. Currently, most African countries levy between 20 and 30 percent in corporate taxes.

Prohibitions and coercion

Since the start of the COVID pandemic, digital service companies have exploded in popularity and have become important economic players. Some African countries like Kenya, Nigeria and Zimbabwe are about to introduce rules to tax them. But these new sources of revenue would be prohibited under the new OECD tax reforms, explained Ryding, a Eurodad expert: “They would commit not to use taxes on digital services. But it also appears that over time they could risk engaging in binding dispute resolution. , they could lose their sovereignty over certain tax matters if they register. “

Nigeria and Kenya have clearly expressed their skepticism, but, according to Ryding, there have been no parallel negotiations to address their concerns. She said powerful and industrialized countries are using their economic advantage to put pressure on poorer countries. Ryding used Namibia as an example, pointing out that from 2016 to 2018, Namibia was on an “EU list of non-cooperative countries and territories for tax purposes” because the southern African nation had failed. not in accordance with OECD guidelines.

“Blacklisting Namibia was not a very obvious thing for the EU to do,” she said. “But Namibia did not make a commitment to abide by the OECD rules. So there was very open and clear pressure on developing countries to adhere to the OECD rules which were negotiated in a process where they weren’t at the table. “

A better path for reforms?

Skepticism about tax plans is growing, and there are now demands for such tax reforms to be carried out under the auspices of the United Nations, with binding resolutions. One of the draft resolutions seen by DW – that Guinea plans to present to the UN General Assembly on behalf of 134 poorest countries – invites “to take due account of the importance of fighting against illicit financial flows”.

Tove Ryding said she sees great benefits in the UN leading tax reforms. “In a United Nations context, developing countries can participate on an equal footing. And we have seen time and time again that this is not the case at the OECD.

Alvin Mosioma of Tax Network Africa also believed in a UN solution on taxation. “We already have a general consensus that taxation is not just a national agenda, it is not just a sovereign issue. If there is consensus, it basically means that there should be a global framework to deal with these cross-border issues, ”he said. , adding that the OECD is currently dominant but does not have the legitimacy to lead this process.