Reforms to tackle new tax challenges

Action points for African governments and tax administrators

The BEPS pillars will no doubt provide an opportunity for African governments to tackle the various tax challenges arising from the digitalisation of economies in Africa. To harness the potentials of BEPS Pillar One and Pillar Two, it is essential for African countries to fully participate in the ongoing negotiation process to ensure that their challenges are addressed and that the international tax rules that emerge from this process are favourable to African countries.

Research shows that more than 50% of African states are not actively involved in the global tax reform process. It is imperative that African governments participate in their numbers in order to champion a common African position during negotiations and protect their tax bases.

Those participating have been represented by the intergovernmental Group of Twenty-Four (G24) and the ATAF, which coordinate the positions of members that are taking part in the negotiation process. In addition to participation, African states must take into consideration the fact that their tax challenges are quite different from those of developed countries, and must therefore ensure that their final solutions are suitable and unique to the realities of their local economies.

While the new Pillar Two rules are considered to be ‘a step in the right direction’ in curbing illicit financial flows and profit shifting out of Africa by MNCs, there is a need for African tax administrators to push for a global minimum tax rate that would prove effective in protecting African tax bases and significantly improving tax revenues for governments in Africa. Since most African states have corporate income tax rates of 25-35%, tax justice campaigners and experts have argued that the 15% minimum corporate rate under Pillar Two is too low and cannot lead to a significant reduction in profit shifting in Africa.

What’s the World Economic Forum doing about tax?

The World Economic Forum has published its Davos Manifesto 2020, calling on business leaders to sign up to a series of ethical principles, including:

“A company serves society at large through its activities, supports the communities in which it works, and pays its fair share of taxes.”

Additionally, the Forum’s Trade and Global Economic Interdependence Platform provides a vital link between trade and tax communities to enable coherent policymaking which responds to societal needs and reflects business realities.

Taking its lead from OECD-led reforms, the work brings technical issues to a high-level audience and enables honest dialogue among diverse stakeholders on polarising topics.

It has been observed that in light of the implications of adopting a global minimum tax rate on the continent, there is a need for African tax administrators to rethink their tax incentives framework in order to avoid losing revenues to other countries and jurisdictions.

The African Union (AU) is also expected to play a critical role in providing leadership and political support on the ongoing negotiations, while also engaging other global political organs such as the United Nations in developing measures to redress the current imbalance in the allocation of taxing rights between the source and residence states.

It is also essential for African governments and tax administrators to focus on developing internal capacities to reduce the evolving challenges of taxing digital businesses. According to the AU, this can be partly achieved through support by ATAF, which is already building capabilities of many tax administrations in Africa.

A unique opportunity

There is no doubt that the COVID-19 pandemic has revealed a pressing need for African countries to address fair and effective taxation of multinationals that can finance the fulfilment of economic growth and development on the continent.

The BEPS pillars offer a unique opportunity for African governments to address the various tax challenges arising from increased digitalisation of economies, as well as maximise tax revenues and solve developmental problems.

To utilise this opportunity, African governments and tax administrators must work diligently towards providing policy direction and political support to ensure that the new rules under Pillar One and Pillar Two promote Africa’s interests and ensure equitable taxing rights for the continent.

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Aimée Dushime is Global Shaper, Kigali Hub

The views expressed in this article are those of the author alone and not the World Economic Forum