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African governments say delay in enforcing the MLC hampers their revenue collection targets
Kampala, Uganda | RONALD MUSOKE | Following the recent publication of an international treaty that seeks to make global tech giants and other large multinational corporations pay more tax where they do business, the Organisation for Economic Cooperation and Development (OECD) said Oct. 11 it had registered a breakthrough on a global deal but the African Tax Administration Forum (ATAF) said African governments are frustrated with the slow progress of negotiations surrounding the taxation of international digitalized businesses.
The OECD said the publication of the convention moves the international community a step closer towards the finalisation of the “Two-Pillar Solution” to address the tax challenges arising from the digitalization and globalization of the economy.
According to OECD, the existing international rules, which were designed in the 1920s are out of date, as they do not give countries ample rights to tax digital businesses operating within their borders but without a physical presence.
“The Multilateral Convention to Implement Amount A of Pillar One (the MLC) reflects the current consensus achieved among members of the Inclusive Framework,” said a statement from the OECD.
“Amount A of Pillar One co-ordinates a re-allocation of taxing rights to market jurisdictions with respect to a share of the profits of the largest and most profitable multinational enterprises (MNEs) operating in their markets, regardless of their physical presence.”
“It also ensures the repeal and prevents the proliferation of digital services taxes and relevant similar measures, secures mechanisms to avoid double taxation, and enhances stability and certainty in the international tax system.”
Under Pillar One, taxing rights on about US$ 200bn in profits are expected to be reallocated to market jurisdictions each year. This is expected to lead to annual global tax revenue gains of between US$ 17 32 bn, based on 2021 data.
New analysis finds that low and middle-income countries are expected to gain the most as a share of existing corporate income tax revenues, underlining the importance of swift and widespread implementation of the reforms.
“The international community has been working closely to resolve the remaining technical issues behind their landmark agreement to reform international taxation,” OECD Secretary-General Mathias Cormann said.
“The text of the Multilateral Convention released today (Oct.11) provides governments with the basis for the coordinated implementation of this fundamental reform to the international tax system and represents significant progress towards opening the Convention for signature.”
Countries now have the means to swiftly move forward with the steps necessary to secure signature and ratification, and we are ramping up our support for developing countries, to ensure we can deliver on our goal of making the international tax system fairer and work better in the digitalized world,” he said.
The so-called inclusive framework is also making good progress on Pillar Two. With the opening for the signature of the multilateral instrument to implement the Subject to Tax Rule (STTR), the work on the STTR is now largely complete. The STTR is a treaty-based rule that allows developing countries to “tax back” where certain intra-group payments are subject to nominal corporate income tax rates below 9%.
Pillar-2 also introduces model rules for the global minimum tax that countries may implement into their domestic law which will ensure large MNEs are subject to an effective tax rate of 15% on their profits in every jurisdiction where they operate. The global minimum tax is expected to raise up to US$ 200bn in additional revenue annually.
African Govts unhappy
Despite what the OECD calls progress, many African governments say the continued delay in enforcing the MLC continues to affect their revenue collection targets.
Logan Wort, the executive secretary of ATAF, a pan-African non-profit that has been working with several African countries to build an effective tax administration, says the current global tax rules do not allow for African countries to tax digitalized businesses effectively.
“It is vital that African countries effectively tax highly digitalized businesses, which is not possible under the current global tax rules,” he said on Oct.11, in response to the OECD’s new framework.
“As indicated by our membership, Amount A is not only complex but more concerning is the uncertainty of when it will be implemented, meaning a continued lack of opportunity to tax the growing digital economy.”
According to ATAF, the taxation challenges arising from the digitalisation of the economy, and the associated revenue loss, have been an area of major concern for Africa for many years. Many countries, including ATAF members, report difficulties in taxing highly digitalized businesses as their economies get more and more digitalized.
The current global tax rules are not fit for taxing such a digitalized global economy, and the domestic rules of most countries are also not appropriate for the taxation of such businesses.
In response to the concerns raised by ATAF members, ATAF published a policy brief in 2020 to assist its members in their tax policy consideration of how to tax digital firms.
Following the publishing of that policy brief ATAF published its Suggested Approach to Drafting Digital Services Tax Legislation which set out various options for drafting Digital Services Tax (DST) rules.
Some African countries have started considering whether or not to enact DST legislation, but some stated they would await the outcome of the Inclusive Framework negotiations on Amount A of Pillar One; which aims to address the taxation of the largest and most profitable digital firms.
Uganda which is not a signatory to the OECD’s Inclusive Framework is one of the African countries that have made laws that are aimed at taxing digital businesses in the country.
According to a brief prepared and published in April, this year, by Kampala Associated Advocates, the evolution of the digital economy has disrupted the traditional way of conducting business around the world, thanks to the advancement in technology.
The digital economy is enabling the conduct of business virtually across countries without the need for establishing a physical presence. But Kampala Associated Advocates note in their brief, that the international taxation rules require a physical connection for an entity to be taxed yet big technological companies are earning and repatriating huge incomes from different countries without being taxed.
To go around this challenge, countries like Uganda attempted to find a solution by reforming their current tax laws so that income is taxed where it is earned with or without a physical presence.
Uganda, for instance, has recently moved to tax companies providing digital services in the country. Section 86A of the Income Tax (Amendment) Act, 2023, imposes a digital service tax on every non-resident person deriving income from providing digital services in Uganda to a customer in Uganda at a rate of 5%.
The tax is imposed on income derived from providing a digital service in Uganda to a customer in Uganda if the digital service is delivered over the internet, electronic network or an online platform. Digital services have been defined to include; online advertising services; data services; and services delivered through an online marketplace or intermediation platform, including an accommodation online marketplace, a vehicle hire online marketplace place and any other transport online marketplace; digital content services, including accessing and downloading of digital content; online gaming services; cloud computing services; data warehousing; services, other than those services in this subsection, delivered through a social media platform or an internet search engine.
The introduction of digital service tax thus targets foreign companies that derive income from Uganda by providing services through the Internet. This means that companies like Google, Facebook, Amazon, Alibaba, Airbnb and Twitter among others, will have to incur 5% on revenue earned from providing digital services such as advertising and sales.
The same tax will apply to subscription-based video and audio content providers operating in Uganda such as Netflix, HBO, Disney+, iTunes and Spotify among others. Previously Uganda did not join the rest of the world in implementing the OECD “Base Erosion and Profit Shifting” programme (BEPS) that sought to impose a minimum tax on multinational companies in the digital space under Pillar 2.
With the introduction of a digital service tax, Uganda joins several countries in the world that have unilaterally imposed a DST on non-residents deriving income from jurisdictions electronically or have proposed to enact a Digital Service Tax (DST) to be imposed on MNEs.
These include Kenya, Nigeria, Tunisia, Zimbabwe, Egypt and South Africa among others from Africa and some EU member states such as the United Kingdom, France, Italy, Austria, Belgium, the Czech Republic, Hungary, Italy, Poland, Slovenia, Spain, Turkey, among others.
The introduction of a digital service tax though belated is intended to broaden the tax base and make these companies pay taxes on income derived from Uganda even if those companies do not have a physical presence in Uganda.
It is not clear how the government will enforce the law but in June, last year, the Uganda Revenue Authority (URA) said it had established mechanisms to start collecting Value Added Tax (VAT) from non-resident service provider companies operating in the nation’s economy including social media giant Facebook.
“There is a global forum under the OECD giving us access to 144 countries to share information with. It will tell us who is trading within our economy and is supposed to pay money to our country instead of taking it to another country,” the URA Commissioner General, John Musinguzi told a post-budget conference in Kampala.
Regina Navuga, the Coordinator of the Financing for Development, Southern and Eastern Africa Trade, Information and Negotiations Institute -SEATINI- Uganda told The Independent on Oct.17 that African countries are still worried that a global consensus on how to tax the digital economy might take long.
“We believe that imposing a DST is one of the ways. Unfortunately, the OECD is discouraging countries from tapping into this measure. As you are aware, this FY, Uganda introduced the Digital Service Tax under the Income Tax. This was welcomed by CSOs.”
“In the meantime, we call upon the government of Uganda to continue collaborating with other countries to exchange information for tax purposes, harmonize the tax policies with the EAC region, and strengthen skills of technocrats,” she told The Independent.
