This is a “major step forward” in international cooperation according to Vitor Gaspar, director of the Tax Department at the IMF.
This tax ‘revolution’ sounds the death knell for some strategies for tax optimisation, as the agreement aims to change the rules for calculating and allocating taxes for multinational companies.
Nigeria and Kenya have taken the lead in small group of states that consider this “advance” to be counterproductive.
97% of affected countries support the change
When the agreement is effectively implemented in 2023, companies with a turnover of more than $17bn and a profitability of more than 10% will have to pay their taxes in the market jurisdictions (where they make their turnover), rather than in the country where their head office is located (pillar 1). These taxes will amount to 25% of profits above the 10% profitability threshold for the ‘big winners of globalisation’.
In addition, a minimum tax of 15% on the profits of companies with a turnover of more than $850m will be introduced to limit global tax competition (pillar 2). The IMF’s Gaspar says that “this minimum tax rate on certain companies worldwide will put a stop to international competition fuelled by a race to the bottom.”
According to the official OECD statement, the aim is to “reform international tax rules and ensure that multinational enterprises pay their fair share of taxes wherever they operate.” In any case, complying with these ‘consistency‘’ and ‘transparency’ measures is expected to generate an additional $240bn in tax revenue, or 4-10% of global corporate income tax revenue, according to the international body’s estimates.
…the OECD has produced an agreement that strongly favours the interests of the largest and richest countries, to the detriment of the poorest countries.”
Following a movement that began 30 years ago, and which has elicited outcry over the years, 97% of the countries involved finally agreed to the deal in mid-October 2021.
However, even though countries such as Barbados and Ireland – Google, Apple, Facebook and Amazon’s preferred location, as it has one of the lowest tax rates in the world (12.5%) – have agreed to sign the bilateral agreement, Kenya and Nigeria are sticking to their positions.
Too low a tax rate
To justify its disapproval, Kenya says it opposes a clause in the agreement that would force signatory countries to abolish existing taxes on digital services. In fact, the latest OECD/G20 declaration on tax base erosion and profit shifting states that the multilateral agreement “will require all parties to eliminate all taxes on digital services and other similar measures relevant to all businesses, and commit to not introducing such measures in the future.”
In addition to this, the government of East Africa’s largest economy argues that the 15% threshold tax rate for some companies falls far short of what is needed in the country, where corporate tax is already at 30% of net profit. Nigeria and Kenya both agree that the revenue generated by the low tax rate would be insufficient to finance their budget deficits, which was estimated at $5.5bn in 2020, according to Nigerian officials.
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According to a study by the French prime minister’s Conseil d’Analyse Économique, although the minimum tax will bring in between $5bn and $15bn a year for developed countries, developing countries will end up accruing a much lower amount. An expert from the European Network on Debt and Development says that “the OECD has produced an agreement that strongly favours the interests of the largest and richest countries, to the detriment of the poorest countries.”
About 18% of the countries that are working together within the inclusive framework to end tax avoidance strategies are African. They include Sierra Leone, Liberia, the DRC and CAR, which are among the top 10 poorest countries in the world. Morocco, Angola, Botswana, Burkina Faso, Cameroon, Djibouti, Egypt, Eswatini, Gabon, Kenya, Namibia, Senegal, Togo, Zambia and South Africa have also joined the agreement.
Financial and extractive sectors excluded
Within the ‘scope’ of the 8 October 2021 declaration, it is stated that “extractive industries and regulated financial services are excluded” from the two-pillar solution.
In its official communications, the OECD argues that a minimum tax on extractive industries will disadvantage commodity-supplying countries, as they derive significant revenues from taxes on the extractive sector.
According to the African Development Bank (AfDB), in Kenya, the industry accounts for 3% of total export revenues and is expected to reach 10% of national GDP. In Nigeria, according to the latest available report from the Extractive Industries Transparency Initiative, total revenues generated by the extractive sector amounted to $538.6m in 2018.
However, although the extractive sector is an important part of the African economy, the margins on extraction activity are low. The margins higher up the value chain and at partner companies outside African countries of operation is considered to be larger. Nevertheless, only the latter is covered by the two-pillar plan.
On average, African countries “lose between $470m and $730m per year in corporate taxes due to tax evasion by multinationals”, according to an IMF study published on 21 September 2021 on tax avoidance in sub-Saharan Africa. Thus, the two African countries that oppose the agreement feel that the measures proposed by the OECD are insufficient.
A decisive G20
The international tax system’s major reform was finalised on 8 October 2021 at the OECD and the two-pillar solution was presented ahead of the G20 finance ministers’ meeting in Washington on 13 October.
The agreement will be the focus of discussions at the G20 leaders’ summit in Rome on 30-31 October. The 136 countries will develop model legislation and put in place a multilateral deal in 2022 ahead of its implementation in 2023.
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