G7 global tax deal overrated, unfair for Africa
BY LEARNMORE NYAMUDZANGA
On June 5, 2021, the finance ministers of the G7 countries (US, UK, France, Germany, Canada, Italy and Japan) announced the so-called landmark global tax deal purporting to bring the international tax system into the 21st century. While it is recognized that the G7 has created momentum through political commitment to major international tax reforms, the deal is overrated, lacks transparency and is neither historic nor global. This is just a political position taken by the seven countries whose population constitutes 10% of the world population, estimated at 60% of additional income, leaving only 40% to the remaining 90% of the world population (Tax Justice Network). It’s a power game, with seven developed countries claiming to have struck a global deal on a planet with more than 200 tax jurisdictions. Is it fair and comprehensive?
To give a brief overview, in 2013, OECD and G20 countries launched the Base Erosion Profit Shifting (BEPS) initiative. This was intended to address the legal and illegal aggressive tax planning strategies of multinational corporations (MNCs), which exploit loopholes and mismatches in tax rules, to artificially shift profits to low or no tax countries, where there is little. or no taxation of economic activities known as seat jurisdictions. However, some feared that these efforts were not inclusive as such, the so-called Inclusive Framework (IF) on BEPS was established in June 2016. Fast forward, the OECD IF with particular emphasis on The digital economy has been underway since January 2019, trying to address the fiscal challenges posed by globalization and the Fourth Industrial Revolution (4IR) later exacerbated by the Covid-19 pandemic.
Some of the digital multinationals accused of abusing corporate income tax (IS) include Facebook, Amazon, Zoom, Twitter, WhatsApp and Google etc., which are mainly headquartered in the G7 and Southern countries. G20. They make a profit by selling their services in high tax countries where they are not physically present e.g. Zimbabwe (known as the market / source jurisdiction), transferring them to and taxed in the countries where they are. physically present, for example UK, US or Bermuda (known as headquarters jurisdictions).
Now coming to the gist of the analysis, what does the G7 tax deal mean for Africa, especially Zimbabwe? It is important to note that the G7 communiqué contained 22 points, but this analysis will focus on four commitments made under point number 16 where the G7 committed to:
Support ongoing efforts through the G20 / OECD Inclusive Framework to address the fiscal challenges linked to globalization and the digitization of the economy.
Reach a fair solution on the allocation of taxing rights, with market countries being granted taxing rights on at least 20% of profits exceeding a margin of 10% for the largest and most multinational companies. profitable (first pillar).
An overall minimum tax of at least 15% country by country (second pillar).
Elimination of all taxes on digital services and other similar measures relevant to all businesses.
It is important to note that the so-called Inclusive Framework is made up of 139 countries of which 26 are African countries and the IF has two pillars in layman’s terms; the first pillar focuses on the scope and tax rights, the second pillar focuses on the minimum tax rate. Unfortunately Zimbabwe is not a member of the IF but is represented by the African Revenue Authority (ATAF).
Implications for Africa
To begin with, not all countries are represented in the OECD IC supported by the G7. Africa, let alone Zimbabwe, lacks the political strength to influence the G7 and G20 / OECD countries. So we are on the table, but unfortunately we cannot set the agenda and some are just bench warmers. Current international tax rules (IFs) favor headquarters countries by denying source / sales / market countries such as African countries much-needed income (ATAF 2021). Moreover, the IF is too complex and unfairly allocates tiny profits to small and developing countries like Zimbabwe.
Regarding tax rights (first pillar), the focus is on the largest and most profitable multinationals instead of all profitable multinationals. African countries are expected to secure tax rights of at least 20% on tiny residual profits exceeding a 10% profit margin. According to Alex Cobham, executive director of Tax Justice Network (TJN), with this rule, around 100 multinationals will be affected, generating additional global revenues of $ 5 to 12 billion per year, which is expected to be 2 to 5% of estimates. worldwide annual loss of US $ 245 billion due to CIT abuse. This commitment affects few multinationals, allocating tiny benefits to African states and fosters inequalities between states, as more benefits are allocated to high-income countries, especially the G7 or G20, where most multinationals are headquartered. . There are also fears that multinationals are underestimating their profit margins to stay below 10%. Africa will not benefit from the profits made by Amazon since its net margin was 7.5% in the first quarter of 2021 which is less than 10% and was less than 10% last year.
According to Alex Cobham, a minimum CIT of 15% will bring globally up to $ 275 billion, unfortunately 60% of all additional revenue will go to the G7 forcing Africa and the rest of the world to share the remaining 40%. The G7 minimum CIT of 15% is too low given that in Zimbabwe the CIT is 24% and the reduced CIT rate for selected mining companies is 15%, the CIT for Zambia and Sudan is of 35% and that the average CIT in Africa is estimated at 27.46% (KPMG 2021). Using the average for Africa, there is a difference of 12.46%, which is enough (incentive) to encourage multinationals to shift their profits to the jurisdiction charging 15%. To make matters worse, a minimum CIT of 15% equals Mauritius’ CIT, which means Mauritius will remain our problematic African child (Tax Haven).
It is estimated that 10 African countries, including Zimbabwe, apply a unilateral digital services tax (DST). In 2019, Zimbabwe introduced a special flat rate digital tax of 5% on satellite broadcasting services and e-commerce with annual income above US $ 500,000. Additionally, effective January 1, 2020, Zimbabwe introduced Value Added Tax (VAT) on the provision of electronic services such as Facebook. We aspire to multilateralism, but the removal of DST in Africa / Zimbabwe as per the G7 proposal will be a blow to much-needed tax revenue, as the tax deal does not bring much revenue to Africa.
The current tax deal will benefit a few rich countries (G7 and G20) at the expense of many developing economies and low-income countries like African countries. This may be a positive step in the right direction, but it does not end the race to the bottom or correct outdated and unfair international tax rules. Africa urgently needs tax revenue to, among other things, recover from the Covid-19 pandemic, rebuild its economy and health sector, and lift its citizens out of poverty. Currently, a proposal of at least 25% from the Independent Commission for the Reform of International Business Taxation (ICRICT) is best followed by the United States -21%, the ATAF proposal of 20%, the G7-15%, then finally 12.5% by the G20 / OECD FI. Perhaps, although I doubt, that the long-awaited OECD discussions in July 2021 by the G20 and others 139 will bring better results and I hope that in October 2021 the G20 will have made the final decision.
Join forces with many other countries and organizations calling for a new United Nations tax convention and the opening of a United Nations intergovernmental tax negotiation that will protect countries’ fiscal sovereignty and the human rights of people from grabbing companies
Although MoFED and ZIMRA have a research-based position, they are to issue a statement and were possible to join the inclusive framework to amplify the voice of the 26 African countries existing in the IC
Continue to push for a fair, clear and simple tax law as well as a reasonable minimum CIT through ATAF
Nyamudzanga is an economist, tax advisor, member of the ZES, holder of a Masters in tax administration and a diploma in economics. Email: [email protected] These weekly New Perspectives articles are coordinated by Lovemore Kadenge, outgoing president of ZES. – [email protected] or mobile +263 772 382 852