By Emmanuel Eze
“A goat does not eat into a hen’s stomach no matter how friendly the two may be” -Chinua Achebe.
African Nations are working “closely” with other nations, led by the OECD under the auspices of the “Inclusive Framework (IF)”, to find a multilateral solution to the tax challenges posed by the digitalization of the global economy. All parties to the ongoing discussions are supposedly participating on “equal footing”. While expressions like “inclusive” and “equal footing” are appealing to the Continent, we draw from Achebe’s wisdom, to sound a cautious note that even within a multilateral solution, the OECD will push for a solution that best suits the OECD while Africa must fend for herself. Given that the developed nations, typified by the OECD, have more human, political, and financial resources to make their views prevail, it is doubtful if the use of the phrase “equal footing’ is as deep rooted as projected. Africa should be mindful that the Multi-National Enterprises (MNEs), who are the primary beneficiaries of weak and skewed international tax rules are capable of influencing policies of their governments and are predominantly located in the developed nations. To this end, what is in the best interest of the OECD may not, in all cases, be in the best Interest of Africa. Africa, therefore, must rise to scrutinise all proposals for taxation of digital economy in order to defend her tax base and mobilise revenue to drive sustainable development in the continent. This paper opines that the current clamour to remake international tax rules is and should be for Africa, a fight for Fiscal Justice, not just a drive for a marginal increase on taxing right.4
According to recent report, 60 of the world’s 500 largest companies, including Amazon, Netflix and General Motors, paid no taxes whatsoever in 2018, despite a cumulative profit of $79 billion, because the existing International Tax rules allows them to do so.5 These rules are premised on sharing taxing rights between source and residents’ states. Under the rules, MNEs are taxed on their income from source states -e.g, developing countries in Africa – where they have physical presence or Permanent Establishments (PE) and the incomes subject to tax are those that are attributable to such PE. These rules, namely, nexus and profit allocation rules are fraught with loopholes which enable the
MNEs to fleece the continent of billions of US Dollars annually. To make matters worse, the rules predate the current technological advancement and all the complexities it has brought to the way and manners that MNEs organise and do business. Put differently, the rules do not take cognisance of the fact that the world leading companies like Netflix, Amazon, Facebook, Google, etc do not need to have physical presence in Africa to reap massive profits from the continent. Consequently, proposals are made to reform the rules to make them more responsive to the current technological and digital realities.
This article would deploy qualitative method to analyse the current issues around taxation of digital economy inclusive of the various proposals, the key players, etc, in a bid to decipher their implication for Africa and how the continent could win her quest for tax justice.
The proposals are built on two pillars: pillar one and pillar two. While pillar one addresses issues around allocation of taxing right and the remaking of the nexus rules; pillar two deals with broader Base Erosion and Profit Shifting (BEPS) issues that have not been tackled by the BEPS project. Under pillar one, proposals like User Participation, Marketing Intangible and Significant Economic Presence has been made. However, the Unified Approach proposed by the OECD Secretariat is the current trend. The approach covers four elements: scope, economic nexus, formulary apportionment profit allocation, and binding dispute resolution. Under the scope element, it is proposed that the new rule should cover more than highly digitalised MNEs but with a carve out to extractive industries. The economic nexus element proposes that the new nexus rule to tax digital economy will dispense with physical presence and rely majorly on other criteria, such as a sales/revenue threshold. The revenue threshold would consider digital activities, such as online advertising services that target users in locations that are different from the locations wherein the relevant revenues are booked. The mechanism proposed for bringing this into being is to include a new standalone economic nexus article in tax treaties.
The formulary apportionment profit allocation suggests that the new profit allocation will be based upon an approximation formulaic approach without the need for precise arm’s length benchmarking. The new allocation rule would apply to both profit and losses and the mechanism are: -Amount A – a share of deemed residual profit allocated to market jurisdictions using a formulaic approach, i.e. the new taxing right; ‒ Amount B – a fixed remuneration for baseline marketing and distribution functions that take place in the market jurisdiction; and ‒ Amount C – binding and effective dispute prevention and resolution mechanisms relating to all elements of the proposal, including any additional profit where in-country functions exceed the baseline activity compensated under Amount B. Public discussions are solicited on this proposal in preparatory to submission of a final report to the G20 in 2020.
It is clear from the above, that the emerging reforms entail not just a change of rules but also increased global governance for tax. The reference to binding dispute resolution is an example. How is Africa represented at that level of governance when OECD and G20 have overwhelming interest in determining the direction of the reform? It is also clear that Amount A will be based on “deemed” residual profit. Who will be doing the deeming, and would this not expose the continent to similar issues as we are currently suffering under transfer pricing and its arm’s length principles? How many
African countries has the political and technical capital to drive significant interest at the IF? Is there a reasonable number of Africans working at the OECD?
In conclusion, it is recommended that the continent should seek to boost technical capacity in both international tax and the taxation of digital economy. The continent should also call for an independent and more neutral body, possibly overseen by the UN to assimilate or take over the current work of IF or seek for more entrenched participation at the OECD. The continent should realise that active campaign and political lobbying at the global level may be necessary to push key policy reforms that will recognise the peculiarities of Africa and the current injustice suffered by the continent as result of International Tax Rules skewed against her. The rules are also still too complex, the Continent should call for the simplification of these rules for ease of administration. Also, the cost of attending meetings to participate in the rounds of negotiation may be hard on some African countries, the continent may call for a fund to sponsor participating African countries to attend relevant meetings where issues affecting their taxing rights are to be determined to ensure that they are not technically excluded by paucity of funds. Above all, the continent should not be fooled by
Europe and developed world’s “friendliness and collaboration”, in this matter, as “a goat does not eat into a hen’s stomach, no matter how friendly the two may be”.
▪ Eze wrote this award-winning essay and was named the best essayist for African Tax Administration Forum (ATAF) Tax Essay. He received his award in Kampala, Uganda.
(Essay) Taxation of digital economy and Africa’s quest for fiscal justice: Challenges and the need to put our best foot forward
By Emmanuel Eze