Global Minimum Taxation of Multinationals: Opportunities and risks for some African States
By By AMAGLO Kokou Essegbe, KOUEVI Tsotso and ADJEYI Kodzo Senyo
To face the challenges posed by the digitization of the economy, the OECD’s Inclusive Framework has developed two Pillars to address tax base erosion and profit shifting. The objective of Pillar Two is to define the minimum amount of tax to be paid by multinational enterprises in the jurisdictions where they operate. The OECD’s Inclusive Framework has adopted an average effective rate of 15% for this purpose. The objective of this study is to show whether the implementation of Pillar Two in African jurisdictions constitutes an opportunity or a risk for them.
The results show that it is an opportunity for countries with a low effective tax rate and a risk for countries with a high effective tax rate. Therefore, setting a 15% income tax rate for non-resident multinationals is an opportunity for some African countries. For it would constitute for these countries a source of additional tax revenue mobilization. For this reform to be an opportunity for Africa, however, the minimum effective tax rate must be raised to at least 20%, as was demanded by the African Tax Administration Forum (ATAF).
The risk that lies in the application of an effective rate of 15% for Africa as a whole is that some African countries might have to reduce their effective tax rate. This would be a loss of revenue for those African countries. Since most countries in the African jurisdiction have effective tax rates and statutory corporate income tax rates that are more than 20 percent, above the set average effective rate, multinationals would seek to shift their profits to the countries with the most advantageous taxation. This could lead to a transfer of profits to other jurisdictions.
Leveraging South-South and Triangular Cooperation for Reducing Poverty and Hunger, and Promoting Rural Development
By Yuefen Li, Daniel Uribe and Danish
The world is experiencing unprecedented global multidimensional crises that have increased poverty, hunger and food insecurity, with the sharpest impacts being felt among rural areas and communities. Deepening international cooperation is essential to help developing countries face economic headwinds and recover from lasting scars of the COVID-19 pandemic and climate change-induced natural disasters. In this scenario, scaling up of South-South and Triangular Cooperation (SSTC) can play a critical role in catalyzing sustainable development initiatives in developing and least developed countries.
This policy brief therefore considers how SSTC can be effectively leveraged for undertaking initiatives on poverty alleviation, hunger reduction and rural development through strengthening of national SSTC institutional setups. It also explores how SSTC can facilitate increased coordination among stakeholders, and considers areas for fostering mutually beneficial initiatives between developing countries. This brief then focuses on the institutional setup for SSTC in some selected countries across Asia, Africa and Latin America, and considers their role in mainstreaming of SSTC. It further considers some recent experiences from developing countries that use SSTC modalities, outlining important initiatives which could be shared with partners to support poverty alleviation, food security and rural development efforts. Finally, the brief provides some important conclusions and lessons learned which can support developing countries’ efforts to achieve the SDGs and the 2030 Agenda.
Taxation of Computer Software: Need for Clear Guidance in the UN Model Tax Convention
By Abdul Muheet Chowdhary and Sebastien Babou Diasso
Developing countries pay enormous sums of money for the right to use intellectual property such as patents, trademarks, copyrights, etc. Such payments are known as ‘royalties’. The scale is enormous, and just 27 South Centre Member States paid $45 billion in 2020 as royalties. Some proportion of these payments are for the right to use computer software. Developing countries can gain significant revenues if the United Nations can provide clear international tax guidelines that payments for the right to use computer software should be taxable as royalties. This Policy Brief provides the world’s first country-level revenue estimates for 34 of the South Centre’s Member States and finds that they could collect potentially $1 billion in tax revenues in 2020 had they been able to tax payments for the use of computer software as royalties.
Enforcing Secondary Taxing Rights: Subject to Tax Rule in the UN Model Tax Convention
By Abdul Muheet Chowdhary and Sebastien Babou Diasso
The Global Anti Base Erosion (GloBE) Rules under OECD’s Pillar Two recommendations, with a minimum effective tax rate of 15%, are expected to play a significant role to end the ‘race to the bottom’ in corporate taxation, which is one of the main drivers of profit shifting. However, the thrust of these rules is designed in a manner to give priority to the developed countries. In this light, the Subject to Tax Rule (STTR), which is a treaty-based rule that allows source jurisdictions to impose limited source taxation on certain payments that are taxed below a minimum rate in the country of residence, is of extreme significance for the developing countries. Under Pillar Two, application of STTR is restricted to base eroding payments or mobile income between related parties only, which does not address Base Erosion and Profit Shifting (BEPS) concerns in an entirety. That apart, the withholding tax rate of 9% proposed by the OECD may not result in generation of significant resources for the developing countries. In this light, developing countries keenly expect that the UN Tax Committee should devise an STTR that is simple to operate, has a broad scope covering all payments in a tax treaty and imposes a higher withholding tax closer to 15% to bring meaningful revenues for them. Also, developing countries desire that STTR provisions may be introduced at the earliest so as to speedily implement them through the UN Multilateral Instrument under contemplation. This Policy Brief also examines existing average withholding tax rates on interest and royalty payments in existing tax treaties of 48 South Centre and 52 G-77+China Member States and finds that out of a total of 100 developing countries, only 25 would stand to benefit from the STTR in its restricted form in Pillar Two, further strengthening the need for an improved version formulated by the United Nations.
The Midterm Comprehensive Review of the International Decade for Action on Water for Sustainable Development amid growing tension between a human rights perspective and the commodification and privatization of water
By Luis Fernando Rosales Lozada
Climate change is affecting the availability of water resources in different regions around the world. In addition, some growing trends towards water commodification and privatization could exacerbate the problem since they are guided by profit maximization strategies. The United Nations (UN) will hold the Midterm Comprehensive Review (MCR) of the Implementation of the Objectives of the International Decade for Action, “Water for Sustainable Development”, 2018–2028, from 22 to 24 March 2023. This is an important opportunity for the international community to assess the challenges on access to clean drinking water and sanitation. The MCR debates and outcomes should be guided by a human rights approach towards promoting access to water for all in 2030 in alignment with Sustainable Development Goal (SDG) 6.
Understanding the Functioning of EU Geographical Indications
By Andrea Zappalaglio
This contribution investigates the functioning of the EU sui generis Geographical Indication (GI) system, with a specific focus on the regime for the protection of agricultural products and foodstuffs within the scope of EU Regulation 1151/2012. In particular, based on the results of the recent “Study on the Functioning of the EU Geographical Indications System” of the Max Planck Institute for Innovation and Competition (February 2022), this paper: (1) clarifies the nature of EU GIs as it emerges from an empirical assessment of the specifications of all the products that appear on the EU register; (2) comparatively analyses the national practices of the EU Member States and explores the discrepancies that exist among them to date; (3) provides an in-depth assessment of the structures of the specifications of EU GIs, highlighting the domestic specificities; (4) investigates the contents and functions of the amendments to the specifications of the registered products. It concludes by emphasizing the importance of the present research in light of the current EU international agenda, with a specific focus on the bilateral agreements recently or currently negotiated.
Digital taxation under the OECD Amount A and UN Article 12B mechanisms for market jurisdictions in Africa: a comparative analysis
By Erica Rakotonirina
This Policy Brief examines the need for the evolution and harmonization of international taxation in the face of the digitalization of economic transactions.
Between the OECD proposal for shared taxation of residual profits through the Amount A mechanism and the UN proposal of Article 12B for taxing income from Automated Digital Services on a gross basis through shared but capped taxation, with an optional variant of the taxation of net profits, African States need to make vital political and technical choices.
The strategic negotiations must include regulatory sustainability, the right balance and fiscal fairness between the divergent interests of residence states vs source states (which include almost all African countries), and MNEs in their quest for profit and expansion.
The Policy Brief carries out quantified evaluation of possible revenue estimates using a case study approach. However, such an exercise remains difficult for questions of accessibility and reliability of data relating to the activities of multinational companies.
To be realistic, the scope of the study was restricted to a reference company in the digital sector but targeted economies of different scales. The results of the revenue estimates represent an optimistic case of the impacts on tax revenues of the application of the OECD and UN measures on different types of economies.
Policy responses for fostering South-South and Triangular Cooperation in response to the food crisis in the area of trade
By Peter Lunenborg
The Russia-Ukraine conflict since 24 February 2022 and the various sanctions imposed on Russia are having tremendous global repercussions, including on developing countries. This world is already experiencing multiple crises such as COVID-19 and measures in response to the virus including lockdowns, money printing and increases in government debts, conflicts and tensions in other parts of the world as well as climate change and extreme weather events such as extreme flooding or droughts. The conflict is compounding and aggravating these shocks.
In the short to medium term, prices in particular for energy (oil, gas), derived products (fertilizers) and food (in particular cereals) will remain elevated. Availability might also suffer. As a result, food insecurity is and will remain a serious concern in the near and medium term. Policy actions are required to mitigate any potential famine(s) which may arise and to build resilience for the future.
This paper explores concrete options for developing countries to address food insecurity in the short, medium and long term, including purchase policies, better implementation of WTO rules and increase in domestic investment in wheat and fertilizers production.
Climate Finance Withholding Mechanism: Exploring a potential solution for climate finance needs of the developing countries
By Radhakishan Rawal
The developed countries’ commitment to provide climate finance to the developing countries has remained unfulfilled. The Climate Finance Withholding Mechanism (CFWM) is a potential solution for addressing climate finance needs of the developing countries. The CFWM adopts the well settled “withholding mechanism” under the tax laws to provide a steady flow of funds to the developing countries.
Multinational enterprises’ (MNEs) tax residents of developed countries earn income from the developing countries and pay tax on such income in the developed countries. The CFWM requires retention in the developing country, of the amount of tax so payable by the MNE, towards climate finance commitments of the developed countries. The CFWM does not result in additional tax outflow for the MNEs and also does not adversely impact taxing rights of the developed countries. The CFWM results in application of tax revenue of the developed countries towards their climate finance commitments. The CFWM does not address all the issues related to the climate finance problem but only attempts to speed up the flow of funds to the developing countries from where the relevant income originates.
Taxing Big Tech: Policy Options for Developing Countries
By Abdul Muheet Chowdhary and Sébastien Babou Diasso
Even as the COVID-19 crisis wreaked havoc on the global economy, it gave rise to a small set of winners, namely Big Tech. The increasing prevalence of remote work and an acceleration of the digitalization of the economy allowed Big Tech companies to raise enormous revenues during the pandemic, which in some cases dwarfed the gross domestic product (GDP) of several countries. This policy brief explores the rising untaxed profits of Big Tech in particular, and the digitalized economy in general, and explains why the existing rules are insufficient. It also critically examines the solution that has been devised by the Organisation for Economic Co-operation and Development (OECD), an intergovernmental organization of developed countries. Finally, it outlines alternative policy options that are more suitable for developing countries to tax the profits of Big Tech.
Technology Transfer and Climate Change: A developing country perspective
By Nicolás M. Perrone
The role of technology transfer in climate change negotiations is vital. If technology is to help us mitigate and adapt to climate change, the international community needs to ensure sufficient innovation and technology transfer. One of the main challenges of the technology transfer regime for environmentally sound technologies is that a private and market-led model may not meet global technology transfer needs. This policy brief suggests that governments should explore market, hybrid and non-market approaches to accelerate the transfer of environmentally sound technologies. Developing countries’ governments should also explore cooperative approaches to improve their bargaining power, reduce costs and ensure adaptation and innovation capacity in the developing world.
Revenue Effects of the Global Minimum Corporate Tax Rate for African Economies
By Seydou Coulibaly
This policy brief provides the first piece of empirical evidence on the revenue implications of the recent global minimum tax rate reform agreement for African economies. We implement a regression discontinuity design to evaluate the effect of having an effective corporate tax rate of at least 15% on tax revenue collection for a panel of 28 African economies over the period 2000-2020.
The estimation results indicate that the implementation of the global minimum effective corporate tax rate of 15% proposed under Pillar II of the Organisation for Economic Co-operation and Development (OECD) Two Pillar Solution has a positive but not statistically significant likely impact on corporate tax revenue and total tax revenue at the conventional significance levels. This suggests that the global minimum tax deal is unlikely to increase tax revenue for African economies. These findings exhort the Inclusive Framework and all the stakeholders of the global tax reform negotiations to consider revising the global minimum tax rate rules to ensure that the agreement will effectively benefit African countries through better tax revenue collection.