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.
South Centre Inputs to UN Secretary-General for “Promotion of inclusive and effective tax cooperation at the United Nations”
The South Centre submits the following comments and recommendations to the UN Secretary-General for the report being prepared in response to UN General Assembly resolution 77/244 on “Promotion of inclusive and effective tax cooperation at the United Nations.”
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.
COMMENTS ON PILLAR ONE – AMOUNT A: DRAFT MULTILATERAL CONVENTION PROVISIONS ON DIGITAL SERVICES TAXES AND OTHER RELEVANT SIMILAR MEASURES
The BEPS Monitoring Group, 25 January 2023
The BEPS Monitoring Group submitted comments to the public consultation on the draft provisions on withdrawal of Digital Services Taxes and ‘relevant similar measures’. Abdul Muheet Chowdhary, Senior Programme Officer of the South Centre Tax Initiative, was a contributor.
Transfer pricing remains a highly complex and challenging area for developing countries. The ultimate objective of transfer pricing is to determine a market price for intra-company transactions, but doing this in practice is a largely subjective exercise, which makes it prone to abuse and profit shifting. Developing countries lose billions of dollars in revenue each year due to abusive transfer pricing.
Amount B is important for developing countries as it seeks to provide a simple method through which in-scope intra-company transactions can be priced, which can potentially ease tax administration, reduce disputes and increase tax certainty. However, the current form of the proposal renders it highly complex and unlikely to achieve its stated objective of simplification.
These draft provisions are amongst the most controversial aspects of the Pillar One rules, as countries which decide to implement the OECD solution will be expected to give up the use of DSTs and similar measures on all companies, not just those in-scope of Amount A.
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.
Illicit Financial Flows and Stolen Asset Recovery: The Global North Must Act
by Abdul Muheet Chowdhary and Sebastien Babou Diasso
Domestic resource mobilization is essential for developing countries to achieve the Sustainable Development Goals by the deadline of 2030. Concomitantly, Illicit Financial Flows (IFFs), which also lead to asset theft, are major means through which these countries are losing resources. This research paper analyzes the World Bank’s Stolen Asset Recovery (STAR) database and shows that countries from where assets have been stolen are mostly developing countries, and countries where the stolen assets have been hidden are developed countries. The paper also shows that regarding the pending or ongoing asset recovery cases, there is a clear pattern where the majority of countries waiting to have their assets returned are developing countries, and those who must return them are developed countries. There is an unexplained and unjustified delay by developed countries in the process of returning the frozen assets to developing countries which needs to be addressed as soon as possible. There is also an evaluation of international legal reforms which can be implemented to accelerate the asset recovery process. However, all these will need the full commitment of Global North countries where most of the stolen assets are hidden and which bear the brunt of responsibility for returning them to the developing countries.
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.