Tax Policy

SouthViews No. 248, 31 May 2023

The United Nations Intergovernmental Process – An Opportunity for a Paradigm Shift

By Kuldeep Sharma and Raunicka Sharma

Efforts are underway to strengthen the inclusiveness and effectiveness of international tax cooperation so that the current tax structures consider the equitable interests of developing countries. This is necessitated as a section of developing countries has lost confidence in the OECD and there is a lingering doubt whether OECD has developing countries’ best and equitable interests in mind. As a result, the United Nations General Assembly has launched intergovernmental talks to enhance international tax cooperation and draft a UN Tax Convention that aims to establish inclusive norms for transparency and tax cooperation, that leads to development of an acceptable and frictionless worldwide tax policy.

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SouthViews No. 247, 29 May 2023

UN Model Tax Convention Article 26: Inequitable Exchange of Information Regime – Questionable Efficacy in Asymmetrical Bilateral Settings

By Muhammad Ashfaq Ahmed

The United Nations Model Tax Convention between Developed and Developing Countries (UN MTC) Article 26 charts out an exchange of information (EOI) regime “between developed and developing countries,” feigning that it is more favorable to the latter set of nations. Contrarily, the Organisation for Economic Cooperation and Development (OECD) MTC Article 26 is professedly geared to protect and promote interests of OECD members – “the club of the rich.” Even a cursory comparative look at the two MTCs intriguingly reveals lack of dissimilarities, and irresistibly leads to the conclusion that materially both provisions are identical. The situation gives rise to a paradox whereby developing countries that are completely at different levels of development have broken governance structures, convoluted fiscal and criminal justice systems and struggling tax administrations, have been yoked into a multilayered EOI regime, which stemmed from an intra-OECD statecraft imperative and is pre-dominantly beneficial to developed countries. The new normal contributes towards enhancement and deepening of the embedded inequities in the neocolonial economic order. The paper seminally dissects the strains generated by absence of dissimilarities between the two MTCs vis-à-vis Article 26, and posits that, in fact, this fundamentally being a developed country project, developing countries have been exploited as ‘beasts of burden’ merely to promote economic interests of dominant partners in the relationship, and by doing so, sheds light on and galvanizes the unjustness latent in the international taxes system – an inherently unequal and lopsided affair. It also delves deeper into an axiological normative evaluation of the extant EOI regime, and finding it untenable, urges a larger paradigm shift. In fact, the UN’s meek convergence with the OECD on EOI regime, ditching developing countries and leaving them to fend for themselves in this critical area of international taxation, is the scarlet thread of the paper.

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Tax Cooperation Policy Brief 32, 30 May 2023

Global Minimum Taxation of Multinationals: Opportunities and risks for some African States

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.

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Tax Cooperation Policy Brief 31, 25 March 2023

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.

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Tax Cooperation Policy Brief 30, 25 March 2023

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.

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Tax Cooperation Policy Brief 29, 3 March 2023

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.

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SC Contribution – WITHDRAWAL OF DIGITAL SERVICES TAXES & RELEVANT SIMILAR MEASURES, 25 January 2023

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.

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South Centre Comments on Pillar One – Amount B, 25 January 2023

South Centre Comments on Pillar One – Amount B

The South Centre provided its comments to the OECD Secretariat on Pillar One – Amount B. Amount B is part of the components of Pillar One to address the tax challenges arising from the digitalization of the economy. It seeks to simplify transfer pricing rules for ‘baseline’ marketing and distribution functions.

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.

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South Centre Comments on the Amount A Draft MLC Provisions on DSTs & Other Relevant Similar Measures, 20 January 2023

South Centre Comments on the ‘Amount A Draft Multilateral Convention Provisions on Digital Services Taxes and Other Relevant Similar Measures

The South Centre provided its comments to the OECD Inclusive Framework’s Task Force on Digital Economy (TFDE) on the Draft Multilateral Convention Provisions on Digital Services Taxes and other Relevant Similar Measures under Amount A of Pillar One (MLC). This MLC is part of the components of Pillar One to address the tax challenges arising from the digitalization of the economy. It aims to restrict countries which sign to the Pillar One MLC from implementing any digital tax policy solution apart from the OECD’s, such as Digital Service Taxes (DSTs) and other relevant similar measures.

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.

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Tax Cooperation Policy Brief 28, 20 January 2023

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.

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Tax Cooperation Policy Brief 27, 21 December 2022

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.

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