tax’s approach to simplifying the OECD’s digitalisation proposal

PRETORIA – Not all regions of the world are affected the same way by international tax reform. Many African governments are concerned that the OECD’s plans for taxing the digital economy may not go far enough to address the problems they face.

This is why the African Tax Administration Forum (ATAF) demanded that
the OECD simplify its pillar one proposal, arguing that the profit allocation rules maintained an unfair playing field. The ATAF proposal highlighted the specific needs of African economies. This was a key moment for further discussions on pillar one.

“After we told the OECD we didn’t think developing countries or African countries’ discussions were being heard at meetings, we insisted on developing our own set of proposals,” says Logan Wort, executive secretary at ATAF.

“Our proposals did have an impact in a significant change in direction of the discussions in Paris and we found a common ground with other developing countries,” says Wort.

Amongst other successes, Wort cites the case of Zambia, which marked a landmark victory for Africa as the Supreme Court ordered a copper mining company to pay back over $18 million in taxes out of a long-running transfer pricing (TP) dispute.

“In the context of US and Europe numbers, these are small. In the context of African numbers, these are huge,” says Wort.

While ATAF will continue to push for the OECD to include more multinational enterprises (MNEs) within the
pillar one’s global revenue threshold, the organisation is also set to support countries in the implementation of the two-pillar solution in 2022. In a discussion with Leanna Reeves, Wort explains ATAF’s achievements over the last year and its aims for 2021.

Leanna Reeves: What were the highlights of ATAF in 2021?

Logan: Our contribution to revenue collection in our member countries. With last year alone, we contributed through our country programmes in the assessment of just under $300 million worth of tax revenue that was never going to be collected if we hadn’t participated or taken assessments. For that, about $250 million is already in the bank. Now, for African countries and Africa, that’s significant.

Our country programmes are very significant because they have an immediate revenue impact – and it strengthens the policy and administrative staff. That’s our bread and butter, and we are getting stronger on our revenue production. The other highlight is the impact on the international stage. It’s our work with the IF. Our training programme is very successful. We did extensive training for 1,400 tax officials from 45 African countries this year. We’ve launched an African women tax network to enhance women work on the impact of tax policy and tax services. If you look at the type of economy of Africa, the extent of ruralness and the role of agriculture and the informal sector, women form a big part of this. The work is being done on the impact of both revenue collection tax policy and tax spend on that sector, so we’re very excited about that development. We’ve launched this year a programme called ATAF in the new decade, which will set up ATAF on a new platform for the next 10 years. This will include additional functions to our current value proposition, and so we will be developing a tax policy capacity within ATAF as well as a trade and customs capacity.

Also, to prepare for the African continental free trade agreement, we are developing a trade capacity. The immediate beneficiaries will be the stronger economies: South Africa, Egypt, Nigeria, Kenya and so on. The smaller economies are going to experience an immediate gap in the income.

Leanna: What is ATAF’s biggest objective for 2022?

Logan: Our primary aim for this year continues to be
build on our country programmes and the impact on revenue that we are having amongst our member countries to raise more revenue without raising taxes, but by closing loopholes that lead to tax leakage either through poor policy or poor administration. We want to strengthen that. With regards to the global tax reform, we must work with our countries to prepare them for the next phase to either implement or mitigate any repercussions of adopting the two-pillar solution. We are not encouraging or discouraging – our job is to explain what the agreement is, what it will mean in terms of taxation for the country, and what the implications are for not joining and what are the alternatives.

We’ve made some gains by changing some of the thresholds, but there’s a lot of detail that must be worked out. We are committed to voicing African needs at the OECD working parties where a lot of these discussions take place. The number of meetings that is being set up in the inclusive framework is way too many. I don’t know if countries can attend all of these meetings, even virtual. African countries certainly don’t have the capacity or expertise to attend all of them. The other day we received a document after 10 in the evening with a deadline for the next morning. You can sign away your taxing rights in your sleep if you receive a deadline like this. If this process is not careful about the pace, the number of meetings, deadlines and the short notice to comment, it could lead to a de facto exclusion. Our target for 2022 is to intensity our work on this agreement, to be present, but also to raise caution about the possible de facto exclusion.

Leanna: On the OECD’s pillar one, will ATAF continue to pursue a better playing field regarding multinational’s profit and how they are calculated?

Logan: Definitely. We have worked with the African Union and have been involved in the negotiations on the two-pillar solution. We think that
work has been pioneering for Africa – and it has meant our participation in it.

We’ll continue to work to increase Africa’s influence in these rules to ensure it is fair and just. In our view, the pillar one proposal would have achieved a more equitable allocation of taxing rights if it allocated a large potion of the mergers and acquisitions (M&A) global profits to the market jurisdictions. This was a battle. At the base of this is the source of residence debate. In this case, the process missed an opportunity for a more equitable distribution of taxing rights. Developed countries have the G7 and G20 behind them, the developing countries have nobody behind them. We’re very happy that the African Union is now behind the work that ATAF does.

Leanna: What will be the difficulties this year in achieving these objectives?

Logan: To provide support to countries in the technical design of the two pillar agreement and the implementation. We must go beyond the propaganda. A lot of the soft landing around international tax rules or the taxation of the digital economy is the fact that people say that we’re going to have a whole technical capacity building. Everybody must be happy because Africa will be fine as it will get training. Training is not the issue. The issue is taxing rights. Our job must be to support countries in implementing the details of pillar one and two. That cannot happen without sending an expert to Senegal – it is a partnership of implementation. That will be the challenge ahead. Another challenge will be to get more developing countries and African countries to speak at IF meetings. Disagreement by members of the IF has shown that it is possible to make changes to the global tax rules.

This is an
original ITR article.