Introduction
Following extensive consultations with its members, ATAF sent revised Pillar One proposals to the Inclusive Framework today. These proposals respond to both the Inclusive Framework blueprint report released for public consultation in October 2020 and the recent proposals from the USA to revise the blueprint proposals.
The COVID-19 pandemic and measures taken to contain it have had a profound impact upon the well- being of Africans both impacting on their health and livelihood. Tax policy and administration will be a vital part of African government policy if Africa is to enhance Domestic Resource Mobilisation to fund the African recovery from the pandemic and rebuild economies, health sectors and lift its citizens out of poverty. Corporate Income Tax represents a higher share of tax revenues and GDP in developing countries than in rich countries. Tax levies on companies are higher in most African countries, on average 16% of total tax revenue compared to 9% in OECD countries. African countries have been trying to enhance tax yield from corporates by introducing new measures such as robust measures to stop aggressive transfer pricing schemes by multinational enterprises, measures to strengthen mining regimes and new policies on tax incentives. However, digitalisation of economies has created new challenges as many African countries are not able to tax highly digitalized businesses based on the current international tax rules. Therefore, the development of global tax rules is a key part of the tax policy considerations for Africa in the post COVID era. The work being carried out by the OECD and the Inclusive Framework on the Pillar One and Pillar Two rules is of vital importance to African countries.
Mr. Logan Wort, Executive Secretary of ATAF noted “ATAF considers that reaching a global consensus on the tax challenges from the digitalisation of the economy, is of paramount importance as now more than ever, cooperation and multilateralism are required in developing solutions that will assist all countries in rebuilding their economies in a post-Covid-19 environment. We continue to support the Inclusive Framework’s efforts to find a global consensus-based solution.
However It is the view of many of our members that the Pillar One proposals released in October are far too complex and result in a very modest amount of profits being reallocated to market jurisdictions. The rules do little to address the issue of the current imbalance in the allocation of taxing rights between source and residence countries which deny source countries such as African countries of much needed revenue. We and our members have therefore submitted a new proposal to the Inclusive Framework to address these issues. We are pleased to see that elements of the new U.S. proposals are similar to the ATAF proposals and we have met with the U.S. to discuss our proposals and will be having further discussions with the U.S. team. We also look forward to discussing our proposals with the Inclusive Framework”.
ATAF concerns on the blueprint proposals
ATAF has on numerous occasions expressed its concerns that the Amount A proposals are extremely complex yet appear to result in very little reallocation of taxing rights to market jurisdictions. ATAF are also concerned that the rules appear to create an unlevel playing field between so-called Automated Digital Services (ADS) and Consumer Facing Businesses (CFB).
The illustrative profit allocation thresholds of a 10% routine profit and the allocation of 20% of the residual profit to Amount A used in the OECD Economic Impact Assessment Report published in October 2020 appear to lead to a low level of profit reallocation, in particular, to smaller markets jurisdictions.
The proposed rules also appear to create an unlevel playing field as where a business has a taxable presence in the market jurisdiction such as through a distribution activity, that jurisdiction will have taxing rights under the arm’s length principle resulting in many cases in part of the routine profit of the MNE being taxed in that jurisdiction and in some cases some of the MNE’s residual profit. Under the Pillar one proposals the jurisdiction may receive additional taxing rights under Amount A.
However, for a business that currently has no taxable NEXUS presence in a market jurisdiction such as many ADS businesses, the current Amount A proposals may allocate part of the MNE’s residual profit to the market jurisdiction but none of the routine profit will be allocated to that jurisdiction. In ATAF’s view this does not seem an equitable outcome.
The blueprint proposal for determining whether a business has a taxable presence in a jurisdiction for the purposes of Amount A (the market revenue threshold test) also appears to create an unlevel playing field to the detriment of the smaller economies in the world.
The current market revenue threshold proposal of using a single revenue threshold for all economies is inequitable as it clearly discriminates against smaller economies. It also does not address the policy rationale of the test which is to capture those large MNEs that are able to participate in a sustained and significant manner in the economic life of market jurisdictions without necessarily having a commensurate level of taxable presence in that market (based on existing taxation rules).
A sustained and significant engagement in the economic life of a market jurisdiction is a relative concept as what constitutes significant for a small economy is obviously different to what constitutes significant in a large economy.
It is clear that a single monetary threshold is not the appropriate measure of what is a sustained and significant engagement in the economic life of all Inclusive Framework members and in our proposal, we call for a tiered approach as this would meet the above policy rationale and be more equitable.
The ATAF proposal
ATAF’s proposal aims to significantly simplify the rules and address a number of the inequities in the current proposal.
We propose the adoption of a single global threshold rule to cover all MNEs that generate global sales revenue above a certain amount. The new rule would apply to all such MNEs irrespective of their business activities. However, it would retain the current exclusions in the Pillar One blueprint and the Pillar One domestic revenue exclusion.
This proposal is similar to some of the features of the recent U.S. proposal which echoes ATAF’s concerns that the Pillar One blueprint proposals are too complex. Both the ATAF and U.S. proposal aim to greatly simplify the Pillar One rules by bringing all business sectors into the scope of Amount A except the current proposed exclusions in the Pillar One blueprint. Both proposals also remove the current ADS and CFB concept and propose no differentiation in profit allocation between ADS and CFB including the removal of the use of the so-called plus factors. Both proposals would mean no or minimal business segmentation.
Turning to the amount of the MNE’s profit to be reallocated to market jurisdictions, the USA estimates that its proposal would lead to approximately the same level of profits being reallocated as under the Blueprint proposals. ATAF do not consider the estimated level of profits re-allocated under the Blueprint is adequate and needs to be increased.
We propose that the reallocation of profits which we refer to as “Amount D”, would be calculated as a portion of the MNEs total profits instead of its residual profit. The quantum of Amount D would be a Return on Market Sales based on the Global Operating Margin of the MNE group using a tiered approach whereby the higher the Global Operating Margin of the MNE the higher Amount D would be. Amount D would be allocated to a market jurisdiction to the extent it exceeds the arm’s length profits reported in the market jurisdiction for that period.
In our view, this approach provides two advantages; firstly, it will reduce complexity in determining the allocable profits of in scope MNEs; and secondly it will result in a more level playing field between businesses with a current taxable presence in market jurisdictions and those with no such current presence.
This proposal would greatly simplify the rules for both taxpayers and tax administrations and would address many of the concerns regarding the global threshold rule. As the rule would be much simpler there appears to be no need for a high threshold nor a phased approach. In fact, with this simplification there appears no reason why the threshold could not be lowered to €250 million.
