Many tax authorities around the world have shifted their focus to the effective taxation of “Big Tech”, which until recently has had carte blanche on where (or whether) to account for profits, not always having “fiscal justice” in mind — a phrase coined by the French finance minister Bruno Le Maire.

As noted in the new OECD proposal—Secretariat Proposal for a “Unified Approach” under Pillar One —brings together common elements of three competing proposals from OECD member countries and is based on the work of the OECD/G20 Inclusive Framework on base erosion and profit shifting (BEPS), which aligns 134 countries and jurisdictions for multilateral negotiation of international tax rules.

The consultation document describes the “unified approach” to Pillar One as proposed by the OECD Secretariat, and seeks comments from the public on a number of policy issues and technical aspects.

The comments provided will assist members of the Inclusive Framework on BEPS in the development of a solution for its final report to the G20 in 2020.

“For a government to levy corporate tax on a foreign firm, tax rules require a “nexus” or link between the taxpayer and the taxing jurisdiction, typically in the form of physical presence such as offices or workers. In our digital world, firms can interact with users and create value in a country without needing to physically set up there, writes the World Economic Forum.

More than 130 countries are discussing new rules, under the OECD’s Inclusive Framework, to change the nexus requirement so it is not dependent on physical presence. The rules will determine how to allocate some taxable profits to (and among) market jurisdictions where users reside.

Logan Wort, the Executive Secretary of the African Tax Administration Forum (ATAF), says several meetings have been held to discuss the above matters, and comments on the OECD document will be concluded ahead of scheduled public consultations on 21 and 22 November 2019 at the OECD Conference Centre in Paris.

Submissions in response to the document must be made by 12 November.

There are 23 African countries in the Inclusive Framework. Four are members of the steering group, including Nigeria, which holds a deputy chair position, and South Africa, Côte d’Ivoire and Senegal.

“African countries cannot afford not to be part of the discussions,” says Wort. “If the continent does not defend its own interests in the global discussions which are moving at a rapid pace the negative impact on Africa’s share of tax revenues could potentially be drastic.”

Based on the OECD proposals, African countries would primarily be termed “market jurisdictions” — their citizens are mainly consumers of goods and services via digital platforms offered by entities based in offshore jurisdictions — “resident” elsewhere where they may be subject to little or no tax on their income — like Google, Facebook, Microsoft, Amazon, Uber and Apple.

“The end result is that the ‘market jurisdictions’, many of which are in the developing world, receive very little benefit from the digital economic activity of their citizens,” says Wort.

The crux of the framework revolves around allocating more taxing rights to market jurisdictions in which multinational enterprises have a sufficient economic presence, where they have market penetration and generate revenues and what criteria are to be used to allocate the rights to each country.

Wort says while there is consensus around this principle, the debate is around the following main points:

1. The need for a new nexus rule: “The proposed new nexus rule does away with the requirement of physical presence; the discussions centre on at what level of economic activity by the foreign multinational enterprises do they become subject to tax and what the criteria should be,” says Wort.

   Should it be a predetermined level of sales? Or should it include user participation and the role this plays in value creation for digital businesses users? Would the sales threshold be standard for all countries or should a specific threshold be set for each country? If the threshold is set too high, what would be the impact on smaller economies?

2. Profit allocation rules: Based on the newly released Unified Approach, whose objective ATAF supports, there will be three possible allocations of profits to market jurisdictions, namely Amount A, Amount B and Amount C. The details of how these amounts will be determined and allocated to the market jurisdictions is the subject of the current discussion.

Says Wort: “ For those not immersed in the tax agenda, and I dare say even for those who are, the proposals are complex and of a highly technical nature and require some effort to unpack.

But it is imperative that policymakers and tax administrations in Africa urgently roll up their sleeves and get to grips with the proposals on the table, their likely impact on revenue collections, and what this would mean for the money governments need for their spending programmes.”

“Whether the rewrite of the international tax rules will ensure a fairer global tax system for everybody is by no means certain. But African countries, individually and collectively, must stand up and fight for their fair share of taxes,” Wort says. BM