Africa's uncertainty over OECD minimum tax plan

Kenya and Nigeria have withdrawn from a global tax reform plan preventing multinational corporations from easily shifting their profits to low-tax countries.

The regional economic heavyweights had been weighing up taking part in the project, led by the Organisation for Economic Cooperation and Development (OECD), that envisages introducing a global minimum tax aimed at giving countries a partial share of the tax revenue where the profits are generated.

The plan was introduced in response to the increased digitalization of the global economy.

But only 23 African nations among 136 countries worldwide are taking part in the reform project, including South Africa, Senegal, and Egypt.

This means less than half of Africa's countries are participating, and as the project details are finalized, calls are growing to find a cheaper alternative for African nations.

'Deal for the rich'

"There's a reason why this deal has been called the deal of the rich," Tove Ryding of the European Network on Debt and Development (Eurodad) told DW.

"It has very clear biases in favor of the countries where multinational corporations have their headquarters. It's a very unhealthy international principle that the headquarter country should get the lion share of the tax income," said Ryding, who has been following OECD tax reforms for years.

"Adding to that, there's quite broad agreement about the fact that there is not much money in this for developing countries."

The core idea of the tax reforms — which will be tabled at the G20 summit this weekend — is perhaps best explained using an analogy from Facebook: If someone in South Africa logs on to the social media network and sees a paid advertisement on their timeline, Facebook pay taxes on the profits of its income from the advertisement in Ireland, where Facebook's headquarters for Africa are based.

Until now, a rate of 12.5% applied in Ireland, plus numerous exemptions.

The OECD plan proposes that, from 2023, part of the tax revenue would be divided among the countries where the profits were made.

This is the tax reform plan's first pillar. In the above scenario, South Africa would benefit from the advertising revenue.

The second pillar of the tax reform plan would ensure that the biggest corporations would pay a tax rate of 15%. If a country charges less than 15%, then the remainder would be paid to the company's headquarters. 

Devil in the detail

"The general idea that there should be a minimum tax is a good one, but we feel the amount is very low," says Alvin Mosioma, executive director of the Nairobi-based Tax Justice Network Africa.

"We are convinced that European and American jurisdictions are going to benefit most. There's little that developing countries get out of this, let alone African countries," Mosioma told DW.

There are many restrictions: The minimum tax only applies to companies with annual sales of at least €750 million ($872 million). The distribution scheme would only affect about the 100 biggest companies in the world — and only a quarter of tax revenues above a certain threshold are to be redistributed.

"I think the solutions largely being presented by the OECD will generally not work for many African countries or developing countries," said Mosioma.

He fears that many countries will be pressured into dropping their corporate tax to 15%.

Currently, most African countries charge between 20% and 30% in corporate taxes.

Bans and coercion

Since the start of the COVID-19 pandemic, digital service companies have exploded in popularity and have become important economic players.

Some African countries like Kenya, Nigeria and Zimbabwe are close to introducing rules to tax them.

But these new income sources would be outlawed under the new OECD tax reforms, explained Eurodad expert Ryding.

"They would commit to not using digital services taxes. But it also looks like over time, they might risk committing to a binding dispute resolution. So, they might lose their sovereignty on certain tax issues if they sign up."

Nigeria and Kenya have made their skepticism clear, but, according to Ryding, there have been no side negotiations to address their concerns.

She said powerful, industrialized countries use their economic advantage to pressure poorer countries.

Ryding used Namibia as an example, pointing out that from 2016 to 2018 Namibia was on an "EU list of non-cooperative countries and territories for tax purposes," because the southern African nation did not comply with OECD guidelines. 

"Blacklisting Namibia was not a very obvious thing to do, for the EU," she said. "But Namibia had not committed to the OECD rules. So, there's been a very open and clear pressure on developing countries to sign onto OECD rules that were negotiated through a process where they were not at the table."

A better way for reforms?

Skepticism over the tax plans is growing, and there are now demands for such tax reforms to be carried out under the auspices of the United Nations, with binding resolutions.

One of the draft resolutions seen by DW — which Guinea plans to introduce to the UN General Assembly on behalf of 134 poorer countries — invites "proper consideration of the importance of combating illicit financial flows."

Tove Ryding said that she sees big advantages in the UN leading the tax reforms. 

"In a United Nations context, the developing countries can participate on an equal footing. And we have seen again and again this is not the case at the OECD."

Alvin Mosioma of Tax Network Africa also believed in a UN solution on tax.

"Already we have a general consensus that tax is not just a national agenda, it is not just a sovereign issue.

If there is consensus, then it basically means there should be a global framework for addressing those cross-border issues," he said, adding the OECD is currently dominant but does not have the legitimacy to lead that process.

Editor's note: An earlier version of this text stated that the threshold for the global minimum tax was 750 billion euros annual revenue. We corrected this to 750 million euros.