The Organization for Economic Co-operation and Development (OECD), estimates the proposed global minimum tax will generate $150 billion in additional global tax revenues annually. On 23 August, Graphene Economics co-hosted an event together with the Gordon Institute of Business Science (GIBS), where we explored the topic of whether this will benefit developing countries as much as developed countries.
Since July 2021, 137 countries (accounting for more than 90% of the global economy) have signed a deal aimed at ensuring companies pay a global minimum tax rate of 15%. The idea behind the new system is that it will benefit countries where a company’s products and services are sold, and not only the countries where the products or services are provided from. This is a response to the trend towards companies migrating income from intangible sources (such as digital services or intellectual property royalties) to low tax jurisdictions to avoid paying a higher tax rate in their “home” countries.
As Prof. Adrian Saville noted, “In this world of inflation, cost of living crisis, inequality, the evaporation of economic growth, and fiscal strain the matter of taxation is a critical conversation.”
He pointed out that it’s “the big tech guys” that have been accused of finding tax jurisdictions that ensure they pay very low tax rates. “We find some of the investment heroes of the last five years are also the tax shy,” he noted, pointing out that over a decade Amazon paid an average tax rate of 12% versus the US tax rate of 21%.
Michael Hewson, founder of Graphene Economics, said that while the proposed global minimum tax, expected to be implemented from 2024, seems like a good idea for countries that have lost out on revenue collections from low tax arrangements, many developing countries (including South Africa and most African countries) are likely to have to give up any potential digital services taxes. “We need to consider what we stand to lose, in exchange for limited potential benefit,” he says. “This may explain why only 23 African countries have signed the deal to date. We need further impact assessment, urgently.”
“I work a lot in infrastructure finance,” said Fana Marivate, CA(SA), an experienced project finance specialist and green-energy executive who participated in the discussion panel at the event. “A lot of countries on the continent have these huge infrastructure gaps. Part of the reason for that is the weakness of their fiscus. So, to the extent that something like this could begin to address those fiscal weaknesses, it will obviously be a boon for infrastructure development on the continent. But if, on the contrary, it actually serves either not to address the problem or even to exacerbate it, then obviously, it creates more significant problems.”
How the new global minimum tax would work
In October 2020, the OECD released “blueprints” for a two-pillar solution to counter tax avoidance and manage the digitalisation of the economy, comprising two “pillars”.
The objective of Pillar One is new taxing rights over multinational enterprises (MNEs) regardless of physical presence. It will apply to multinationals with global turnover above 20 billion euros and with a profit margin above 10%.
Pillar Two, which aims to ensure that MNEs pay a global minimum tax rate of 15%, will apply to those with global turnover above 750 million euros.
“Both of these pillars will have direct and indirect consequences for large multinationals operating across borders,” says Michael. “It will affect companies whether they’re above the threshold or down the line, even those that that are not in those above those thresholds. In addition, countries, particularly those in Africa, need to consider the impact of these proposals on the income tax incentive programmes, especially if these programmes have the potential to reduce the effective tax rate paid in a country to below 15%. The OECD highlighted they are looking to support emerging markets in understanding the impact of these proposals on their incentive programmes.”
He says that under the new proposals, the benefits of tax havens has been considerably reduced. The ability for countries to tax digital revenue streams may require use of the VAT system if digital services taxes are abolished. “If developing countries’ priorities are not taken into account and the solutions do not cater for them, then I expect to see more aggressive revenue authority audits down the line,” he says.
Michael suggests that business, academia and National Treasury need to come together to undertake an economic impact assessment of Pillar One and Pillar Two for the South African context.
