ACODE, Partners assesses a new OECD global tax deal to harness its potential for a fairer distribution of taxes among African countries

The Organization for Economic Co-operation and Development (OECD) a global tax deal that represents major reforms to the rules governing the international tax system, has been welcomed by scores of African countries and accepted by others due to the need to evaluate the key element, opportunities and challenges it brings to economies in Africa.

Various economic players have urged that though the global tax deal agreement will see economies collect more tax, and an inclusive framework, experts say that it may benefit big corporates that the local companies.

Advocates Coalition and Development and Environment Uganda (ACODE) in collaboration with Global Financial Integrity (GFI) in a new tool-kit has embarked on a journey to examines the key elements, opportunities, and challenges of the OECD tax agreement of the corporate tax reform that is projected to to ensure a fairer distribution in taxes among countries.

In a statement issued by ACODE shows that based on the conditions to join the global tax deal, some African countries are still skeptical to join.

“Due to concerns about the fairness of the deal, four countries - Kenya, Nigeria, Pakistan, and Sri Lanka - have not joined the agreement. Assessing the current momentum around the worldwide tax reform deal can improve our understanding of the African context while promoting a more unified African voice on international tax cooperation and tax governance for sustainable development” the statement partly reads.

According to the statement, the condition including annual fees, the location of the headquarters among other issues is still keeping members joining.

“Although the Inclusive Framework allows all interested jurisdictions and countries to become members, there are conditions and annual fees they have to commit to joining. The majority of African (52%) and Least Developed (69%) countries have not joined the framework” it reads

Jackie Wahome, a Policy Analyst at GFI said “The main concern is that the added tax revenues under the two-pillar solution will disproportionately benefit high-income countries rather than low-income, developing, and African countries, leaving systematic inequalities in tax distribution intact. A progressive and fair tax system must strengthen this relationship and foster good governance,” she saidACODE and GFI and ACODE have called upon civil society engagement in advocating for tax justice in Africa.

“Civil Society Organizations can use this momentum to highlight efforts that have been ongoing on the continent to push for Africa's taxing rights. These could include building support for home-grown solutions to address structural issues such as tax loopholes and illicit financial flows,” said James Muhindo of ACODE and the National Coordinator Civil Society Coalition on Oil and Gas in Uganda.

GFI and ACODE intend to continue to engage governments and stakeholders in Africa to develop tax and fiscal policy initiatives, including knowledge products that inform discussions on key tax issues in Africa and contribute to strengthening Africa's voice on international taxation.

OECD aims to bring to an end tax havens and profit-shifting by multinational enterprises (MNEs). By introducing a global minimum tax rate and new profit reallocation rules, the deal aims to give countries a fairer chance to collect tax revenues from MNEs operating in or generating revenues from their jurisdictions.

The deal was negotiated under the OECD/ G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS), and finalized in October 2021.1

The deal specifically aims to address challenges that arise from the digitalization of the economy and is broken  down    into two pillars including reallocating MNE profits and taxing rights to market jurisdictions and introducing a global minimum tax rate.

Global Financial Integrity (GFI) is a Washington, D.C.-based think tank, producing high-caliber analyses of illicit financial flows, advising governments on effective policy solutions, and promoting pragmatic transparency measures in the international financial system as a means to improve global development and security and reduce inequality.

Advocates Coalition for Development and Environment (ACODE) is an independent public policy research and advocacy Think Tank based in Uganda, working in the Eastern and Southern Africa Sub-regions on a wide range of public policy issues.

Though the global minimum tax is supposed to bring tax justice, the majority of African countries still have doubts to join the global tax deal including Kenya and Nigeria on the percentage of benefits.

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.

Most Countries complain that the tax deal is seen as more beneficial to the rich economies that the growing African countries.

Steven Galiwango a tax expert with Business Portal based in Kampala in a discussion said that 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.

"The tax deal being presented will ideally not benefit African countries” he said

According to the tax deal pillars, 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, African countries would benefit from 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.

A statement released by OECD Secretary General, Mathias Cormann in February 2022 said that

“The agreement will make our international tax arrangements fairer and work better. This is a major victory for effective and balanced multilateralism. It is a far-reaching agreement which ensures our international tax system is fit for purpose in a digitalised and globalised world economy. We must now work swiftly and diligently to ensure the effective implementation of this major reform,” he said

He added that this reform of the international tax system will ensure that Multinational Enterprises (MNEs) will be subject to a minimum 15% tax rate from 2023.

The landmark deal, agreed by 136 countries and jurisdictions representing more than 90% of global GDP, will also reallocate more than USD 125 billion of profits from around 100 of the world’s largest and most profitable MNEs to countries worldwide, ensuring that these firms pay a fair share of tax wherever they operate and generate profits.

Following years of intensive negotiations to bring the international tax system into the 21st century, 136 jurisdictions out of the 140 members of the OECD/G20 Inclusive Framework on BEPS joined the Statement on the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy. It updates and finalises a July political agreement by members of the Inclusive Framework to fundamentally reform international tax rules.