Tax incentives threatened as global deal nears

Experts at the African Tax Administration Forum (ATAF) acknowledge how unbalanced the entire situation appears. For a continent that has perpetually been an after-thought to the initiatives from global powers, the latest initiatives around global taxation, naturally trigger familiar feelings of discomfort.

In a nutshell, after years of negotiations to try to close loopholes, an agreement has been reached to impose a global minimum tax on multinational entities, an initiative referred to as the GloBE rules. Stemming out of discussions within the Organisation for Economic Cooperation and Development (OECD), the initiative means that large multi-national entities will be required to pay at least a 15% effective rate on all of their global profits. The OECD is an inter-governmental economic policy bloc formed by and comprising of high-income economies, located mainly in the West.

By early this year, nearly 140 jurisdictions had signed up to the GloBE initiatives and by 2025, it is estimated that 90% of the world’s large multinationals will be covered by the global minimum tax rate.

In effect, what the initiative says is that when a multinational operating, for instance, in Botswana, under a preferential tax rate or tax incentive and is paying, perhaps 5%, it is duty bound to pay the “top up” of the global minimum of 15% in its home jurisdiction or headquarters.

African countries which decide to introduce Domestic Minimum Top-up Tax (DMTT) legislation will be able to ensure that under GloBE rules, these multinationals pay that whole 15% in the African country, otherwise, those funds are paid by the multinational in the multinational’s home country. Effectively, one way or another, targetted multinationals will pay a 15% minimum corporate tax globally and where those funds go to, depends on whether countries such as Botswana have enacted DMTTs.

Despite the appearances of unfairness and unilateralism around it, many analysts agree that the global minimum tax’s objectives are noble and actually in line with what Africa and specific countries such as Botswana have been pushing for, for sometime.

Enacting a global minimum corporate tax is expected to cut down on illicit financial flows which cost Africa somewhere in the region of $90 billion annually through practices that revolve around multinationals, such as base erosion and profit shifting, unethical transfer pricing and others. The global minimum corporate tax will also address African countries’ concerns about the taxation of tech giants such as Meta, Google and others, whose profits have proved beyond the reach of countries’ tax authorities despite their taxable economic activities occurring on the continent.

The OECD and those backing the initiative say through a global minimum tax rate, the days of headlines where one multinational or the other is exposed for paying single digit tax rates, while impoverished African countries scramble for fiscal resources, will draw to an end.

Logan Wort, the executive secretary of the African Tax Administration Forum (ATAF), the continent’s inter-governmental organisation on tax, says the global minimum corporate tax is emerging out of the evolving and increasingly technical global tax framework.

“One of those is the emergence of companies that make super-profits and whose markets are all over the world because of the blurring of borders,” he explained in a recent briefing of African tax journalists.

“E-commerce and Internet transactions have made it possible to have markets all over the world without having a physical presence.

“However, as you know, you can really only tax an entity when it has a significant, permanent establishment in your country, but with Facebook, Whatsapp and all the other entities that have emerged over the past decade of the digital economy, it’s now possible to do business anywhere without that physical presence.

“Netflix is all over, but other than for a tax agency in Africa to charge the user a surcharge, Netflix itself cannot be taxed because it likely doesn’t have a physical presence in that country.”

The OECD estimates that the global minimum corporate tax could generate revenues of up to $150 billion each year, and adds that the global minimum corporate tax deal incorporates ideas from African countries themselves.

“The GloBE rules acknowledge the calls from developing countries for more transparent, mechanical, predictable rules to level the playing field and reduce the incentive for MNEs to shift profits out of developing countries,” reads an OECD brief on the initiative.

That $150 billion, if more of it could be channelled towards Africa, would be quite handy in reducing the illicit financial flows and boosting the budgets of numerous countries reeling from the COVID-impact on their economies.

African tax authorities seem to broadly agree with the objectives of the global minimum corporate tax, but disagree with quite a few of its clauses, particularly around incentives. Debate is still raging on the continent around the use of tax incentives to attract Foreign Direct Investment, one of the things that will be significantly and deliberately dampened by the introduction of the GloBE.

Like other countries, Botswana’s carefully curated investment climate has long embraced the use of tax incentives for FDI attraction, with rates so low that for some years, the country fought off a tax haven tag pinned on it by some European Union members.

Under the International Financial Services Centre incentives package, qualifying firms enjoy a 15% corporate tax rate (as opposed to 22%) as well as conditional exemptions on Capital Gains Tax, Withholding Tax and other rates.

The package, initially designed to help economic diversification by encouraging the growth of the financial services sector, has been broadened over the years to include areas such as business process outsourcing and taxes on foreign incomes by a wide range of sectors.

In 2018, government introduced the special tax regime for investment in the SPEDU region under which qualifying firms in manufacturing, tourism and agriculture, were taxed at five percent (instead of 22%). According to the incentive, after the first five years of enjoying the discounted rate, businesses will then be required to pay 10%.

More recently, government has prioritised the Special Economic Zones initiative, which seeks to streamline sector-targeted investment in the country, through the offer of incentive packages and assistance to investors in five regions and across eight zones.

Experts at ATAF believe that many African countries have mistakenly placed tax incentives as the spearhead of their hunt for FDI. The advice coming from the continental body, which is providing technical support to 28 countries to boost tax collections, is however guarded as matters of taxation and associated policy are sovereign.

“The GloBE rules mean that in the country that you live in, if a multinational receives a tax incentive and pays perhaps zero percent tax or anything below 15%, that multinational will still pay that 15% to someone else,” said Wort.

“For Africa, this means that we need to look at this obsession with tax incentives as a form of drawing investment, because if we don’t collect that minimum 15% payable, it will simply go to another jurisdiction.

“Low tax income countries and those with high or many tax incentives stand to lose if they don’t develop a domestic minimum top up tax law within their countries.

“Tax incentives are in fact not in the top ten of the key drivers of why companies invest in Africa and there’s no need to have such excessive incentives, especially in extractives, e-commerce and others.”

ATAF experts say across the continent, incentives schemes are poorly administered and monitored and their benefits go unevaluated. Incentives are often treated as the icing on top of a package and their actually usefulness or interconnectedness with broader development mandates is poorly measured.

Botswana has its own examples of incentive schemes going wrong. While the IFSC has helped produce titans such as Letshego Holdings, Choppies, Motovac, Flotek, the country has burnt its fingers in the past.

Between 2008 and 2009, government spent more than P38 million in non-tax incentives propping up the textile sector from a collapse associated with the global recession. The sector, a key employer of unskilled women, had also been supported by tax incentives from the United States and the European Union.

The P38 million bail-out reported created 5,591 citizen jobs, but once the incentives ended, most of the investors, the majority being Asian, closed shop. Some of them relocated to Lesotho which rolled out an array of incentives, including subsidies warehouse leasing and cheap utilities.

In 2013, the local textile sector again approached government for a P500 million bail-out, before making a similar request in 2021.

“It’s important to understand that we are not saying tax incentives should not be done,” Wort said.

“We are saying they should not be given out willy-nilly. Yes, it’s an investment tool, but it must be used effectively.

“We have seen countries that have tax holidays for ten years and in the ninth year, companies pack up and move or demand an extension while having made their super-profits for those nine years.

“Incentives can be good if they are well managed and if they work together with countries’ other economic strategies.”

Local tax expert, Jonathan Hore, says rather than focussing on removing tax incentives, African countries need to better plug the tax leaks and inefficient collections taking place in their jurisdictions. On Thursday, Hore told Mmegi that targeting multinationals with revised tax rates would dissuade investment on the continent.

“Think of a country like Botswana where investors have said the population is a challenge, then imagine it has introduced a domestic minimum top up law, while its larger neighbour has not; that’s not really something you want to do.

“Trying to target the multinationals may not be the best thing for Africa; we need more employment than taxes.

“In fact, we have far more tax leakages, up to 60% in Botswana, and authorities should come up with laws for that,” he said.

Hore said there was evidence that tax incentives were useful in attracting investors to the country.

“Youth unemployment is near 40%.

“Look at what SPEDU is doing for the country. People are going there simply because of the lower tax rate.

“I have clients who have come to invest here because of the IFSC and we have had so many calls from people asking about the Special Economic Zones and these are big investors.

“Tax incentives will always be a key component in decision-making and there are professionals employed to explore tax incentives all over the world.

“Businesses want to pay the least amount of tax that’s allowed by the law.”

Hore said the global minimum corporate tax would take time to “trickle down to Africa,” but added that the initiative was more readily applicable in the OECD than in Africa.

“It’s easy for them to do these type of things, but for us, we are fighting for FDI and the last thing you want is to frighten your investors further with things like the DMTT,” Hore said.

“It’s much better to tighten your screws, meaning the capacity to collect revenue.

“This involves the BURS having more manpower, even if it means importing more auditors, because right now they have only 100 for the whole country.

“More can be imported to go around the country auditing and collecting this revenue.”

Hore’s comments touch on the sour taste in the mouth for Africans left by the global minimum corporate tax drive. Africans have questioned why such an important global initiative, one which could potentially undercut their ability to attract investment and growth, is being led by the OECD and not a more multilateral platform such as the United Nations.

For Africans, the GloBE is again a reminder of who wields the power in the world economy.

The ATAF said it travelled extensively, at great cost, in the last three years to engage repeatedly with the OECD on the GloBE, writing 14 different technical notes on the issue. The continental tax organisation is quick to stress that it has no specific advice to any member state on joining or not joining the GloBE.

However, Wort offered some hard truths.

“You can ask the question about whether the OECD is the right platform for this initiative and whether the UN should be the platform where all tax rules are made.

“That’s part of the debate, but in the meantime, the people that own the world economy are countries in the OECD and so whether we are there or not, they are going to make the rules.

“It’s not the ideal platform and we didn’t get the best deal after negotiating for three years, but this initiative will bring in some revenues.

“We must continue to fight for the right platform and a better deal; while this is happening, let us get the revenues that are due to us.”