Nigeria and Kenya are not part of a new agreement signed by 130 nations, including Egypt and South Africa, that creates a global minimum tax rate of 15% to discourage multinational firms from dodging taxes by shifting profits to low-tax jurisdictions. The framework tagged the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (IF) — which envisages a new two-pillar plan — kicked off on 1 July 2021.
The deal is an attempt to solve the issues posed by a globalized and increasingly digital world economy in which profits may be moved across borders and corporations can make online profits in locations where they do not have taxable headquarters.
Countries could tax their companies’ foreign earnings up to 15% if they go untaxed through subsidiaries in other countries under the agreement. Because profits would be taxed at home nonetheless, there would be no incentive to employ accounting and legal techniques to shift profits to low-tax countries where they conduct little or no business.
However, not all of the 139 countries that joined the talks signed on to the deal, with the deal due to come into effect by 2023.
What Are The Pillars?
According to the framework, the pillars are Pillar One and Pillar Two.
- Pillar One applies to multinational enterprises (MNEs), which have a global turnover of above 20 billion ($23.7bn) and which have achieved profitability (that is, profit before tax) of above 10% in a given year. This does not however apply to multinationals in the extractive and financial industries, meaning that companies such as JPMorgan Chase or Chevron will still be taxed differently. The hardest hit under this Pillar will be technology companies with international spread. But it should be noted that the 15% tax rule does not apply to this Pillar. Under this, tax rights will be awarded to countries where the multinational company earns its revenue, even though it doesn’t maintain its headquarters there.
- Pillar Two is concerned with the global corporate tax rate of at least 15%. Multinational corporations operating in countries that have signed the agreement may ask to be taxed at a rate of 15%, regardless of the industry in which they operate. Pillar Two applies to multinational corporations with revenues of at least 750 million euros, although countries are free to apply Pillar Two to multinational corporations with headquarters in their country even if they do not have revenues of at least 750 million euros.
How Will Multinational Companies In Africa Be Taxed Under Pillar One?
- For international corporations that come under Pillar One, there is a rule known as the special purpose nexus rule. The law allows a multinational to pay 20–30 percent of its profit that exceeds 10% of its revenue as tax in a country where it generates at least 1 million euros ($1.1 million).
- If the multinational generates money from a smaller country (with a GDP of less than 40 billion euros), it will be taxed 20–30 percent of its profit, which is more than 10% of its revenue, provided the company generates 250,000 euros in revenue in that country.
How Will Multinational Companies In Africa Be Taxed Under Pillar Two?
Multinational companies under Pillar Two will be guided by different rules.
However, in total, the minimum tax rate applicable here will be at least 15% corporate tax rate.
Read also:Companies In Nigeria Can Now File For Tax Online
Nevertheless, the rules do not apply to government entities, international organisations, non-profit organisations, pension funds or investment funds that are the parent companies of an multinational company or any holding vehicles used by such entities, organisations or funds. That is, a different tax rate may be adopted for them.
For more technical details on how the tax regime will be implemented, click here.
What Does The New Regime Mean For Countries Like Mauritius Considered As Territories With The Lowest Corporate Rates?
The agreement has no impact on Mauritius’ position as Africa’s top tax haven. In fact, it legitimizes the country’s tax regime, which is currently at 15%, with tax effectiveness as low as 3% after taking advantage of the newly introduced Partial Exemption Regime for Global Business Corporations (GBCs) operating in the country which provides for an 80% tax exemption on specified passive income of the GBC companies in Mauritius.
To put it another way, because firms in Mauritius are typically taxed at 15%, the 80 percent tax exemption means that GBC companies owe just 20% of the original 15%, resulting in a maximum effective tax rate of 3%.
Again, because the two-pillar rules exempt government entities, international organizations, non-profit organizations, pension funds, or investment funds that are the parent companies of multinational companies, as well as any holding vehicles used by such entities, organizations, or funds, it’s unlikely that the new global tax regime will deter multinationals from choosing the East African country.
The new international tax laws exacerbate the situation for countries with high tax rates and those that aren’t on the list. On the other hand, whether or not the big-size countries are members of the agreement, it still pits them against the smaller ones.
However, if adopted by countries where many multinationals have their headquarters, such as the United States and Europe, the new approach could work by making it clear to companies that even if they avoid tax by moving profits to overseas subsidiaries, those profits will be taxed at home up to the bare minimum.
What African Countries Are Part Of The Agreement?
Only 22 of Africa’s 54 countries are part of the agreement so far and they include:
1)Angola 2) Benin 3) Botswana 4) Burkina Faso 5) Cabo Verde 6) Cameroon 7) Congo 8) Côte d’Ivoire 9) Democratic Republic of the Congo 10) Djibouti 11) Egypt 12) Eswatini 13) Gabon 14) Liberia 15) Mauritius 16) Morocco 17) Namibia 18) Senegal 19) Seychelles 20) Sierra Leone 21) South Africa 22) Tunisia
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Charles Rapulu Udoh
Charles Rapulu Udoh is a Lagos-based lawyer who has advised startups across Africa on issues such as startup funding (Venture Capital, Debt financing, private equity, angel investing etc), taxation, strategies, etc. He also has special focus on the protection of business or brands’ intellectual property rights ( such as trademark, patent or design) across Africa and other foreign jurisdictions.
He is well versed on issues of ESG (sustainability), media and entertainment law, corporate finance and governance.
He is also an award-winning writer