A new era of international taxation rules – What does this mean for Africa?

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  • 08 Oct 2021
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After slightly over 2 years of intense negotiations and engagements, On 8th October, most (136) members of the Inclusive Framework agreed a new set of international tax rules to address the tax challenges arising from the digitalisation of the economy. Indeed, the agreement concludes several years of highly complex and difficult negotiations resulting in a two-pillar set of rules that represent the most significant changes to the international tax rules in the last 100 years. Although, most countries and jurisdictions have joined the two-pillar agreement however there is no full consensus as 4 of the Inclusive Framework’s 140 members have not joined at this time.

ATAF and African members of the Inclusive Framework have been heavily involved in the negotiations and ATAF has  been providing technical support to its members to try and ensure that the new Pillar One and Pillar Two rules address the needs of African countries in ensuring that they are simple, equitable and bridge the gap in the existing tax rules that have been skewed in favour of developed countries.

Africa got some of what it wanted but not everything, as in most negotiations.  African countries that have joined the agreement now face the enormous challenge of implementing the new rules within the very ambitious timetable of the end of 2023 set out in the Inclusive framework plan. ATAF will work closely with the African Union and African countries on the implementation work. The countries that have not joined will also advance with this sovereign decision, and depending on whatever advice they may require, ATAF will provide requisite support to unpack whatever implications these will have.

Important to note, is that the agreement is not the end of the global tax debate, and ATAF will continue to press for  greater and more fundamental changes to address both the concerns Africa continues to have on the allocation of taxing rights between residence and source jurisdictions and to address Illicit Financial Flows out of Africa through artificial profit shifting by some Multinational Enterprises. Those further changes will be of paramount importance to ensuing Africa has the domestic resources it needs if African countries are to be able to rebuild their economies in a post-Covid-19 environment.

Pillar One Rules

The Pillar One rules incorporate many of the recommendations ATAF made in our Pillar One proposals of April 2021.

ATAF succeeded in getting the Pillar One scope broadened to include all sectors rather than the narrower scope proposed in the OECD blueprint published in October 2020. We also succeed in having the extractives sector excluded from the scope of Pillar One. This is of great importance to African resource rich countries as minerals are generic goods that are sold and priced on the basis of their inherent characteristics, rather than on other factors such as marketing intangibles. The primary taxing right therefore should be allocated to the resource-producing country.

Secondly, ATAF also achieved our call for greater simplification in the rules through their b segmentation only in very limited circumstances, and a reduction in the nexus threshold from 5 million Euros to 1million Euros and a lower threshold of 250,000 Euros for smaller jurisdictions with GDP lower than 40 billion Euros and no so-called- plus factors. This change to the nexus rule was necessary to  ensure that no member of the Inclusive Framework will be excluded from receiving its reallocation of profit under the so-called Amount A.

Our major concern regarding the OECD blueprint was its proposal to impose a mandatory dispute resolution mechanism for issues relating to Amount A. Together with the AUC, ATAF strongly opposed this as it would impose a costly and resource intensive process on many African countries which have limited capacity and where there is little risk of double taxation. ATAF has succeeded in obtaining agreement that for many African and other developing countries they will not have the mandatory dispute resolution mechanism imposed upon them, and instead an elective binding dispute resolution mechanism will be available for issues related to Amount A for developing countries that are eligible for deferral of their BEPS Action 14 per review[1] and have no or low levels of MAP disputes. The eligibility of a jurisdiction for this elective mechanism will be reviewed regularly; jurisdictions found ineligible by a review will remain ineligible in all subsequent years. This is a major achievement for Africa.

The agreement does not however reallocate part of the routine profit of in-scope  multinationals to market jurisdictions which ATAF strongly called for in the ATAF Pillar One proposal. When it became clear that our proposal  would not be agreed by developed countries, we called for at least 35% of the so-called residual profit to be allocated to market jurisdictions. Despite our call for a higher reallocation, it is disappointing to see that the agreement only reallocates 25% of the residual profit to market jurisdictions under Amount A.

ATAF, however, acknowledges that the agreement will result in some of the profits of the largest most profitable digital companies being taxed in African countries where they have users of services provided by those digital companies such as social media platforms and search engines even where the users do not pay for such services and where those businesses do not create sufficient physical presence status in those countries.

The additional allocation of the global profits of the most profitable MNEs to market jurisdictions is a step in the right direction in the reallocation of taxing rights. However, it will not result in the substantial shift in the allocation of taxing rights between residence and source countries that ATAF and African countries have been advocating for to redress the current imbalance in the allocation of taxing rights which favours residence jurisdictions to the detriment of developing countries which are primarily source jurisdictions.

In ATAF’s view that fundamental reallocation of such taxing rights could have been achieved through the ATAF Pillar One proposals and we will be calling for further work to be done in the global standard setting process to persuade the developed world to agree to a more equitable allocation of taxing rights to provide African and other developing countries with the tax revenue they need to rebuild their economies that have been devastated by the global pandemic.

Pillar Two Rules

Obtaining those tax revenues will however also require having global tax rules that are effective in stemming Illicit Financial Flows out of Africa perpetrated through artificial profit shifting by some multinationals. The Pillar Two rule aims to ensure that all the global profits of MNEs are taxed at least at a minimum effective rate of 15%. However, in ATAF’s view, for such a rule to be effective, the minimum effective rate needed to be at least 20% rather than 15% if it is to stem artificial profit shifting out of Africa as most African countries have a statutory corporate income tax rate of between 25% and 35%. Multinationals will only be disincentivized from such profit shifting in Africa if all its profits are taxed at least at 20% no matter in which jurisdiction the profits are reported.

In addition, ATAF has stated on numerous occasions that a source-based rule such as the so-called Undertaxed Payments Rule (UTPR) or Subject to Tax Rule (STTR) should be the primary rule under Pillar Two to assist in redressing the current imbalance in the allocation of taxing rights between residence and source jurisdictions.

ATAF has consistently advocated for the UTPR to be applied in priority to the so-called Income Inclusion Rule (IIR), and we are disappointed that the agreement gives priority to the IIR and that the UTPR will only apply in very limited circumstances. We are however pleased to see that the STTR, which is a treaty provision rule will be a minimum standard that developing countries can require to be included in bilateral tax treaties with Inclusive Framework members that apply nominal corporate income tax rates below the STTR minimum rate of 9%.

ATAF called for the STTR to be broad in scope to cover payments of interest, royalties, all service payments, and capital gains. The Inclusive Framework has agreed that the STTR will cover interest, royalties, and a defined set of other payments. If the STTR is to be effective in addressing BEPS in Africa and other developing countries, the defined set of payments must include service payments as our members frequently report that service payments are a high BEPS risk. We will be monitoring closely what will be included within defined payments as this work progresses in the Inclusive Framework.


ATAF will continue to work with the Inclusive Framework and our members both on the implementation of the Pillar One and Pillar Two rules and in obtaining further changes to the global tax rules as it is important to both restore stability to the international tax system, and to the development of a fairer and more equitable allocation of taxing rights.

The agreement, by members of the Inclusive Framework has shown that it is possible to make changes to the global tax rules that will be implemented by a broad range of countries. This implementation must be done responsibly and in consideration of the fact that not all countries have similar capacity in implementation of the rules. Further, it is important to note that some Inclusive Framework members have not joined the agreement and there are many African countries that are not members of the Inclusive Framework. ATAF is concerned about how the new rules will impact upon those countries, and that political pressure should not be brought on such countries to apply these rules or join the Inclusive Framework.

In addition, as noted above there is still much more work to be done to ensure a more equitable tax allocation and to stem Illicit Financial Flows from Africa. The United Nations, and the Inclusive Framework continue to be important bodies in that future work, but if the process is to produce an equitable outcome, it will be important to ensure that all countries both developed and developing have an equal and inclusive voice in that work, than has been displayed so far.

The work ATAF’s membership and the African Union have done in the negotiations on the two-pillar solution has been groundbreaking and pioneering work for Africa, and has meant that for the first time, Africa has been able to fight to have its tax policy objectives better reflected in the global tax rules. We will continue to work to increase Africa’s influence in the development of these rules to ensure a fairer and more just international tax system both for Africa and other developing countries.

[1] The conditions for being eligible for deferral of the BEPS Action 14 peer review are provided in paragraph 7 of the current Action 14 Assessment Methodology published as part of the Action 14 peer review documents which is available at BEPS Action 14 on More Effective Dispute Resolution Mechanisms – Peer Review Documents (oecd.org)

Click here to view the  Portuguese and French press release.

For media enquiries contact: communication@ataftax.org or call us on 0797902960

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