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Suranjali Tandon
Intertax
Volume 50, Issue 5 (2022) pp. 396 – 413
https://doi.org/10.54648/taxi2022037
Abstract
In 2021, the Organisation for Economic Co-operation and Development (OECD) announced its proposal to introduce a global minimum tax. This proposal signals that Base Erosion and Profit Shifting (BEPS) program achieved limited success and tax avoidance continues as some countries tax at low or zero tax rates. This article reviews the existing international tax rules to demonstrate that their inefficient design is among the key factors that have compelled developed countries to support a global minimum rate.
In contrast to the previous approach where the OECD identified harmful tax practices, pillar two seeks to address tax competition. In doing so tax rates and incentives will be re-calibrated so as to ensure that a corporation pays 15% in each jurisdiction. For this the rules allow the residence countries to tax back the difference between the minimum and effective tax rate (ETR). The design of the rules indicates that developing countries will not gain tax revenues from this proposal. A more important point for developing countries to consider is that tax structures depend on regulation and structure of the economy. This article presents evidence to suggest that countries must weigh their overall economic objectives against the minimum tax.
Keywords
Minimum tax, CFC, BEPS, incentives, capital controls
Extract
As the Base Erosion and Profit Shifting (BEPS) Project attains a significant milestone with 130 Members of the Organisation for Economic Co-operation and Development (OECD)/G20 Inclusive Framework agreeing on international tax rules that address digitalization of the economy (Pillar 2), and the UN globally approving its tax treaty on Article 12(B) on automated digital services, a handful of African countries have joined their international counterparts in deviating from the global approach by developing and imposing unilateral digital services tax (DST) policy and legislation. This article examines the rationale of short-term measures of a unilateral DST, particularly in the African context post the COVID-19 pandemic and critically examines legislative measures imposed by a number of African countries. The article then contrasts general and specific challenges (applicable to African countries) in imposing a unilateral DST with opportunities that digital taxation presents for the continent, particularly in developing policy and legislation, and in implementation by tax administrations.