Tax deal sets ground to collect at least 15% tax on online sales

A man looks at shoes online. The new tax agreement signed in October last year will ensure that Multinational Corporations pay a minimum tax rate of 15 per cent on online sales. PHOTO/ISAAC KASAMANI

What you need to know:

Under the new arrangement, if a country has physical presence in Europe or another country but sells its products through online platforms, such a company will be required to pay taxes in the country where its products have been sold

A new global tax agreement will allow low income countries to collect taxes from multinational companies with physical presence in foreign countries but whose products are sold in countries where such multinationals have no physical presence.

Under the new arrangement, if a country has physical presence in Europe or another country but sells its products through online platforms, such a company will be required to pay taxes in the country where its products have been sold.

The agreement also introduces minimum tax rates of 15 percent below which no country will be allowed to charge tax rates. This, the agreement says, will prevent multinational companies from migrating from countries with higher tax rates to countries with lower tax rates.

Currently, it is estimated that between $100 billion and $240 billion (Shs355 - 850 trillion) - about 4 percent to 10 percent of global corporate income taxes in revenue is lost each year because MNEs take advantage of gaps and mismatches between different countries’ tax systems. Africa loses approximately $50 billion (Shs175 trillion) each year through illicit financial activities of multinationals and wealthy individuals, and approximately US$88.9 billion (Shs311.2 trillion) in capital flight.

Under the current global taxation system, countries can only tax corporations that have a physical presence within their jurisdiction. However, the recent technological advancements have made it possible for companies to sell goods and services globally without a physical presence, and many countries have lost the opportunity to collect taxes from multinationals that generate substantial revenue from their jurisdictions.

Under pillar one of the new agreement, the largest multinationals are compelled to reallocate part of their profits and pay taxes to market jurisdictions.

Global Financial Integrity in collaboration with Advocates Coalition and Development and Environment Uganda say in what is being pegged as the biggest corporate tax reform in over a century, at least 137 counties in October 2021 agreed to the new global tax deal that aims at ensuring a fairer distribution in taxes among countries.

The two entities say 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.

They also say through the global minimum tax agreement of 15 percent minimum tax rate and countries will collect around $150 billion in new revenues annually.

“In addition to a minimum tax rate, the agreement also aims to reallocate taxing rights on more than $125 billion of profit to “market jurisdictions” each year,” the ACODE and GFI state.

Globally, the average corporate tax rate is close to 25 percent, with some countries such as Nigeria charging 30 percent or more. As such, a 15 percent rate will leave incentives for tax competition and avoidance intact.

Jackie Wahome, a policy analyst at GFI, says although the inclusive framework allows all interested jurisdictions and countries to become members, there are conditions and annual fees they have to commit to join. She says majority of African (52%) and Least Developed (69%) countries have not joined the framework.

But most multinational enterprises are headquartered in high-income countries, thus the revenue generated will disproportionately benefit these high-income countries. G7 and EU countries will take home more than two-thirds of the revenue while the world’s lowest-income countries receive a mere 3 percent of the revenue.

“The main concern is 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,” she said.

“A progressive and fair tax system must strengthen this relationship and foster good governance,” she added.

James Muhindo, the national coordinator Civil Society Coalition on oil and gas in Uganda, called for civil society engagement in advocating for tax justice in Africa.

“Civil Society Organisations 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,” he said.

The global tax deal represents a major reform to the rules governing the international tax system, aiming to bring an end to tax havens and profit-shifting by multinational enterprises.

“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,” he said.

Minimum tax rate

For a long time, countries have been grappling with the problem of MNEs avoiding taxation by shifting their headquarters to low-tax jurisdictions or tax havens. It is estimated that countries lose $100-240 billion (Shs354 illion – 854 trillion) worth of revenue annually to tax haven practices, which is the equivalent to 4-10% of the global corporate income tax revenue.

To address this, pillar two introduces a global minimum tax rate of 15 percent which is estimated to generate around $150 billion (Shs531 trillion) in additional global tax revenues annually. The minimum rate will apply to any company with an annual revenue of over €750 million ($850 million or Shs3 trillion). Exempted entities include government entities, international organisations, non-profit organisations, pension funds or investment funds that are Ultimate Parent Entities of an MNE Group or any holding vehicles used by such entities, organisations or funds.

The global minimum tax rate reduces pressure on (developing) countries to offer tax incentives to attract foreign investment, while lessening incentives for MNEs to shift their profits to countries with no or low corporate income taxes.

Narrow scope

The agreement only makes it possible for about 100 of the biggest and most profitable multinationals, namely those with a global turnover above €20 billion (approximately $22.6 billion or Shs80.7 trillion) and above 10 percent profitability to redistribute their taxes. Companies in the extractives and regulated financial services sectors are excluded.

The reallocation rule applies to only part of an in-scope company’s profits, namely 25 percent of residual profit.

There is, however, a provision to expand the scope after seven years, by reducing the turnover threshold to €10 billion ($11.3 billion or Shs40.3 trillion). The agreement also states that taxing rights on more than $125 billion (Shs445 trillion) in profit are expected to be reallocated to market jurisdictions each year.

The rule requires MNEs to pay taxes where their sales and users are located. Most big tech and digital services companies are headquartered in high income countries, but conduct activities and earn significant profits in countries where they have no physical presence.

The scope of companies to which this deal is applicable is narrow and leaves out many companies operating on the African continent, including Uganda. The deal also excludes companies working in the extractives industry.

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