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ATAF Issues Release on Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy — Orbitax Tax News & Alerts

The African Tax Administration Forum (ATAF) has issued a media release welcoming the OECD Inclusive Framework statement for a two-pillar solution to address the tax challenges arising from the digitalisation of the economy, while also noting some concerns. Several ATAF members joined the statement as Inclusive Framework members, including Benin, Botswana, Burkina Faso, Cameroon, Egypt, Eswatini (Swaziland), Gabon, Ivory Coast, Mauritius, Morocco, Namibia, Senegal, Seychelles, Sierra Leone, South Africa, and Zambia.


130 Inclusive Framework countries and jurisdictions join a new two-pillar plan to reform international taxation rules – What does this mean for Africa?

After several years of intensive negotiations, 130 members of the Inclusive Framework have issued a statement on a two-pillar solution to address the tax challenges arising from the digitalisation of the economy. 130 countries and jurisdictions representing more than 90% of global GDP have joined a new two-pillar plan to reform international taxation rules. A small group of the Inclusive Framework's 139 members have not joined at this time.

ATAF welcomes the achievement of this new milestone as in our view, a global consensus on the tax challenges arising from the digitalisation of the economy is of paramount importance as now more than ever, cooperation and multilateralism are required in developing solutions that will assist all countries in rebuilding their economies in a post-Covid-19 environment.

Pillar One Rules

ATAF has been providing technical support to its members to try and ensure that the new Pillar One and Pillar Two rules meet the needs of African countries. We are pleased to note that the new Pillar One proposals reflect many of the proposed changes that ATAF made on the Blueprint Pillar One proposals released in October 2020, which we and our members considered were far too complex and resulted in a very modest amount of profits being reallocated to market jurisdictions.

Due to the adoption by the Inclusive Framework of a number of the measures set out in the ATAF proposal, the new Pillar One rules are far simpler than the Blueprint proposals and will ensure that no member of the Inclusive Framework will be excluded from receiving its reallocation of profit under the so-called Amount A. The Pillar One rules are a step in the right direction in starting to address the issue of the current imbalance in the allocation of taxing rights between source and residence countries which deny source countries such as African countries of much-needed revenue. However, there is still much more that needs to be done to further redress that imbalance, and in partnership with the African Union, we are calling upon the Inclusive Framework to undertake further work on the tax allocation issue.

As ATAF noted in its Pillar One proposal in May this year, the illustrative profit allocation thresholds of a 10% routine profit and the allocation of 20% of the residual profit to the so-called Amount A used in the OECD Economic Impact Assessment Report published in October 2020 appears to lead to only a low level of profit reallocation, in particular, to smaller markets jurisdictions.

We have also been of the view that the proposed rules in the Blueprint also appear to create an unlevel playing field as to where a business has a taxable presence in the market jurisdiction such as through a distribution activity, that jurisdiction will have taxing rights under the arm's length principle resulting in many cases in part of the routine profit of the MNE being taxed in that jurisdiction and in some cases some of the MNE's residual profit. Under the Pillar One proposals, the jurisdiction may receive additional taxing rights under Amount A.

However, for a business that currently has no taxable nexus presence in a market jurisdiction, such as many digital businesses, the current Amount A proposals may allocate part of the MNE's residual profit to the market jurisdiction, but none of the routine profit will be allocated to that jurisdiction. In ATAF's view, this does not seem like an equitable outcome.

We, therefore, proposed that the reallocation of profits would be calculated as a portion of the MNEs total profits instead of its residual profit. The quantum to be reallocated would be a Return on Market Sales based on the Global Operating Margin of the MNE group, whereby the higher the Global Operating Margin of the MNE, the higher the reallocation.

In our view, this approach provided two advantages; firstly, it would reduce complexity in determining the allocable profits of in scope MNEs; and secondly, it would result in a more level playing field between businesses with a current taxable presence in market jurisdictions and those with no such current presence.

We are disappointed that the Inclusive Framework has decided not to adopt this approach but note that it has agreed to allocate between 20% and 30% of residual profit, defined as profit in excess of 10% of revenue, to market jurisdictions. In our view, to result in a meaningful reallocation of profits to market jurisdictions under the proposed approach, at least 35% of residual profit defined as profit in excess of 10% of revenue should be allocated to market jurisdictions. We will continue to support our members to try and achieve as meaningful reallocation of profits to market jurisdictions as possible.

We are also concerned that the Inclusive Framework has only agreed to give consideration to having an elective binding dispute resolution mechanism for issues related to Amount A for developing countries with no or low levels of MAP disputes and that are eligible for deferral of the BEPS Action 14 Peer Review. Both ATAF and the African Union have stated on many occasions to the Inclusive Framework meeting that there should be no form of Mandatory Binding Dispute Resolution mechanisms for transfer pricing and permanent establishment disputes included in the Pillar One rules for countries where there is little double taxation risk as this would impose a demanding and complex process on such countries. It is therefore essential that this elective binding dispute resolution mechanism is made available to all African countries that have limited capacity and no or low level of MAP disputes.

Pillar Two rules

We also consider the new Pillar Two rules to be a step in the right direction in stemming Illicit Financial Flows out of Africa by multinational enterprises (MNEs) through artificial profit shifting. We welcome the introduction of a global minimum tax rate that aims to ensure all of an MNE's global profits are taxed at least at the minimum effective tax rate. However, as we and the African Union have stated on several occasions, the minimum effective tax rate should be at least 20% if it to be effective in protecting African tax bases and stem Illicit Financial Flows (IFFs) by reducing profit shifting by MNEs. We note that the Inclusive Framework has agreed that the minimum tax rate will be at least 15%, and we will continue to work with our members to try and get an agreement at the Inclusive Framework to a rate of at least 20%.

In addition, ATAF has stated 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.

We have consistently advocated for the Undertaxed Payment Rule (the UTPR) to be applied in priority to the so-called Income Inclusion Rule (IIR), and we have been disappointed by the strong opposition from many developed countries, who will be beneficiaries of the IIR, to this proposal. In the circumstances, we are pleased to see that there is an agreement to having the STTR, which is a treaty provision rule as 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.

We have 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 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.


We continue to support the work of the Inclusive Framework as it is important to restore stability to the international tax system. Corporate Income Tax represents a higher share of tax revenues and GDP in developing countries than in rich countries. Tax levies on companies are higher in most African countries, on average 16% of total tax revenue compared to 9% in OECD countries.

African countries have been trying to enhance tax yield from corporates by introducing new measures such as robust measures to stop aggressive transfer pricing schemes by multinational enterprises, measures to strengthen mining regimes and new policies on tax incentives. However, digitalisation of economies has created new challenges as many African countries are not able to tax highly digitalised businesses due to the current international tax rules. Therefore, the development of global tax rules is a key part of the tax policy considerations for Africa in the post COVID era. Obtaining an Inclusive Framework agreement on effective and equitable Pillar One and Pillar Two rules is therefore of vital importance to African countries.

There is still further work that needs to be done to finalise the new rules and even when finalised we consider 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 Inclusive Framework provides an opportunity for a broad range of countries to undertake this further work but if the process is to produce an equitable outcome it will be important that developed countries do not exert political pressure on developing countries.

We are also concerned about how the new rules will impact upon countries that are not members of the Inclusive Framework or on any Inclusive Framework members that choose not to adopt the new rules. We are concerned that political pressure should not be brought on such countries to apply these rules or join the Inclusive Framework. It is important that countries join the Inclusive Framework because they want to join it and not because they have been coerced into joining.