The African Tax Administration Forum (ATAF) has released its Suggested Approach to Drafting Domestic Minimum Top-Up Tax Legislation. Members of the ATAF include Angola, Benin, Botswana, Burkina Faso, Burundi, Cameroon, Chad, Comoros Islands, Egypt, Eritrea, Gabon, Gambia, Ghana, Ivory Coast, Kenya, Lesotho, Liberia, Madagascar, Malawi, Mauritania, Mauritius, Morocco, Mozambique, Namibia, Niger, Nigeria, Rwanda, Senegal, Seychelles, Sierra Leone, South Africa, Sudan, Eswatini (Swaziland), Tanzania, Togo, Uganda, Zambia, and Zimbabwe.
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INTRODUCTION
In December 2021, the Inclusive Framework published the Global Anti-Base Erosion (GloBE) Model Rules, and in March 2022 published the accompanying Commentary.
The GloBE rules comprise of two interlocking domestic rules: (i) an Income Inclusion Rule (IIR), which imposes top-up tax on a parent entity in respect of the low-taxed income of a constituent entity; and (ii) an Undertaxed Payment Rule (UTPR), which denies deductions or requires an equivalent adjustment to the extent the low-taxed income of a constituent entity is not subject to tax under an IIR. The implementation of these rules will affect both Inclusive Framework and non-Inclusive Framework members.
The Inclusive Framework has agreed that the GloBE rules will have the status of a common approach. This means that Inclusive Framework members are not required to adopt the GloBE rules, but, if they choose to do so, they will implement and administer the rules in a way that is consistent with the outcomes provided for under Pillar Two, including in light of these model rules and guidance agreed to by the Inclusive Framework. They also agree to accept the application of the GloBE rules applied by other Inclusive Framework members, including agreement as to rule order and the application of any agreed safe harbours.
The GloBE rules will apply to MNEs that meet the threshold of annual consolidated revenue of 750 million Euros, as also applies under BEPS Action 13 (country by country reporting). Countries are free to apply the IIR to MNEs headquartered in their country even if they do not meet the threshold. Government entities, international organisations, non-profit organisations, pension funds or investment funds that are Ultimate Parent Entities (UPE) of an MNE Group or certain holding vehicles used by such entities, organisations or funds are not subject to the GloBE rules.
The IIR is the primary rule and the UTPR only acts a backstop to the IIR. This means that the ordering of the GloBE rules generally works in favour of residence countries (in most cases developed countries) to the detriment of source countries (usually developing countries).
ATAF has throughout the long negotiations on these rules called for the source-based rule of the UTPR to 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 IIR, and we were disappointed that the agreement gives priority to the IIR and that the UTPR will only apply in very limited circumstances.
How might African countries benefit from the GloBE rules
Very few, if any, African countries will collect the top-up tax under an IIR as most African countries have very few if any UPEs resident in their country. As the UTPR is only a backstop to the IIR, it is also unlikely the UTPR will result in significant additional tax for African countries.
It is possible that the GloBE rules may relieve some of the pressure African countries face to grant tax incentives which, in many cases are wasteful. Under the GloBE rules where a tax incentive results in an effective CIT rate of less than 15%, the GloBE rules will lead to another tax jurisdiction, usually the jurisdiction of the UPE, collecting the difference between the effective tax under the tax incentive and the minimum effective rate of 15% (i.e. the top-up tax). It is important to bear in mind that the IIR will enable residence jurisdictions to collect top-up tax on tax incentives from African countries whether or not they are Inclusive Framework members.
However, the technical design of the GloBE rules provides for an opportunity for African countries, as well as other countries, to collect this top-up tax generated by tax incentives in their country rather than allowing the residence jurisdictions to collect the top-up tax through the IIR. This can be achieved by African countries enacting a Domestic Minimum Top-up Tax (DMT) in their domestic tax legislation.
Enacting a Domestic Minimum Top-Up Tax (DMT) in Africa
If an African country decides to enact a DMT, it will need to carefully consider the design of that DMT and the extent to which it should align with the IIR. This is for two reasons. Firstly, if it is not deemed to be aligned enough with the IIR to be considered a "Qualified DMT" under the OECD Inclusive Framework peer review process (see below) the tax accrued under the DMT may not qualify as a deduction in the computation of the jurisdictional top up tax for IIR purposes. This means that the top-up tax on the excess profits would still be taxable in the jurisdiction of the UPE.
Secondly, if the DMT is not closely aligned to the IIR it may result in either the DMT not collecting all of the top-up tax in the African country, or in it collecting more tax than the top-up tax - which may again impact adversely on foreign direct investment.
In implementing a DMT, African countries should also consider the need to consult with other government agencies, particularly where responsibility for tax incentives are under the purview of such agencies. Those agencies may not be aware of the complexities of whether another jurisdiction may be able to collect the tax given away under the tax incentive, and providing that context may be helpful in taking the DMT through legislative processes successfully. In addition, African countries may wish to inform and consult with their industry on the introduction of the DMT, in the interests of maintaining a transparent legislative process.
To assist African countries that wish to enact a DMT ATAF has developed this Suggested Approach to Drafting Domestic Minimum Top-up Tax Legislation. ATAF has already drafted a number of Suggested Approaches such as the ATAF Suggested Approach to Drafting Transfer Pricing Legislation which have been widely adopted in Africa as the Approaches are based on international standards and best practices, but customised to meet specific challenges faced in Africa.