Introduction
Base erosion and profit shifting (BEPS) refers to tax planning strategies or abusive transfer pricing used by multinational enterprises that exploit gaps and mismatches in tax rules to avoid paying tax.
Developing countries’ higher reliance on corporate income tax means they suffer from BEPS disproportionately. BEPS practices cost countries USD 100-240 billion in lost revenue annually.
Working together within OECD/G20 Inclusive Framework on BEPS, 141 countries and jurisdictions are collaborating on the implementation of 15 measures to tackle tax avoidance, improve the coherence of international tax rules and ensure a more transparent tax environment.
Africa is blessed with both human and natural resources. It has a population of over a 1.3billion people, across 54 countries with a combined gross domestic product (GDP) valued at US$3.4 trillion. Most African countries are ranked among the poorest countries in the world.
With one of the highest rates of poverty in the world, Sierra Leone may wish it could magically acquire a source of wealth to relieve its struggles. Yet, it already has one: it is one of the world’s largest producers of diamonds and other minerals.
The problem is that many of the benefits end up in tax havens. For example, leaked documents revealed that one of the country’s largest diamond mines undervalued sales to its subsidiaries in tax havens by as much as 35%, illicitly reducing revenue that Sierra Leone could have used for schools, hospitals, and roads.
In total, the estimated amount of revenue Sierra Leone loses to tax abuse is nearly 1.5 times its entire health budget.
Many African countries are in a similar position: resource-rich and money-poor. The conventional wisdom is that they should fight corporate tax avoidance by performing their best imitation of tax systems in the Global North.
But this fight takes place on a profoundly unequal playing field. On one side, there are typically under-resourced and undertrained national tax authorities. On the other, there are multinational companies employing teams of top lawyers and accountants. Moreover, rich countries suffer significant losses to corporate tax avoidance too.
OECD BEPS 15 Actions Plan
The OECD/G20 Inclusive Framework on BEPS brings together 141 countries and jurisdictions to collaborate on the implementation of the BEPS Package. The BEPS package provides 15 Actions that equip governments with the domestic and international instruments needed to tackle tax avoidance.
Countries now have the tools to ensure that profits are taxed where economic activities generating the profits are performed and where value is created. These tools also give businesses greater certainty by reducing disputes over the application of international tax rules and standardising compliance requirements.
OECD and G20 countries along with developing countries that are participating in the implementation of the BEPS Package and the ongoing development of anti-BEPS international standards are establishing a modern international tax framework to ensure profits are taxed where economic activity and value creation occur.
Work is being carried out to support all countries interested in implementing and applying the rules consistently and coherently, particularly those for which capacity building is an important issue.
The following are the BEPS 15 Actions Plan:
1. Address the tax challenges of the digital economy
2. Neutralize the effects of hybrid mismatch arrangements
3. Strengthen Controlled Foreign Companies(CFC) rules
4. Limit base erosion via interest deductions and other financial payments
5. Counter harmful tax practices more effectively, taking into account transparency and substance
6. Prevent treaty abuse
7. Prevent the artificial avoidance of Permanent Establishment (PE) status
8. Aligning transfer pricing outcomes with value creation: intangibles
9. Aligning transfer pricing outcomes with value creation: risks and capital
10. Aligning transfer pricing outcomes with value creation: other high-risk transactions
11. Measuring and monitoring BEPS
12. Require taxpayers to disclose their aggressive tax planning arrangements
13. Re-examine transfer pricing documentation
14. Make dispute resolution mechanisms more effective
15. Develop a multilateral instrument
Africa’s Response to Corporate Tax Avoidance
The unitary approach treats a multinational corporate group as a single entity. This means that total global profits would be allocated – or apportioned – to the countries where the company does business in proportion to the genuine economic activity carried out by each subsidiary.
In this way, corporate tax havens where there is little or no genuine economic activity would be cut out. Instead, countries where the resources are extracted or where significant staff are employed, for example, will be able to tax the share of global profits.
This approach would allow African countries to raise the taxes that are rightly theirs to achieve sustainable development goals, reduce reliance on aid and address inequality.
For example, Zambia has adopted what is called “the Sixth Method”. Rather than allowing corporations to report transfer prices based on a counterfactual transaction, this approach simply requires them to use the price of minerals listed on international commodity markets.
The sixth method originated in Argentina in 2003 when the government was seeking to evaluate the sale of raw materials to related parties in countries with lower tax rates. It is a simplified version of the comparable uncontrolled price (CUP) transfer pricing method, designed specifically to limit the risk of transfer mispricing in commodity transactions.
Although Nigeria, as part of the Inclusive Framework, is involved in negotiating a consensus approach, in 2020, Nigeria introduced the Companies Income Tax (Significant Economic Presence) Order, 2020 (SEP Order) made according to the Finance Act 2019.
The SEP Order is a unilateral approach that seeks to bring non-resident companies that derive income from electronic commerce and digitalised activities in Nigeria within the tax net, as well as non-resident companies that provide technical, management, consultancy or professional services to persons resident in Nigeria.
The SEP Order has a clause to the effect that any consensus arrangement reached by the multilateral agreement will override the SEP Order.
African governments can also increase their use of mineral royalties. Unlike profit-based corporate income tax, which encourages companies to report artificial losses to reduce their tax bills, royalties are fees based only on production and revenues.
Another option is to set hard limits on interest deductions. For example, South Africa does not allow companies to deduct interest payments to foreign-based companies exceeding 40% of turnover from taxable profits.
This reform prevents companies from issuing excessive loans between subsidiaries in a straightforward way that doesn’t require tax authorities to compare each loan to a hypothetical market transaction.
Conclusion
Africa is keeping pace with the rest of the world in adopting global best practices relating to transfer pricing. With conformity to the OECD Guidelines and the UN Manual, the continent is on the path to tackling transfer pricing issues used by Multinational Companies (MNCs) to evade tax payments, which resulted in low revenue.
By simplifying tax administration and necessary tax reforms to reduce loopholes, it is believed that MNCs will pay more taxes to the governments in Africa which would translate into economic growth and development.
OECD and G20 countries along with developing countries that are participating in the implementation of the BEPS Package and the ongoing development of anti-BEPS international standards are establishing a modern international tax framework to ensure profits are taxed where economic activity and value creation occur.
Work is being carried out to support all countries interested in implementing and applying the rules consistently and coherently, particularly those for which capacity building is an important issue.
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Olatunji is the founder Taxmobile.Online and Managing Partner/CEO of AOA Professional Services. Prior to this,Olatunji worked as Director,Tax & Regulatory Services at Nolands Nigeria Professional Services, Senior Manager -Tax,Regulatory & Advisory Services at Saffron Professional Services.
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