Proposals released by the ATAF on the Inclusive Framework

At the beginning of July 2021, the Inclusive Framework released a statement which had been agreed to by 130 out of 139 countries in the framework. The new framework set out Two Pillars to enhance international tax reform and address the effect of digitalisation on global taxation. We discuss the statement in this newsletter. As mentioned, Pillar One addresses the allocation of taxing rights between jurisdictions and proposes new nexus and profit allocation rules; and Pillar Two focusses on a global minimum tax. Now that the official announcement is out and some time has passed, various countries and organisations are starting to comment. In this newsletter, we outline the comments made by the Africa Tax Administration Forum (“ATAF”).

In this newsletter we specifically focus on what the Inclusive Framework would mean for African countries based on the comments made by the ATAF on 1 July 2021 in a media release.

So in a nutshell, these are the ATAF’s main comments on the allocation of taxing rights between jurisdictions as proposed in Pillar One:

• Pillar One is a step in the right direction, but more work is needed regarding the tax allocation issue for African countries based on source taxing rights.
• The ATAF believes that the profit allocation thresholds of 10% routine profit and 20% of residual profits would have a low level of profit allocation for smaller market jurisdictions and is therefore proposing:
  • That total profit should be allocated instead of residual profit; and
  • That 35% of the profit should be allocated as opposed to 20%.
• The ATAF believes that the binding dispute resolution mechanism to resolve issues regarding the allocation of profits could be unfair towards African countries that have little or no mutual agreement procedures in place and is therefore recommending that the binding dispute resolution mechanism be elective.

Regarding Pillar Two, although the ATAF welcomes the introduction of a global minimum tax rate it is proposing:

• That the global minimum tax rate be at least 20% as opposed to 15% as almost all African countries have a tax rate in excess of 20%.
• The ATAF also wants source-based rules such as the Undertaxed Payments Rule (“UTPR”) and the Subject to Tax Rule (“STTR”) to be utilised to assist in curbing the imbalance between taxing rights in countries with a residency based taxation system compared to countries with a source based taxation system:
  • The UTPR protects jurisdictions against the shifting of profits through intra-group payments to low tax jurisdictions by requiring the affected taxpayer to make an adjustment in respect of any top-up tax that is allocated to that taxpayer from its related party in a low tax jurisdiction. However, the UTPR is currently applied after the income inclusion rule, which the ATAF disagrees with. The income inclusion rule requires a parent company to pay additional tax if its subsidiaries pay tax below a minimum rate.
  • The STTR is proposed to apply in relation to interest, royalties, and a specified list of payments. The ATAF has requested that the scope of application of the STTR be as broad as possible. The STTR applies when transactions are subject to tax in a jurisdiction with a tax rate that is below a set minimal rate of tax.

From the proposals requested by the ATAF, it appears that it is concerned that the overall effect of the changes and the “benefit” to Africa, would actually be insignificant. This is because many African jurisdictions won’t meet the allocation requirements and most African countries have tax rates higher than 15%. Furthermore, the ATAF is concerned about the effect on jurisdictions that do not join the Inclusive Framework or that do not implement the rules.

The ATAF will continue to lobby for its proposed changes to be implemented, only time will tell if it will be successful. As we have said before, these are interesting times, and we are keeping an eye on all of the developments. If you have any queries, please click below to contact us.

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How you structure your business is a critical question as you expand globally.  The right structure will protect your assets, improve your currency position, support your business operations, facilitate future business expansion and changes, and optimise your overall tax rate. Trying to unscramble a sub-optimal structure entered into in haste or without full consideration of relevant facts is complex and expensive, so it’s important to plan upfront.

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