Last week’s Monday opinion focused on the digital economy and its potential for domestic resource mobilization (DRM) in Zambia, with a focus on tax opportunities in the ICT sector. We discuss Zambia’s prospects from the OECD’s two-pillar solution that seeks to accord countries taxing rights and a global minimum tax rate in this week’s Monday Opinion.
Since 2013, Zambia has benefited from a long-term OECD technical assistance program on transfer pricing and other Base Erosion and Profit Shifting (BEPS)-related issues.In December 2017, Zambia joined the OECD/G20 Inclusive Framework on BEPS, an international collaboration of over 135 jurisdictions working together to end tax avoidance.
The digitalization of the economy has created quite a conundrum. Addressing the tax challenges posed by digitalisation is a top priority for the OECD/G20 Inclusive Framework, and the “BEPS” Project has focused on this issue since its inception.
Zambia is one of the countries that has agreed to the OECD/G20 Inclusive Framework, which aims to modernize international tax rules.The rules, which date back to the 1920s, were not designed to accommodate the digital economy, in which global businesses have little or no physical presence in the countries where their customers are located.
The OECD had hoped to reach an agreement on how to tax the digital economy by the end of 2020, but that deadline was missed.In October 2021, 136 jurisdictions agreed to a two-pillar solution in principle.
Pillar 1 aims to ensure a perceived fairer distribution of profits and taxing rights among countries. Multinational corporations with a global turnover of more than €20 billion will be taxed in the countries where they operate.The new taxing right will benefit countries where the multinational generates at least €1 million in revenue. For smaller countries like Zambia, with a GDP of less than €40 billion, the threshold will be set at €250,000.’Market jurisdictions,’ or countries where goods or services are used or consumed, will receive a quarter of profits over ten percent of revenue.
According to the OECD, taxing rights on more than US$125 billion in profit will be reallocated to market jurisdictions each year under pillar one. Furthermore, between October 8, 2021, and December 31, 2023, or until the multilateral convention implementing the deal enters into force, pillar one imposes a “standstill” on the imposition of new digital services taxes (DSTs), with no new taxes imposed. The convention’s signatories will agree to repeal current DSTs and not enact similar legislation in the future.
The “global anti-base erosion” (GloBE) pillar or pillar 2 aims to address the risk of profit shifting to entities with low or no taxation by requiring multinational corporations to pay a global minimum tax of 15%, regardless of where they are headquartered or operate. According to the OECD, the new minimum tax rate will apply to companies with revenues exceeding €750 million and is expected to generate an additional US$150 billion in global tax revenue annually.
GloBE would not be limited to highly digitalized businesses. Its goal is to end the “race to the bottom” in terms of tax rates and ensure that all international businesses pay the bare minimum. Countries will not be forced to follow the GloBE rules, but they must do so in accordance with the agreement if they do. Countries that choose not to adopt the rules must accept that the rules will be applied by others.
Pillars 1 and 2 will be implemented via a multilateral convention, which the OECD hopes to sign in 2022 and enter into force in 2023.However, some countries such as Kenya, Zimbabwe, Nigeria, UK, France, and Spain have taken unilateral actions and introduced their own DSTs to maximise tax revenues on multinational corporations’ profits.These will fall away when the new international rules come into force.Zambia could exploit the situation and act unilaterally. However, Zambia would be hampered by incompatible OECD rules, as well as any potential retaliatory consequences.
The US government has previously expressed opposition to certain aspects of pillar one, which will result in a shift of tax revenues from the US to market jurisdictions, particularly in Europe. The proposals have now been accepted as part of a two-pillar strategy that includes a low tax rate. The proposals, however, must be approved by the US Congress, which will almost certainly face opposition.
1. Once pillar 2 is in place, there will be no incentive for tax havens or overly generous tax breaks for foreign investors, which will increase DRM.
2. Government should simulate a unilateral approach and make projections of the possible tax revenue gains from this process, with or without the OECD rules.
3. Government needs a robust digitalized database to effectively tax the digital economy, which allows for the identification and location of taxable individuals and businesses, users of search engines and social media platforms among others.
4. Government should begin mapping its market jurisdiction to prepare for the tax-sharing opportunities that the digital economy presents.
5. Toimprove performance and reap the benefits from the digital economy, Government should invest in human, financial, technological, and legal resources.
6. Rather than just for taxation purposes, policymakers should adopt a more comprehensive strategy aimed at digitizing the registration of informal businesses to protect their rights, entitlements, and assets as entrepreneurs.
For this week’s Monday Opinion, that was all we had. Join us again next week as we discuss yet another fascinating topic.
About the Author
Mr. Boyd Muleya is Head of Research at the Centre for Trade Policy and Development, he is an Economist and Banker by training, and his area of interest in research includes Monetary Economics , Financial Markets,Investment Analysis and Financial Inclusion.