Introduction
In today’s increasingly digital and interconnected global economy, the significance of international taxation cannot be overstated. This article explores the implications of two prominent international tax frameworks, namely the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) and the United Nations (UN) Tax Convention, with a specific focus on how these frameworks influence Zambia’s efforts in domestic resource mobilisation.

Overview of the OECD/G20 Inclusive Framework on BEPS

The OECD/G20 Inclusive Framework on BEPS is a global initiative designed to tackle tax avoidance strategies that exploit gaps and mismatches in tax rules. Launched in 2013, the BEPS project aims to ensure that profits are taxed where economic activities generating the profits are performed and where value is created. The framework consists of 15 action points, each targeting a different aspect of tax avoidance, such as transfer pricing, interest deductions, and tax treaty abuse.

One key feature of the BEPS project is the Two-Pillar Solution. Pillar One consists of two components: ‘Amount A’ and ‘Amount B’. Amount A aims to reallocate taxing rights on profits by establishing a new nexus, particularly targeting highly digitalised businesses. It imposes a tax on multinational enterprises (MNEs) with revenues exceeding EUR 20 billion and a profit margin exceeding 10% as reported in their financial statements. MNEs meeting these criteria will be taxed on 25% of their profits that exceed the 10% threshold. However, there is a minimum quantitative threshold for allocating Amount A to a market jurisdiction, set at EUR 1 million. For smaller jurisdictions with GDPs below EUR 40 billion, the threshold is EUR 250,000.

Amount B addresses the transfer-pricing issue related to charges imposed by MNEs on their foreign subsidiaries and branches for marketing and distribution activities. This component proposes a standardised formula to determine these charges, aiming to streamline disputes over appropriate pricing for such activities across different countries.

Pillar Two introduces the global minimum corporate tax of 15%. This means that multinationals, with a revenue of EUR 750 million or more per annum, will pay a minimum effective tax of 15% in every jurisdiction in which they trade. This shall be done by imposing a top up tax to ensure that an entity paying less than a corporate effective tax rate of 15% shall do so. The right to impose and collect this top up tax shall be governed by a set of rules known as the Global anti-Base Erosion rules (GloBE rules). The complex requirements of the BEPS measures strain Zambia’s administrative capacity, making it difficult to fully enforce and benefit from these rules.
Moreover, the focus of the BEPS project on high-income countries means that Zambia might not see a substantial increase in tax revenues. The reallocation of taxing rights under Pillar One and the global minimum tax rate under Pillar Two may not significantly boost Zambia’s revenue, given its limited market size and economic profile. This underscores the need for a more tailored approach to international tax rules that considers the specific challenges and capacities of developing nations.

Overview of the UN Tax Convention

The UN Tax Convention is a proposed legal instrument designed to address the unique challenges faced by developing countries. The UN framework emphasises inclusivity and fairness in international tax policies, aiming to create a more balanced global tax system compared to the already existing frameworks. It advocates for simpler, more accessible tax rules that can be effectively implemented by countries with varying levels of administrative capacity. For Zambia, this inclusivity allows unconditional participation from agenda-setting to implementation, providing a unique opportunity to amplify its voice in international tax negotiations.

Overall, while the OECD/G20 Inclusive Framework on BEPS represents a robust effort to address global tax challenges, its complexities and high-income country focus may limit its applicability and benefits for Zambia. Conversely, the UN Tax Convention emerges as a promising alternative, offering a pathway for Zambia and other developing countries, to advocate for simpler, fairer international tax rules that align with its developmental priorities.

In the next piece, we will explore in greater detail why the UN Tax Convention offers Zambia a superior alternative to the OECD framework, and how this choice could significantly bolster the country’s initiatives to enhance domestic resource mobilisation.

About the Authors

Elijah Mumba is a development economist and public finance expert, currently serving as the Lead Researcher for Public Finance Management at the Centre for Trade Policy and Development. He holds a master’s degree in Development Economics from the University of Cape Town.

Nyasha Nigel Machiri is an international tax expert currently working as an Associate Director in charge of Tax Advisory services at HLB Zambia. He holds a BSc (Hons) in Applied Accounting from Oxford Brookes University, a postgraduate diploma in Applied Taxation, and an advanced diploma in international taxation from the Chartered Institute of Taxation.