IAN MACLEOD: Double, double, tax and trouble?

The Organisation for Economic Co-operation & Development (OECD) has been toiling over a cauldron of new international taxation policies ever since its 2009 summit in London. At the time, economies were still climbing out of the Great Recession and anger towards big, rich companies was at fever pitch. Finance ministers were under pressure to show electorates they were on their side, and politicians took aim at “excessive” global corporate profits and tax havens.  

A decade on, the inclusive framework on base erosion and profit shifting (BEPS) proposes to target the global earnings of the planet’s largest multinationals through two neat pillars.

First, there’s pillar 1, which would see a tax of 25% of residual profits reallocated to the country where the multinational’s users and customers are located (as opposed to where its head office is incorporated). This kicks in when a multinational achieves consolidated revenue of at least €20bn, and a pretax profit margin of above 10%.

Pillar 2 applies to a far less exclusive club. Multinationals with group revenue above €750m will be forced to pay a global minimum tax rate of 15% for each jurisdiction in which they operate. Wherever a subsidiary pays an effective rate below 15%, the difference will have to be paid as a top-up to the revenue service in the parent country.

The obvious upshot of pillar 2 is that signatory states will lose their ability to attract foreign corporates with tax incentives that undercut the 15% floor. Or, from the OECD perspective, it will prevent a global race to the bottom.

But what will the combined result of the two pillars be? For now, we are guessing. A feasibility study has been conducted by the OECD using 2016 data. But it may as well have used 1916 data, given how Covid has reshaped the worlds of work, international trade and digital business.

Still, the study estimated that, taken together, both pillars would increase gross corporate income tax around the world by 4%.

Of course, that raises a few questions. Do we want corporates paying more tax to governments? To all governments? How much of that 4% will be cleaved from sources unfairly avoiding the taxman? And how much of the burden will be shifted to consumers?

When it comes to greater fairness, the OECD findings suggest the revenue gains would be similar for low-, middle- and high-income countries. But if fairness means helping out poorer nations, that hasn’t been carried through into the system design. Countries defined as “investment hubs”, with high inward foreign direct investment relative to GDP, face substantial revenue losses.

As a result, some countries are pushing back. In Africa, for example, Kenya and Nigeria are unwilling to forgo their current digital services taxes, which pillar 2 will require as part of the bargain.

An increased reporting burden

In SA, there’s been little official response. “For now, we don’t have any detailed statements or policies from Sars [the SA Revenue Service] or the National Treasury,” says Michael Hewson, tax expert and founder of transfer pricing consultancy Graphene Economics.

“SA is a member of the G20 and has certainly been part of the development of the BEPS framework. But there is a long way to go from here to knowing the nuances of implementation. Tax professionals and CFOs are waiting with bated breath.”

Among the several puzzles BEPS creates, Hewson highlights the vast and intricate new reporting it will demand. “Affected companies will be required to start reporting figures they have never even calculated before,” he warns. “This will mean entirely new skill sets and growing departments in both the private and public sector.”

So, for example, even if a company above the €750m threshold pays more than 15% tax in each jurisdiction, it will “need to develop the systems to obtain the data to demonstrate this”.

Hewson also cautions against complacency for companies outside the threshold size. “We calculate that fewer than 100 companies are currently large enough to fall into the qualifying calculation for amount A of pillar 1 and even fewer of these have operations in SA. But scope-creep for both pillars is likely if countries see benefits after implementation.”

At this stage, it’s uncertain “if all of this is justified and whether this will benefit emerging markets”, he adds. “We need a full feasibility study that uses the latest data. It is important that we explore how these policies will play out in a post-Covid world.”

Macleod is a founding member of the Centre for African Management & Markets at the Gordon Institute of Business Science. The centre conducts academic and practitioner research, and provides strategic insight on African markets