It was heartwarming when our International tax law class at the Faculty of Law Uppsala University as participating guests in the major international tax law forum at Deloitte Sweden was the fulcrum of attention and knowledge sharing. It was a forum interspersing.
Purposely, our study visit was for insight into the recent international tax reforms by the OECD/G20 countries. Since 2013, the OECD/G20 has identified tax avoidance as a priority. There had been thought out plan to curb Base Erosion & Profits Shifting when it comes to digital mining Multinational Enterprises (MNEs). The debates to implement significant changes to international tax rules that apply to multinational companies had intensified. Finally on July 1, 2021 about 130 countries signed up to the agreement called the ”OECD/G20 inclusive framework on BEPs when it comes to digital taxation.
What is in this agreement for developing countries like Liberia?
The agreement carved out two pillars solutions called Pillar one & Pillar two. For the past 100 years the standard international tax rules had been a country can exercise their taxing rights by the physical presence of a company through a permanent establishment or a subsidiary. With the implementation of the new rules, this will bring to an end these multinational enterprises (MNEs) like Google, Apple and Facebook who has exploited lot of revenues from market jurisdictions without their physical presence and leading to no taxation. Through this new development, large companies would pay more taxes in countries where they have customers and a bit less in countries where their headquarters, employees, and operations are. Additionally, the agreement sets up the adoption of a global minimum tax of 15 percent, which would increase taxes on companies with earnings in low-tax jurisdictions.
At the outset or the past 100 years, the profit of foreign sellers of products or services are not taxed in the country where huge of their customers are located for example Liberia, Nigeria etc. We all use facebook, twitter, Instagram, but the profits are only tax in the provider’s country of residence or another source country where business functions of the provider are performed (”Network functions or algorithms) to drive their network effects in carrying on their digital mining. So every time we like, post on Facebook, Instagram and Twitter, these companies are carrying on digital mining by the collection of our data called consumer contents which are sold to companies for Research & Development (R&D) purposes. Through these, multinational Enterprises (MNEs) are generating billions of revenues from these intangibles contents. However, if Pillar one and two go into effect, there will be an end to tax planning by Multinational Enterprises into market jurisdictions with no physical presence.
What is in the package for these major international tax rules?
For Pillar one (1) is a departure of the long standard in international tax practice to tax base on physical presence. The in-scope Multinational Enterprises (MNEs) are MNEs with global turnover revenues in excess of 20 billion Euro with 10% of profit margin before tax. Therefore, in Amount A of Pillar one, above 10% of residual profit of 25% after tax in the residence state will be allocated to the market jurisdiction (for example Liberia) where the MNEs do not have physical presence but had generated huge revenues. So where MNEs had earn 1m Euro; or for smaller economies or market jurisdictions with GDP less than 40 billion ( of which Liberia in-scope with the GDP of 2.70 billion in 2020/2021) where MNEs generate revenues of 250K will be able to tax residual profit irrespective of the existence of physical presence within those jurisdictions.
For Pillar two (2) is about the agreement is on the payment of global minimum level of taxation of 15% on the top up at the parent jurisdiction. The main rule is Income inclusion rule (IIR). This rule imposes tax on the repatriated profit in the parent jurisdiction given that income in the source state of subsidiaries and permanent establishments were taxed at less than a 15% minimum effective tax ( in other words, this is intended to counter profit shifting from low tax jurisdiction countries with corporate tax rate of less than 15%). The in- Scope MNEs are groups with annual consolidated group revenue of at least 750 million Euros in at least two of the four immediately preceding fiscal years. Entities excluded are: Investment funds/real estate investment vehicles that are ultimate parent companies, Pension funds, governmental entities, international organisations, non-profit organisations.
The details for these international tax reforms (Pillar one & two) by the OECD/G20 on Base Erosion Profits Shifting (BEPS), will be developed and the expectation is that the rules will be finalized in 2022 and take effect beginning 2023. So countries who signed the framework will benefit from the OECD/G20 Inclusive framework on BEPs regarding digital taxation by Multinational Enterprises (MNES).
Liberia stands significantly to benefit as the country is a part of the over 130 countries that have affixed their signature to the agreement. This is a major policy shift in international tax law that will have a greater proportionality as envisage by the law.
All of these developments in international tax law is an indicative that no nation can be developed in the absence of strong tax laws with the objective of protecting it tax base. As the new rule goes into effect, the OECD/G20 proposes that Governments should begin the implementation plans and turning the new rules into law.
As solutions for the protection of tax base continue to unravel in the community of tax law researchers, the pervasiveness of corruption runs unparallel with the purpose of revenue generation for the provision of national social welfare such as electricity, running water, better health systems, and better roads infrastructures. The lack of these basic necessities are the rephrased of the world-famous battle cry stemming from the American independence against British oppression in 1765 we studied about have our heads wrapped around which is echoed in the expression ”No Taxation without representation”. This expression that is form key tax policy dialoque in taxation emanated from the Stamp Act Congress in New York in 1765 at a meeting leading the American colonies to declare to the Bristish Crown that you have no right to tax Americans who have no representation in parliament. This phenomeno led to turmoil that we read about.
The causative factor that led to slogan by the American colonies are not the same to our community today but have transmogrify or metamorphose into different fashion with the label corruption. A Society of Corruption is comparative to a society without representation, because representation denotes doing something for the populace. Therefore, corruption deprives the citizenry of the basis necessities that taxation relates to. This concept is found in Adam Smith theory ”the wealth of nation”. Smith Proposed taxation for the redistribution of resources to the low level of the economy through the provisions of the basic services. In one of his lines regarding taxation he wrote ” “The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.” So Smith correspondingly proposed the payment of taxes to the revenue in turn enjoy or the benefits correspondingly receive. This is the problematic puzzlement if the nation is engulf by corrupution against taxpayers’ dollars then it is as if there is no representation.
The new international tax law order will spurs inclusive growth and development in those nations or market jurisdictions with no physical presence of multinational companies. The adaption of the new international tax law framework and existing tax revenue measures must be aligned with practical and workable anti-corruption machineries for suitable welfare programes for all inclusive growth and development.
Author
Rufus B. Senyon is an International Tax Law student at the Faculty of Law Uppsala Unviersity, Sweden. His research paper is on the topic: ”Legislating against tax avoidance – Focus on the General Anti-Avoidance Rule in International Tax Law & the Rule of Law”
