Introduction

On 1 July 2021, over 130 countries agreed on a new framework to reform the rules of the international tax system. The Framework is scheduled to come into force in 2023 and countries are now in the process of national implementation . It is also a topic during the German G7 Presidency. The “Political Priorities” state that the decisions are to be implemented on time and the capacities of developing countries in the implementation are to be strengthened. This new plan is based on two pillars that conclude a long debate within the BEPS (Inclusive Framework on Base Erosion and Profit Shifting) framework to address the challenges posed by the taxation of multinational enterprises (MNEs). As we shall see, the Global Tax Agreement is truly historic and overturns rules that have been in place for a century. The agreement has been decried by civil society in both the North and the South[1]. What are the fundamental changes introduced by this global agreement? What are the main criticisms of this agreement? What impact will this agreement have on Southern countries and in particular on a country such as Tunisia? What alternatives would be more appropriate for a country like Tunisia? This article will attempt to answer these questions.

A historic agreement

Before going into the details of the agreement and its two pillars, a brief history of multinational taxation is important to put the agreement into perspective. Prior to this agreement, the taxation of multinational enterprises was based on what is commonly referred to as the “1920s compromise”[2]. This compromise is based on the division of taxing rights between the country where the activity takes place (the source country) and the country of residence of the MNE (where the ultimate beneficiary resides). Thus, the active income of the MNE is taxed by the source country and the passive income (such as dividends, interest or royalties) is taxed by the country of residence. This is at the heart of double taxation treaties, which aim to agree on the allocation of taxing rights between passive and active income between the source country and the country of residence. However, as international economic activity has become more complex with the trade in services and then with the advent of the digitalisation of trade, this compromise has seemed increasingly unsuitable. Indeed, the notion of source country became more difficult to define as economic activity became more digital and the notion of destination country (where sales take place) emerged to remedy this. In addition, many countries have put in place tax exemptions and incentives to attract MNEs to their country through 10-year corporate taxation exemptions, VAT exemptions or other exemptions that are very costly, especially for developing countries. MNEs have developed tax-planning strategies to optimise the distribution of their income in order to minimise taxation. It is mainly to fight against these strategies that the BEPS (Inclusive Framework on Base Erosion and Profit Shifting) was created and started to explore an overhaul of the international tax system leading to the July 2021 agreement.

While pillar one of the agreement is supposed to ensure a fairer distribution of the taxation rights of states with regard to the profits of large multinational corporations – especially from the digital economy, the second pillar encompass the global minimum tax.

Pillar One: an incomplete agreement

Pillar One is a milestone in the right direction for the taxation of income from the digitalisation of the global economy. Indeed, Pillar One establishes the principle of taxation of income for destination countries (where sales take place) even if this income was not physically generated in the source country. However, Pillar One is both insufficient and prohibitive. Insufficient because the scope of its application is so narrow that at the current thresholds it will only apply to 78 MNE according to a study quoted by Oxfam[3]. According to the same study, all low-income countries will only receive USD 140 million to share among themselves. A pittance. Prohibitive because, in return, the signatory countries of the agreement must renounce the imposition of a tax on digital services, even on those MNEs that do not fall under the scope of Pillar One. In other words, developing countries would give up their right to tax digital services in return for a trickle-down effect from which they would benefit very little. This is why countries such as Nigeria and Kenya are among the few countries to refuse to sign the agreement because of a digital services tax already in place in these countries[4]. However, some African countries that have introduced a digital services tax, such as Tunisia, have joined the agreement. Indeed, Article 27 of the 2020 Finance Law introduced a 3% tax on digital services, in particular on “sales of computer software and services carried out via the internet by non-resident companies in Tunisia”.

Pillar Two: First come, first served

Pillar Two has received the most attention from the various stakeholders involved. And for good reason. Pillar Two imposes a minimum tax rate of 15% on the revenues of multinationals. This low level has been the subject of sharp criticism from civil society[5][6][7][8]. Indeed, most feel that the rate should be at least 20% or even 25% given that according to the African Tax Administration Forum (ATAF) the nominal corporate tax rate in Africa is between 25% and 35%[9]. Although 15% is low and should be higher, the focus of criticism on this point has overshadowed the main issue. It is important to emphasise how this rate will be applied in order to measure its effects. This rate will be applied for each individual MNE and the 15% rate is an effective rate, not a nominal one. The difference is significant, especially for developing countries. Whether through generous government tax incentives and exemptions, tax avoidance or even the use of transfer pricing by MNEs, the effective rate actually paid is very often well below the nominal rate announced in the law. For example, researchers Ndajiwo and Nyamudzanga have shown that although the nominal tax rate in Nigeria was 30%, the effective rate was rather 6% below the 15% rate in the global agreement[10].

Pillar Two is simple to understand in its entirety but quite complex in its application. Indeed, the overall agreement establishes several rules for taxation in case the effective tax rate is below the 15% threshold. In order to address the ability of MNEs to choose the source countries where taxation is most favourable, the agreement gives priority to the country of residence to tax the difference between the effective tax rate and the 15% threshold. Only if this priority rule given to residence countries does not apply perfectly, a taxing right is given to source countries . Thus, the G7 countries, representing the interests of the capitalist countries where the majority of MNEs are resident, have broken with the “1920s compromise” and swooped down on this untaxed active income below the famous 15% threshold. First come, first served. In return for this swoop on active income not taxed by source countries, the G7 countries have offered source countries the opportunity to tax passive income (dividends, interest, etc.) at a lower rate of 9% and allow them to enshrine it in double taxation agreements. However, there is a risk that this will remain a non-starter as many countries have signed stability clauses in these treaties not allowing them to change the benefits granted to MNEs from countries of residence. According to the European Tax Observatory[11], Pillar Two would allow High Income countries to gain EUR 191.2 billion, equivalent to 18% of their corporate taxation income, EUR 13.7 billion for Upper Middle Income countries, equivalent to 3% of their corporate taxation income, and 0.6 billion for Lower Middle Income countries, equivalent to 1% of their corporate tax income. Thus, it is not the rate itself that is unfair but the priority given to home countries to tax the share of untaxed income below the 15% threshold. This priority breaks with the compromise that gave priority to source countries to tax active income. This will force developing countries to review the system of voluntarily uncollected taxes, such as exemptions and incentives, on MNEs which would, under this Global Tax Agreement, be turned into direct subsidies to the treasuries of the G7 countries. A new form of illicit but legal financial flows.

One of the achievements of the BEPS initiative has been the introduction of country-by-country reporting of MNEs. This partial data allows estimating the actual taxes paid by MNEs. The only data available are for the years 2016 and 2017. Thus, according to the data collected by the European Tax Observatory[12], it is possible to calculate the effective tax rates for Tunisia for these two years. For decades, Tunisia offered a tax exemption to so-called non-resident companies (two-thirds of whose capital comes from abroad) until the international community forced the country to remedy this, notably by adding Tunisia to the European blacklist of tax havens[13]. In 2016 and 2017, the general corporate taxation rate was 25% (with specific sectoral rates). According to our calculations, based on data from the European Tax Observatory, the effective rate paid by French and American MNEs[14] in Tunisia was respectively 14.6% and 23.5% for 2016 and 15.6% and 12.9% for 2017. Considering that these rates are on average and that some MNEs may have to pay higher rates of 35% for the rentier sectors. Thus, for the French MNEs, whose effective rate is more stable, we observe that the difference between the general nominal rate and the effective rate is around 10%. Since 2017, Tunisia has revamped its nominal tax rate and has gradually reduced it to a general rate of 15% for the year 2021. This corresponds exactly to the minimum threshold of the Global Tax Agreement. However, due to generous incentives and exemptions, the effective rate that MNEs will pay in Tunisia is likely to be lower than the new minimum rate of 15%.

Conclusion

By joining the global tax agreement without measuring the consequences, Tunisia finds itself in a peculiar situation. It will benefit very little from Pillar One but will have to give up implementing the digital services tax introduced in 2020. By lowering its nominal corporate income tax rate to the same level as the effective rate of the global agreement, Tunisia is obliged to give up all the tax incentives and exemptions granted to MNEs to attract them. Otherwise, it will find itself in a situation where it will subsidise the public coffers of France, the United States, Germany or Italy. In order not to subsidise the G7 countries, Tunisia will have to ensure that the MNEs effectively pay the nominal rate, which may be very difficult in practice. Thus, in order to maintain an effective rate above 15%, Tunisia will have to increase the nominal rate and/or suppress the tax incentives granted to MNEs. In these conditions, the haste with which Tunisia joined the Global Tax Agreement was not very smart.

[1] https://www.globaltaxjustice.org/en/latest/gatj-reaction-oecd-inclusive-framework-statement

[2] https://www.elibrary.imf.org/view/books/071/28329-9781513511771-en/ch003.xml#ch03fn01

[3] https://politicsofpoverty.oxfamamerica.org/show-us-the-money/

[4] https://www.undp.org/blog/global-corporate-tax-deal-african-perspective

[5] https://www.icrict.com/press-release/2021/10/12/icrict-open-letter-to-g20-leaders-a-global-tax-deal-for-the-rich

[6] https://www.globaltaxjustice.org/en/latest/g20-global-south-members-uphold-g77-tax-interests-–-not-those-g7

[7] https://taxjusticeafrica.net/african-civil-society-organisations-call-for-rejection-of-oecd-g20-global-tax-deal/

[8] https://financialtransparency.org/global-south-countries-will-main-losers-oecd-minimum-global-minimum-tax-deal-risking-undermining-covid-19-vaccination-recovery-efforts/

[9] https://www.ataftax.org/a-new-era-of-international-taxation-rules-what-does-this-mean-for-africa

[10] https://afripoli.org/what-does-the-g7-proposal-on-taxation-of-the-digitalised-economy-mean-for-african-countries

[11] https://www.taxobservatory.eu/revenue-effects-of-the-global-minimum-tax-country-by-country-estimates/

[12] https://taxobservatory.shinyapps.io/CbCR_Explorer/

[13] https://inkyfada.com/fr/2017/12/26/tunisie-liste-noire-union-europeenne/

[14] The only ones with stable data that do not operate exclusively in the extractive sector.

Chafik Ben Rouine is the Co-Founder and President of the Tunisian Observatory of Economy.