So how have my earlier Pillar One predictions (in this post here) turned out so far?

First, I had predicted that the mid-2021 target date (for securing Inclusive Framework agreement) would be missed.

Well, we don’t have unanimous agreement of all Inclusive Framework members, so we can safely say the target has been missed. Most members are on board, but there are some notable holdouts – for Africa, that would be Nigeria and Kenya.

Next, I had predicted an increase, during 2021, of digital tax measures, to be introduced by various countries, as they wait for the global solution to take wings.

This prediction has come to pass. In fact, even now in 2022 (even after the publication of more concrete proposals from the Inclusive Framework), such unilateral measures are still being introduced. For example, Nigeria has recently announced a 6% digital services tax. Perhaps this particular move should come as no surprise, as Nigeria had already indicated its dissatisfaction with the Pillar One outcomes, and declined to sign the agreement. That said, it’s a bit strange to see this new tax, given that Nigeria had only recently (in 2020) introduced a significant economic presence tax regime, ostensibly targeting (among others) revenues from digital businesses.

I had also predicted that the slew of unilateral taxes would lead to the introduction of standard tax treaty provisions providing relief for double taxation, and that, this ‘organic’ approach ‘will render Pillar 1 redundant’.

This prediction has not (yet) come to pass, but I still believe that things will pan out this way. There’s an added complication, though. In the months since my post was published, the scope of Pillar One has been expanded beyond digital businesses. As a result, it no longer focuses solely on high revenue-yielding digital businesses. As such, the risk of double (or multiple) taxation has increased in scope, albeit for different reasons. However, focusing strictly on digital businesses, I still believe that we will see tax treaty solutions begin to emerge.

I had also stated that I would be ‘very surprised if Pillar 1 ever saw the light of day as a concrete plan’.

I remain of this view. Despite its adoption by most members of the Inclusive Framework, there remain misgivings about certain key aspects of the proposals. For one thing, we are far from clear on all the technical aspects of Amount B, an issue of particular relevance for developing countries. There is still some way to go.

Overall, I stand by my earlier predictions. Let’s keep watching, see how things go.

Just published: the OECD Secretary-General’s Tax Report to G20 Finance Ministers and Central Bank Governors.

The Report has been published in advance of the G20 meeting scheduled for 9 and 10 July in Venice.

Among other things, it gives an update of the work of the Inclusive Framework, i.e the Two Pillars proposals. From the Report, we learn that one more IF member (Peru) has signed up to the agreement published on 1 July. The Secretary-General is ‘confident’ that the other eight members (who did not sign up) will also come on board. (I’m far less optimistic on this point.)

So far, no solid reasons given for the hold-out from Nigeria and Kenya. We’ll find out soon enough.

The Inclusive Framework has agreed (broadly) on the future framework under Pillars One and Two. Here is the official statement.

Of the 139 Inclusive Framework member countries, 130 signed up to this agreement.

Nigeria and Kenya are among the nine that did not sign up. Thus far, no reasons given for the decision of both countries not to join the seemingly happy consensus. The OECD has stated, however, that, broadly, non-signature does not necessarily imply non-agreement; some countries had not managed to obtain political sign-off back home, in time for the announcement. In such cases, the expectation is that those countries would later sign up. Perhaps that is the situation with Nigeria and Kenya? We shall see.

That aside, Ireland has made it clear that its own non-signature was actually down to non-agreement, specifically on the matter of the 15% rate for the proposed global minimum corporate tax rate. Apart from that significant point, Ireland broadly supports the proposals.

Even so, it’s not all harmonious singing from the 130 countries that did actually sign up. For instance, despite having signed the agreement, Switzerland has expressed “major reservations” with the agreement, even going as far as telling us that it is not alone in feeling this way. Switzerland states that it is offering “conditional” support, for the sake of moving the project forward.

Away from the Inclusive Framework members, and coming closer to Africa, ATAF is not exactly jumping for joy, either. As to Pillar One, the Inclusive Framework did not accept ATAF’s recent proposal for allocation to be based on a portion of MNE total profits, rather than on residual profits. ATAF was also not best pleased about the agreement on mandatory binding arbitration. And as for Pillar Two, ATAF had been looking for a global minimum tax rate of at least 20%. Even so, they can live with the agreed 15%, at least as a starting point.

On a wider note, though, what next for the two Pillars?

Do I still think Pillar One will go nowhere? Well, it is difficult to be pessimistic these days, especially now that the United States has climbed firmly onboard. However, I still see significant hurdles ahead.

For example, of the nine countries that held out on signing, three of them (Estonia, Hungary, and Ireland) are Member States of the European Union. Given that any future tax rules will have to be implemented in the EU via a Directive (therefore requiring unanimity among Member States), the hold-out of these three countries makes that process particularly troublesome. Also, there could be potential problems with Pillar Two and EU law, particularly given the jurisprudence of the Court of Justice of the European Union in the Cadbury Schweppes case.

I’m also thinking of Switzerland’s heavy hint that all is not harmonious behind the scenes, i.e. that there are other countries also harbouring major reservations. I have a sense of the whole thing being held together by fraying consensus. The coming months will reveal what we don’t now see.

The UNCTAD World Investment Report is out.

Good news is that global FDI flows are expected to recover a bit from the 2020 battering. UNCTAD is looking at increase of around 10 – 15%.

Of course, covid-19 is largely to blame for last year’s fall. However, the numbers had been falling for some time before that.

Even so, the Report retains some hope. It expresses cautious optimism for growth in 2022.

Looking particularly at Africa, the Report observes a 16% fall in FDI flows to the continent (in 2020). This drop was more keenly felt in the resource-dependent economies.

The Report highlights further risks re FDI in Africa, mainly due to the slow vaccine rollout, and the emergence of new covid-19 strains. For 2021, the Report projects that Africa will see only a marginal increase in FDI. However, matters could improve in 2022, if certain things come to pass. One such thing could be the finalisation of the Investment Protocol of the the Africa Continental Free Trade Area Agreement.

Click here to read the full Report.

The UNCTAD Least Developed Countries (LDCs) Report 2020 has recently been published. You can find it here.

The G20 Riyadh Summit concluded today. On international taxation, there was (as expected) broad support for the work of the OECD Inclusive Framework.

The G20 Leaders expect that the work will be concluded (as earlier promised by the OECD) in mid-2021.

Well, I don’t think this will be achieved. The outstanding technical issues are a big obstacle, moreso as any agreement would require the unanimous approval of the members of the Inclusive Framework.

As far as digital taxes are concerned, here is my prediction: over the next few months, there will be an increase in unilateral measures to tax digital businesses. Countries that have held back up till now will begin to introduce these new taxes. While many countries had held back, waiting instead for a ‘global solution’ from the OECD Inclusive Framework, there is an understandable impatience in the air. Countries don’t want to miss out on tax revenues, and the recent delay (by the Inclusive Framework) is already prompting some countries to introduce their own measures. In this, they would be joining those other countries that had earlier on decided not to sit back and wait for a global solution, but rather to introduce their own rules in the meantime.

And this will, of course, lead to double, and even multiple, taxation across jurisdictions. Eventually, countries will negotiate bilateral agreements to reduce or eliminate this double taxation.

This is most likely how the digital taxes issue will be resolved. We will also likely see common features emerge in the various unilateral digital taxes being introduced, making it easier for there to be standard treaty provisions for double tax relief.

This ‘organic’ approach will render Pillar 1 redundant. The combination of unilateral (taxing) measures and treaty provisions (for double tax relief) will see to that.

I think this is the way that things will go. I would be very surprised if Pillar 1 ever saw the light of day as a concrete plan.

And as for my prediction for Pillar 2, I’ll leave that for another blog post.

Earlier this month, the Platform for Collaboration on Tax held a public consultation workshop on its Draft Toolkit on Tax Treaty Negotiations.

In case you missed it, you can view the recorded event here.

The UN Tax Committee has reached a decision: the proposed Article 12B (on the taxation of income from automated digital services) will be included in the UN Model Tax Convention.

I remain doubtful whether this provision will actually make it into any real-life tax treaties, especially those treaties that matter where such income is concerned. For example, the United States (typically the residence state for the largest digital businesses) is unlikely ever to agree to such a provision in its tax treaties.

Also, the provision can only have proper effect if the treaty partners actually have domestic legislation taxing this income. The treaty itself cannot give a right to tax if such income is not taxable in the jurisdiction of the treaty partners.

And even if the treaty partners do have domestic laws taxing ‘digital income’, it depends further on the particular type of tax regime in place. This Model treaty provision applies only to ‘payments’ for automated digital services. As such, it won’t affect taxing rights that apply where a payment has not been made. For example, where the country levies a tax on the ‘value created’ (within its jurisdiction) by the non-resident company, even if there has been no actual ‘payment’ (from its jurisdiction) to that company.

Still, considering the slow progress over at the OECD, one must not quibble over this development. It’s a start. Although one does rather wonder at the point of including (in a Model treaty) a provision that has scant likelihood of ever being used.

Last week, the OECD published the blueprints for both Pillar 1 and Pillar 2. Of course, as curious as we all are, not everyone is keen on wading through hundreds of pages.

And who can blame them? Anyway, here’s some good news. The good folks at TaxSutra have performed an almighty public service. For Pillar One, at least. They’ve put together a useful highlights document, setting out the main takeaways. You can access it here.

I haven’t seen something similar for Pillar Two. Must be there somewhere. If not, I might have to create it myself.

ATAF has published a technical review of the proposed Article 12B of the UN Model.

Interesting because, if more African countries introduce digital services taxes (and ATAF recommends that they do), then these will have to work in tandem with any applicable treaty provision on automated digital services.

And, as the UN Model draft provision is the only such treaty provision on the table at the moment (albeit still in draft form), it’s worth the extra attention it’s getting from all quarters.

Several points in the ATAF document, but this one stood out for me: ATAF cautions that the scope of the UN Model draft provision is much narrower than what ATAF has been recommending for African countries. The proposed Article 12B applies only where there is a payment from the source country to the residence country (i.e. the country where the automated service provider is resident).

ATAF points out that, where the automated digital service is supplied free to a user in a market jurisdiction, the proposed Article 12B would not apply. This could happen, for example, where the service is provided for free to users within a particular jurisdiction, and the payment (to the service provider) comes in the form of advertising revenue, for example, from a third party in another jurisdiction.

The proposed Article 12B concerns itself only with the existence of a payment for automated digital services, seeks to identify the jurisdiction where that payment is sourced, and allocates the taxing right between that (source) jurisdiction, and the jurisdiction where the service provider is resident.

However, ATAF recommends a much broader approach. It recommends that countries levy digital services taxes based on ‘user participation’. Under this approach, a country would levy the tax if there were users of the service within its jurisdiction, even if those users are not themselves paying for the service. ATAF points to the value (to the service provider) created by user participation, together with the attendant network effects. ATAF insists that countries should be able to tax such value streams, irrespective of whether the revenues come from the users themselves.

Solid point, but again, that brings us to the issue of implementation. Levying a tax on the basis of user participation would be horrendously difficult. Those complexities have already been seen in more developed countries (see, for example, the discussions around the UK Digital Services Tax). We can expect the Africa situation to be even more challenging. Against that backdrop, the draft Article 12B approach appears a more realistic way.

You can access the ATAF document here.