Why Africa is rallying for new tax rules
Heading into the negotiations, the Global Alliance for Tax Justice has already set the tempo. According to Chenai Mukumba, the Executive Director at TJNA, the process is fundamentally about reclaiming Africa’s economic sovereignty.
Chenai Mukumba, the Executive Director at Tax Justice Network Africa (TJNA), speaking during the International Tax Justice Academy in Nairobi. (Courtesy photo)
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As the Intergovernmental Negotiating Committee (INC) on the United Nations Framework Convention on International Tax Cooperation (UNFCITC) kicks off the latest negotiations from 3rd to 13th August in New York, Africa is rallying for better tax rules, especially as bilateral and multilateral agreements take precedence over domestic tax laws.
With the negotiations bending into the last miles, since 2022, African countries anticipate favourable outcomes, including a clear UN Convention and fair rules on tax dispute resolution, as the continent loses an estimated $483 billion, according to Tax Justice Network Africa (TJNA), to, among others, porous double taxation agreements amidst limited arbitration capacity where transfer pricing arises.
Heading into the negotiations, the Global Alliance for Tax Justice has already set the tempo. According to Chenai Mukumba, the Executive Director at TJNA, the process is fundamentally about reclaiming Africa’s economic sovereignty.
“Africa’s labour, natural resources, and markets have generated enormous wealth yet the international tax rules have often denied African countries their fair share of taxing rights over the arising income,” she says.
UNFCITC promises fair allocation of taxing rights. However, although the early protocols to the Convention are focused on the taxation of income from cross-border services and the prevention and resolution of tax disputes, Tove Maria Ryding, the tax coordinator at the European Network on Debt and Development (EURODAD), notes that neither of the protocols have a clear objective at the moment.
Scenario, Demands
Africa is keen to divorce the OECD in favour of the UN, which promises a dedicated body to address tax-related matters, anticipating fair international tax rules even where countries have limited treaty networks, while also fixing limits to improved domestic resource mobilisation.
According to the African Group, the protocol on the prevention and resolution of tax disputes should establish minimum standards and optional mechanisms for the prevention and resolution of cross‑border tax disputes that arise from bilateral or multilateral tax agreements between parties.
“African countries face complex cross-border tax challenges in an increasingly globalised economy. Existing mechanisms and frameworks for cross-border tax dispute prevention and resolution have often favoured jurisdictions with greater technical capacity and broader treaty networks, leaving many African States exposed to prolonged tax disputes, revenue loss, and legal uncertainties,” the African Group observes.
Background
In December 2022, the United Nations General Assembly adopted a resolution to promote inclusive and effective international tax cooperation to further commitments that also seek to fix illicit financial flows, where Africa loses an estimated $88.6b per year, combat aggressive tax avoidance and evasion.
The move follows persistent demands to amend the existing treaty-based rules, which unfairly allocate rights to tax income and capital among jurisdictions, over time enabling aspects like profit shifting, thus motivating the need for change to reflect new ways that business may be conducted in an increasingly digitalised and globalised economy.
The Tax Disputes
As for the current tax system, the continent still sits on the receiving end while tied to porous double taxation agreements. Mark Mutumba, a trade policy analyst, explains that as taxing rights, based on source of revenue and residence of corporations shape arising disputes, the protocol on prevention and resolution of tax disputes now offers a wide range of options. For instance, joint and simultaneous audits, the mutual agreement procedure, conciliation and mediation, besides arbitration.
“Even in the absence of double taxation agreements with countries like Australia and France, if Uganda ratifies the second protocol, it can tap into the wider web of dispute resolution. However, the political will shall define the success of the negotiations,” says Mutumba
Uganda’s Landing Point
Aloysious Kittengo, the programme coordinator, financing for development, at the Southern and Eastern Africa Trade Information and Negotiations Institute cites an opportunity for Uganda. “The existing tax system favours capital flight and the ultra-wealthy. Uganda now has an opportunity to change this by demanding a fair share of the tax revenue from the operations of multinational corporations,” says Kittengo.
Uganda’s transfer pricing regulations, 2011, are drawn from the OECD framework. However, Mutumba highlights gaps like the long time frame and non-binding nature of the mutual agreement procedure, plus a lack of arbitration to the end, which is also costly for many African countries.
Whereas Uganda's 9 double taxation agreements with countries like the United Kingdom, Netherlands, India, and South Africa generally limit its ability to tax dividends, interest, royalties, technical fees and other derivatives, the same treaties are invoked in times of investor-state dispute due to the excessive leverage they extend to the developed country investors.
For instance, in the arbitration between Tullow Uganda and the Republic of Uganda, the Uganda-UK double taxation agreement served as the legal instrument. As for Total E&P BV Vs Republic of Uganda, the Netherlands-Uganda treaty was used. Kittengo explains that the majority of the foreign investors in Uganda come from complicated jurisdictions that undermine transfer pricing and the arm’s length principle.
Meanwhile, the fact that countries can opt in or out of the protocol on the prevention and resolution of tax disputes has been raised as a risky turning point that’s likely to undermine the Convention's intentions. Still, the protocol discussions have been quoted to be disconnected from the Convention.