Why Kenya and Nigeria did not agree to a global deal on business taxation – Quartz Africa

Last month, the Organization for Economic Co-operation and Development (OECD), an intergovernmental economic body, announcement that 136 countries and jurisdictions had signed an agreement for global companies to pay a minimum tax rate of 15%. But Kenya, Nigeria, Pakistan and Sri Lanka had not accepted the deal, the OECD said.

Now the two African countries have expressed concerns about the deal, including Kenya saying it could cause it to end its new digital services tax (DST) and the two countries raising issues. with the dispute resolution requirements of the agreement.

The global minimum tax agreement covers multinationals with global turnover of at least 20 billion euros and at least 10% pre-tax profits. According to Kenya Revenue Authority (KRA) Commissioner Terra Saidimu, only 11 companies meeting this requirement operate in Kenya, but the country currently has 89 companies paying DST, which targets these companies.

“You have to know exactly what you are getting to give up what you already have,” Saidimu, the intelligence and strategic operations commissioner, said at a recent tax forum hosted by the agency.

Digitization has required changes in tax rules

Digitization has created tax challenges. As businesses operate digitally but not physically in different jurisdictions, some avoid tax and there are questions about how to change international tax rules, which are typically based on ‘brick and mortar’ economic environments, for adapt to the current global economy.

The global minimum tax rate aims to change international tax rules to ensure that multinationals pay a fair share of tax wherever they operate. A total of 140 countries and jurisdictions, including 23 from Africa, negotiated to fight tax evasion, improve the consistency of international tax rules, guarantee a more transparent tax environment and meet the tax challenges linked to the digitization of the economy.

The deal is entry into force in 2023. It has two main objectives, or pillars: to ensure a more equitable distribution of profits and tax rights between countries and to put a floor on competition in terms of corporate tax, by introducing a rate d. global minimum corporate tax.

Kenya has a digital services tax

Kenya took initial steps to tax the digital economy by introducing a 1.5% DST in January this year.

Entering the new global tax deal would mean stopping the DST, Saidimu said, but “one bird in hand is worth two in the bush” because there is “uncertainty that we are not aware or may not be able to. be not knowing exactly how much we’re going to get.

He cited Uber and Booking.com, which do not meet the revenue and profit requirements of the tax deal but pay for daylight saving time in Kenya.

“Allowing them to trade and not pay their fair share of tax would not only be fair to local businesses, but would also be unfair in terms of business practices,” he said of these businesses.

Only six companies would be covered by the new deal in Nigeria, said Mathew Gbonjubola, group leader at the country’s Federal Inland Revenue Service.

“The truth is that there is little or no money flowing from Pillar 1 or Pillar 2 to developing countries,” he said at the KRA tax forum. “We must not kid ourselves.

Global tax deal has compulsory and binding arbitration

Saidimu and Gbonjubola both said that another obstacle was the agreement’s arbitration mechanism for the settlement of disputes, which is mandatory and binding and can cause taxing countries to lose their sovereignty by having tax issues resolved in those countries. country of origin of companies.

Describing the deal as a “once-in-a-century deal,” Pascal Saint-Amans, director of the OECD’s Center for Tax Policy and Administration, insisted at the forum that it would benefit countries and said the decision of Kenya, Nigeria, Pakistan and Sri Lanka not to join is “very frustrating”. Kenya, he said, fails to raise an additional $ 50 million – the country’s tax authority has not disclosed how much it has raised through the DST.

Saidimu said Kenya was still in contact with the OECD on the country’s areas of dispute and the way forward, including asking to retain DST implementation powers for companies outside the jurisdiction of the OECD. the agreement.

“We are not yet out of the discussion,” he said. “We are very supportive of the process. What we don’t 100% agree with is the detail of the deal, as numbers like this require some questioning. “

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