Weekly digest for 5 Nov 2021
KEY READING FOR THE WEEK
On October 8th 2021, the OECD announced a tax deal for the digital age. The new tax deal, signed by 136 out of 140 member states, representing over 90% of global GDP, will allocate around US$125 billion in profits to countries around the world. In the second part of our series on ICT taxes, the focus is on unpacking how the OECD deal will work. The first step is to define the problem. The central issue is that, because Netflix doesn’t have a physical presence in Kenya, Netflix is not liable for any corporate income tax (CIT) even though they sell services to Kenyans in Kenya (see item 1 in the figure below).
From an OECD perspective, there is another issue: the transfer payment from Netflix BV incorporated in the Netherlands and Netflix Cayman Islands (items 3 and 4 in the Figure). By paying a royalty fee to Netflix Cayman Islands, Netflix BV can claim very low revenues in the Netherlands and therefore pay a very low CIT. The OECD solution is laid out in the table below.
| Problem | OECD Solution | |
|---|---|---|
| “Scale without mass”: A business can sell services without having any physical presence in a country and not pay any taxes to that country | Pillar 1 | Kenya gets a proportion of the tax on Netflix’s profits (as long as Netflix Kenya earns more than the revenue threshold US$ 1 million in Kenya) |
| Netflix Kenya doesn’t need to establish any physical presence in Kenya | ||
| The amount of the DST is 25% of the residual profits of a firm. Residual profits are defined as profits above a 10% profit margin. For example, if a firm has profits of US$30 million on revenues of US$100 million, the first US$10 million would be excluded and the tax would be US$5 million (25% of the residual profits of US$ 20 million). | ||
| The OECD estimates that US$125 billion will be reallocated as taxable revenues. Of this amount, 25% would be about US$31 billion, shared between 136 countries. | ||
| Corporations “transfer” their profits to low tax jurisdictions | Pillar 2 | A minimum corporate tax rate of 15%. |
| Companies must calculate their “effective tax rate” (ETR) in each country they operate. If the ETR is less than 15%, then the country with the corporate HQ has the right to top up the tax to 15%. | ||
From a digital tax perspective, Pillar 1 is the innovative new development. Pillar 1 solves the main challenge that many unilateral DST’s (i.e., imposed by individual countries) cannot address because they cannot impose cross-border taxes. For example, the DST in Kenya only focuses on Kenyan residents and doesn’t address digital transactions where a digital platform sells Kenyan user data to unrelated 3rd party (say the Ukraine). At present, Pillar 1 is the best solution currently on offer, though it is still a complicated tax. How complicated it is will be the subject of next week’s blog post.
Other weekly news from around Africa
- Ghana: MTN Ghana has announced that there will be on-net/off-net parity for voice and SMS plans starting 1 November. This means that the price will be the same regardless of whether the call is off-net or on-net. The change is as a result of the regulator declaring MTN to have significant market power.
- Nigeria: MTN Nigeria is going ahead with its planned IPO of 575 million shares later on this month.
- Namibia: Paratus has signed its first national roaming agreement with MTN to offer LTE services. This is the first roaming agreement ever signed in Namibia.
- South Africa: Amazon Web Services has launched a solar plant that connects to the Eskom grid. It uses a billing system called wheeling, where power produced in one location is billed to an energy user in another location. The solar plant will produce 28 million kWh annually (that’s enough to power around 3000 households per year).