Companies operating in Africa are feeling the impact of the 15% global minimum tax rules that have been adopted by several African countries, including South Africa, Nigeria, Kenya, Mauritius, as well as those adopted in multinational enterprise headquarters locations in Europe, Asia and elsewhere.
Five crucial challenges have heightened the relevance of the new minimum tax, known as Pillar Two, in Africa, shaped by the continent’s diverse and evolving tax landscape that spreads across 54 countries:
Hyperinflation dilemmas. A seeming blind spot in Pillar Two’s design affects multinationals with entities in hyperinflation economies.
Indicated by various factors including a country’s cumulative inflation rate approaching or exceeding 100% over three years, at least six African economies—Burundi, Ghana, Malawi, Sierra Leone, South Sudan and Sudan—fall into this hyperinflation category, with others including, Egypt and Nigeria being monitored.
Hyperinflation accounting requires companies to adjust their financial statements for inflation using a general price index, countering for the impact of erosion of purchasing power.
Non-monetary items including property, plant and equipment and intangibles are restated, boosting the profit and loss number and Pillar Two income, while monetary items including current and deferred tax are not adjusted. This inflationary adjustment can artificially lower Pillar Two effective tax rates, or ETR, that measure whether Pillar Two taxes as a percentage of Pillar Two income meet the minimum 15% and trigger tax. Adding different financial reporting and local currencies into the mix could further compound this ETR distortion.
This creates additional tax burdens in relation to hyperinflationary economies, reducing the attractiveness of poor economies that need additional investment.
African effective tax rates. Thirty-three of the 54 African countries have alternative minimum taxes—do the Pillar Two rules factor these into covered taxes?
Gross-basis turnover taxes generally are excluded from Pillar Two covered taxes. However, exceptions can apply where these are imposed in place of a generally applicable income tax, with the intention of taxing profit.
Alternative minimum tax design varies widely across African countries, but usually falls in one of three categories:
- Gross-basis turnover taxes directed at ensuring fiscal contribution by large companies with high-economic income, without regard to profitability, appear to be excluded from covered taxes.
- Other alternative minimum taxes, designed with an intent to tax profits, likely qualify as covered taxes.
- A third group sits in a gray area, either because of the way a business books them in their accounting ledger, or because it’s unclear whether the measure is really intended to tax net profits.
This is predominantly an African challenge, and the double taxation risks could undermine the continent’s attractiveness to much-needed foreign investment.
Questionable effectiveness of African tax incentives. Pillar Two can claw back the value of tax holidays, reduced corporate tax rates, and other income-based incentives, which proliferate in Africa.
This has two effects: it can restrict unproductive tax competition, but it may reduce some African countries’ capacity to attract investment. While the Pillar Two substance-based income exclusion, calculated as a percentage of local payroll and tangible assets, can partially protect such incentives, the low wage levels in Africa may reduce protection in practice.
Replacing current incentives with Pillar Two-protected refundable tax credits would have been challenging for African governments due to limited funds. However, the ongoing global renegotiation of Pillar Two may allow for some protection of expenditure-linked tax incentives such as super deductions, which could help Africa remain attractive to investors.
Getting the right numbers. Meeting Pillar Two accounting data requirements is complicated by sub-consolidations.
Take the case of an M&A transaction where multinational A (parent in Country A), which prepares consolidated financial statements under GAAP A, acquires multinational B (parent in Country B), which prepares its statements using GAAP B.
Going forward, the multinational A statements may be prepared by simply converting the multinational B statements directly to GAAP A and combining—a sub-consolidation.
This can cause Pillar Two compliance issues. If multinational B had a subsidiary in African Country C it may be that the separate entity package accounts are just under GAAP B; there may be no GAAP A accounts, as needed for Pillar Two.
The situation is more complex where both multinational A and multinational B had subsidiaries in African Country C—now there may be a mix of GAAP B and GAAP A accounts.
This issue arises often in practice in Africa.
Being caught off guard. Joint ventures, typically accounted for under the equity method—an accounting approach applied where an investor holds significant influence over a company—are prevalent across Africa, particularly in the energy and natural resources sectors so crucial to many African economies. In practice, the Pillar Two treatment of joint ventures has proved to be extremely complex.
Identifying Pillar Two joint ventures can be challenging, as their definition differs from accounting standards. A multinational may think it has no Pillar Two joint ventures, but one could exist where there is 50% or more “ownership interest” in an equity method investment—determined by equally weighting rights to profits, capital, and reserves.
This means an entity could have a Pillar Two joint venture even if it’s not considered as such for accounting purposes, or a joint venture for accounting purposes where it is not considered a Pillar Two joint venture, depending on the ownership interest percentage.
There are other technical complexities. Double tax risks can arise where one group consolidates an entity and another group treats the same entity as a Pillar Two joint venture. Interpretative challenges arise when dealing with partnerships or investment funds treated as Pillar Two joint ventures, and country level guidance can differ.
Beside these difficulties, company tax departments may struggle to obtain the data necessary to apply the rules for Pillar Two joint ventures, and the cost of collecting this data can be significant compared to the potential tax revenue.
Going forward, all these African Pillar Two challenges may merit further policymaker consideration, guidance and changes to the Pillar Two rules.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.
Author Information
Cynthia Fox is an international tax partner with KPMG South Africa.
Conrad Turley is global head of tax policy, KPMG International.
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