Author
The digitalisation and internationalisation of today’s commercial world, with many businesses operating across borders and digitally, has focussed attention on how countries can receive their fair share of tax. This concern was initially being addressed through Base Erosion and Profit Shifting (BEPS) Action Point 1 (“Tax Challenges Arising from Digitalisation”), a project being carried out by The Organisation of Economic Cooperation and Development (OECD) together with G20 (commonly known as OECD/G20 Inclusive framework on BEPS).
In working towards achieving a global consensus in the taxation of the digital economy, one of the key milestones reached is the Two Pillar Solution consisting of “Pillar One” and “Pillar Two”, each of which seeks to address a particular gap in the existing international tax framework. While Pillar One focuses on reallocation of profits to market jurisdictions (regardless of physical presence) for the big multinational enterprises (MNEs), Pillar Two aims to have a global minimum corporate income tax which essentially means where the effective tax rate (ETR) of an MNE is below 15%, the MNE Group pays a top-up tax so that the ETR of the MNE Group entities is effectively 15%.
This tax is collected by (i) either the low-tax jurisdiction itself, under Qualified Domestic Minimum Top-up Tax (QDMTT) or (ii) where no QDMTT applies, by another jurisdiction through the imposition of either a) Income Inclusion Rule (IIR, which imposes top-up tax on the parent entity in respect of the low taxed income of a constituent entity) or Undertaxed Payment Rule (UTPR, which denies deductions or requires an equivalent adjustment in a subsidiary jurisdiction).
Whilst the OECD has issued some guidance on how to implement these rules, it is still an evolving area. The impact of these rules on a particular economy is a hot topic of discussion and many jurisdictions are still struggling to assess whether the adoption of the different components of Pillar Two will have a positive impact on their economy and how to incentivise business investment, research and innovation.
MNEs with subsidiaries in Tanzania could be in-scope MNEs for the purpose of Pillar Two even if Tanzania does not adopt Pillar Two. There is rapid progress on the adoption of Pillar Two by various countries which raises the question as to the steps that Tanzania should take. In an instance where the ETR in Tanzania is below 15%, it would mean that in order to adhere to Pillar Two rules, in the absence of QDMTT adoption in Tanzania, the MNE would have to account for the top up tax in the jurisdiction of the parent entity (IIR rule) or other jurisdictions (UTPR rule) - effectively resulting in tax foregone in Tanzania.
Although Tanzania’s corporate income tax rate (30%) is above the minimum threshold of 15%, there are cases where tax incentives enjoyed by a company might result in an ETR of below 15%. In such a scenario, the concern is that the practical impact of Pillar Two will be to negate the corporate tax incentives accorded to the investor (with the corporate income tax foregone in Tanzania being paid as tax in another jurisdiction).
What is a potential solution? Against the background of Pillar Two, there may be a need for a review of the corporate income tax incentive system (mainly for Economic Processing Zone, Special Economic Zone or strategic investors as these would generally contribute to having an effective tax rate lower than 15%). With regards to adoption of the Two Pillar Solution, a step by step approach could be considered where Tanzania implements some aspects of the solution (so that top-up tax is collected in Tanzania) and continue observing how Pillar Two aspects are evolving in the future.
Many countries (including advanced economies) have taken such a conservative (and phased) approach in implementing the Pillar Two. For example, Singapore will implement from 1 January 2025 two components of Pillar Two – the IIR and QDMTT however UTPR will be considered at a later stage. South Africa and Australia have released draft legislation for IIR and QDMTT to be applicable from 1 January 2024 and UTPR from 1 January 2025 (for Australia). As for Switzerland, the QDMTT is applicable from 1 January 2024 while the decision to implement IIR and UTPR will be made later. Of particular interest is that Kenya’s Finance Bill 2024 published on 9 May 2024 (subsequently withdrawn by the President) included a proposal to introduce a minimum top up tax (QDMTT).
In Tanzania, consultations with stakeholders on the implications of the Two Pillar Solution are ongoing - a step in the right direction but QDMTT is a low hanging fruit.
