How Can the G20 Support Africa’s Tax Agenda?

Summary

African countries still face many challenges related to tax policies, although progress has been made during the G20 Indian and Indonesian presidencies.
Hence, as African countries face multiple shocks resulting in fiscal issues, more action needs to be taken, notably by the upcoming Brazilian and South African G20 presidencies.
This policy insight highlights the progress made during the past two G20 presidencies on tax issues and formulates policy recommendations to guide the G20’s next decisions.
More support for the implementation of international tax rules is needed to ensure the effective adoption of the Two-Pillar Solution by African countries.

Executive summary

Africa has a tax-to-gross domestic product (GDP) ratio of 16%, compared to 20% in Asia-Pacific, 22% in Latin America and the Caribbean, and 34% in OECD countries. To achieve the Sustainable Development Goals (SDGs), African countries require resources. While international financing can help, it will not provide these countries with the level of revenue they need, especially given their vulnerability to debt crises. Hence, Domestic Resource Mobilisation (DRM) is a key priority. This policy insight looks at the extent to which the past two G20 presidencies have helped African countries to mobilise funds to finance the SDGs and highlights issues that the next G20 presidencies should prioritise.

Introduction

DRM is crucial for the achievement of the SDGs. However, Africa still lags behind the rest of the world in this regard.¹ Hence, the continent could use the support of the G20 to mobilise funds to finance the SDGs.² This policy insight attempts to answer three critical questions:

Have the major decisions on taxation made during the last two G20 presidencies been relevant for the African continent?
What key African challenges were not addressed sufficiently during the past two presidencies?
What should the upcoming Brazilian and South African G20 presidencies, in 2024 and 2025 respectively, focus on in terms of taxation – notably international tax, social protection, and climate change – to better support and address the needs of African countries?

This analysis is based on a review of the G20’s priorities and achievements in terms of taxation issues during the Indonesian (2022) and Indian (2023) presidencies. It relies mainly on declarations, decisions and reports published during these presidencies, paying particular attention to those that impact developing countries and the African continent.

Declarations on tax issues

During the Indian and Indonesian presidencies, the G20 ‘reaffirmed its commitment to implement international tax rules for a fairer international tax environment’ and mainly oriented its decisions and declarations on the taxation topic around those issues.³ Through the annual G20 leaders’ declarations,⁴ the two presidencies called on the OECD/G20 Inclusive Framework to take specific actions, such as finalising Pillar One and completing negotiations on the Subject to Tax Rule under Pillar Two. Emphasis was placed on the consistent implementation of the Global Anti-Base Erosion Model (GloBE) Rules. In addition, they supported the Crypto-Asset Reporting Framework and amendments to the Common Reporting Standard. Finally, both presidencies ‘noted’ the G20/OECD Roadmap on Developing Countries and International Tax, which analyses and proposes actions to improve international taxation in developing countries. These actions can contribute to increased tax revenue for African countries by aligning international tax rules and preventing profit shifting. Furthermore, support for the Crypto-Asset Reporting Framework and amendments to the Common Reporting Standard enhances transparency and compliance, fostering an environment that encourages higher tax revenues.

The international tax agenda

The fight against base erosion and profit shifting (BEPS)⁵ is the main channel through which the G20 – with the international tax agenda implemented by the OECD – helps developing countries to raise more domestic revenue. International tax rule negotiations under the OECD/G20 Inclusive Framework aim to place countries on an ‘equal footing’. However, there has been recognition that developing countries may face more challenges in implementing them. Hence, specific actions have been taken by the G20 to help developing countries put in place international taxation rules. This section, based mainly on reports from the OECD/G20, looks at the progress made by developing countries.

The BEPS project

To combat corporate tax avoidance, the G20 supported the OECD BEPS project in September 2013. This initiative is particularly relevant to developing countries that rely on corporate income tax to collect revenue, as tax evasion significantly reduces the effectiveness of their tax systems.⁶ The OECD estimated that, in developing countries, losses from tax avoidance could be four times the value of foreign development aid to Africa.⁷ The OECD argues that In Africa, ‘BEPS practices cost governments between $100 billion and $240 billion a year in lost revenue, or between 4% and 10% of global corporate tax revenue’.⁸ Hence, fighting BEPS is a fundamental issue that could bring more equity to the international tax system. Acknowledging the urgent need for developing countries to combat tax avoidance more effectively, the G20/OECD put in place the Inclusive Framework on BEPS in 2016. This initiative, ‘endorsed by the G20 Leaders’ Summit in Antalya on 15–16 November 2015’,⁹ was created to:

ensure interested countries and jurisdictions, including developing economies, can participate on an equal footing in the development of standards on BEPS related issues, while reviewing and monitoring the implementation of the OECD/G20 BEPS Project.¹⁰

Hence, the inclusive framework supports developing countries on BEPS issues. During the past two G20 presidencies, significant progress has been made by the inclusive framework, with more developing countries joining the initiative. According to the OECD, as of July 2023, ‘over one third (36%) of the members are low- or middle-income countries that are not members of the OECD or G20 and are not considered to be financial centres’.¹¹

However, the representation of African countries is still low, as shown by Figure 1. As of November 2023, 23 African countries have joined the inclusive framework.

Figure 1: Members of the inclusive framework as of November 2023

Source: OECD¹² and Authors’ own elaborations

Taxation of the digital economy

The first action plan of the BEPS – and currently the most central one – consists of addressing tax challenges arising from the digitalisation of the economy that is particularly relevant for the African continent.¹³ Indeed, as the digital economy rapidly expands and new digital payment tools emerge – increasing the risk for BEPS – African countries face more and more difficulties in taxing digital services. By 2025, the digital economy could account for $180 billion (5.2% to Africa GDP).¹⁴ However, African countries’ tax systems traditionally hinge on the physical presence of businesses, an approach that is increasingly outdated in the era of digitalization, where economic activity extends beyond physical borders.

Officially agreed on in July 2021, the Two-Pillar Solution is ‘the commitment of 136 out of 140 Inclusive Framework members, under a mandate from the G20’ (Figure 2).¹⁵ It is particularly relevant to developing countries since it aims to provide more equity to the international tax system to make sure that multinational enterprises (MNEs) are also taxed in countries from which they derive revenue, even if they have no physical presence there. The Pillar One proposal centres on reallocating residual profits of MNEs to the market jurisdictions of their customers, irrespective of the MNE’s physical presence in those locations. Its implementation faces various challenges, including the elimination of digital services taxes for all companies. Pillar Two establishes a global minimum effective tax rate. Under this system, MNEs with consolidated revenues exceeding €750 million¹⁶ ($ 816.4 million) are obligated to meet a minimum effective tax rate of 15% on income generated in low-tax jurisdictions. Pillar Two is progressing ahead of Pillar One, with many developing countries having largely endorsed the proposal. The OECD/G20 has put in place a programme to assist developing countries in assessing the effectiveness of tax incentives and their implications in terms of DRM¹⁷ to prepare them for the implementation of Pillar Two.

Figure 2: Key milestones of the Two-Pillar Solution

Source: OECD, “Statement on a Two-Pillar Solution to Address the Tax Challenges Arising From the Digitalisation of the Economy“, October 8, 2021

Consumption-based taxes on the digital economy

The OECD/G20 has acknowledged the importance of consumption-based taxes, attesting that ‘corporate income tax reforms alone are not enough to fund the SDGs’.¹⁸ Hence, significant progress has also been made on the application of consumption taxes to the digital economy.¹⁹ The OECD/G20 has provided technical assistance for developing countries to implement VAT/GST on the digital economy.²⁰ For instance, and concerning the specific case of African countries, the VAT Digital Toolkit for Africa was published in 2023 to guide African countries on designing, administering and implementing a VAT framework for collection on digital trade.

Progress on other actions of the BEPS

Action 6 of the BEPS is aimed at preventing treaty abuse. Developing countries have made significant efforts in this area, notably through the signature and ratification of double tax treaties based on the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS.²¹ Under Action 5, developing countries have made progress in removing, and avoiding, ‘harmful tax practices’. Information on tax rulings also helped them to better assess the risk of double-non-taxation and tax avoidance.²²

Tax transparency

There has been progress on building trust between developing countries’ tax administrations and multinational firms. Tax transparency is crucial for a better configuration of the international tax system.²³ Indeed, a low level of trust and inadequate transparency can be obstacles to the implementation of international tax rules, notably the global minimum tax.²⁴ The Global Forum on Transparency and Exchange of Information for Tax Purposes aimed to help with the implementation of ‘exchange of information on request’ and ‘automatic exchange of financial account information’ standards. More than 165 members of the initiative are developing countries.²⁵ Exchange of information allowed African countries to identify €76.6 million ($ 83.4 million) in additional revenue in 2022.²⁶

Technical assistance and capacity building

Implementing rules from the international tax agenda of the OECD/G20 inclusive framework can help developing countries improve DRM to enhance the achievement of the SDGs. However, developing countries need special assistance, adapted to their context, to fully benefit from the international tax system. The G20 New Delhi Leaders’ Declaration acknowledged their need for technical assistance to facilitate the smooth implementation of the international tax agenda.²⁷ During the past two presidencies, the G20 has provided capacity building to African tax administrations (Train the Trainer programme, Women Leaders in Tax Transparency pilot programme) on international standards on transparency and exchange of information.²⁸ Progress in this regard has also been achieved through ‘bilateral programmes, regional initiatives and the Global Relations Programme on Taxation (GRP)’.²⁹ Furthermore, Tax Inspectors Without Borders continues to work closely with tax administrations, providing technical assistance to developing countries to tax MNEs. According to the OECD, the programme had raised $1.7 billion in tax revenues as of July 2022.³⁰ Other initiatives on the training of developing countries’ officials have also been undertaken by the OECD/G20.³¹

Governance

In terms of the governance of the inclusive framework, the G20 has increased the voice of developing countries. This was mainly done during the Indonesian presidency through electing Marlene Nembhard-Parker³² as its inaugural co-chair and the update of the mandate of the OECD Advisory Group for Global Dialogue on Tax Matters, which aims to increase the engagement and representation of developing countries in the inclusive framework.³³ During the Indian presidency, a significant and memorable development has been the admission of the AU as a permanent member of the G20.³⁴

What key issues/concerns do African states have in terms of taxation that were not sufficiently addressed during the past two G20 presidencies?

DRM can lead to sustainable development, and effective national and international tax systems are needed to ensure the sustainable financing of development projects. In addition, tax policies can also be used to support more vulnerable strata in society. Finally, apart from raising revenue, tax policies can change behaviours and help supporting the most vulnerable strata. For instance, tax instruments play a crucial role in the fight against climate change and the promotion of adequate social protection measures. Hence, a part from international tax rules on which the G20 focused more during last two presidencies, other issues related to tax needs to be addressed to help African countries. Hence, as African countries still face many challenges related to tax policies, this section focuses on those related to international tax, but also social protection and climate change that remain crucial for a sustainable development of the continent. These two issues are particularly relevant with the willingness for the plan for the Brazilian presidency to create the Global Alliance against Hunger and Poverty and the Global Mobilization against Climate Change task forces.³⁵

Implementing international tax rules remains a challenge for developing countries

Although progress has been made by the OECD/G20 Inclusive Framework to provide more equitable international tax rules and developing countries have been more involved in the conversations, more still needs to be done. For instance, as highlighted by the African Tax Administration Forum (ATAF),³⁶ while many concerns of African countries – such as the exclusion of extractive industries from the scope of Pillar One, and more flexibility for low-income countries on dispute resolution rules – have been addressed, some remain. For instance, a minimum tax level of 15% (to MNEs reaching revenues above €750 million) will allow African countries to have a minimum amount of tax revenue from local activities. However, a higher rate – such as the 20% rate proposed by the ATAF – could have a greater impact.³⁷

In addition, international tax rules remain very complex, and developing countries often do not have the internal capacity to interpret them. Thus they face difficulties in drafting legislation and effectively applying those rules. In terms of Pillar Two, African countries will need to adapt their national tax systems to comply with the global minimum tax rules. This entails a revision of preferential tax regimes and tax incentives. Other issues relate to the complexity of the rules, calculation of the effective tax rate, the calculation of the GLoBE income, particularly for complex MNEs, and the determination and application of the Qualified Domestic Minimum Top-up Tax, which requires specific knowledge on the part of developing countries. Hence, they need more capacity building and assistance to apply international tax rules. Transparency also remains a challenge. For instance, developing countries still face difficulties in complying with Country-by-Country (CbC) reporting, notably in ‘completing the process of accessing to CbC reports of foreign-headquartered MNE groups’, as mentioned by the 2023 OECD Roadmap on Developing Countries and International Taxation.³⁸

Furthermore, the OECD acknowledged that international taxation would not be enough to raise the funds needed to finance development.³⁹ Other instruments, notably indirect taxes, must be explored. Although efforts have been made to allow the application of VAT/GST on the digital economy, African countries are still struggling to apply those reforms effectively. Furthermore, since companies do not necessarily have a physical presence in African countries, the digitalisation of tax administrations is crucial. Digitalisation includes for instance a possibility to digitally register, declare, and pay taxes. Providing both capacity building and financial and technical assistance to African tax administrations would be useful to complete those reforms.

Social protection should go beyond mere gesture. The informal sector accounts for 85.8% of total jobs in Africa.⁴⁰ While public services remain crucial in the fight against poverty, it is difficult to finance social welfare programmes efficiently when most workers are under informal contracts. African countries need to find an effective way of providing social protection to that population and of financing those services. The rapid expansion in digital tools, notably digital financial services, could help. For example, in a self-enrolment system, workers in the informal sector could also benefit from basic social protection services such as healthcare, pensions, etc. Moreover, enhancing DRM, for example through better taxation of the wealthiest, could finance social protection measures for the poorest. During the Indian presidency, the G20 Labour & Employment Ministers’ Meeting published the ‘G20 Policy Options for Sustainable Financing of Social Protection’,⁴¹ aimed at putting together policy actions that could ensure better ways to finance social protection policies in G20 countries. Among the proposed policy actions to increase international cooperation, the G20 specified strengthening ‘social protection in developing countries and least developed countries including by promoting the implementation of the UN Global Accelerator on Jobs and Social Protection for Just Transitions’.⁴² However, more needs to be done to achieve that aim.

More action is also needed on climate change. G20 member countries are responsible for more than 80% of global greenhouse gas emissions.⁴³ Nevertheless, Africa – which accounts for only 4% of global greenhouse gas emissions⁴⁴ – suffers the most from the negative impacts of climate change. To address the impacts of climate change, financial resources and effective incentive policies are needed. The G20, as a major international forum, could play a pivotal role in facilitating discussions and actions to achieve that objective. However, the recent failure of G20 countries to reach a consensus on decreasing fossil fuel use in favour of renewable energy⁴⁵ is proof that the subject needs to be put at the centre of G20 actions and decisions. Discussions could include talks on achieving green international tax policies that would, for instance, raise enough revenue to compensate African countries for the negative effects of climate change.

What key issues should the G20 Brazilian and South African presidencies advocate to support African countries on taxation policies?

The past two G20 presidencies made some progress on taxation. However, African countries still face many challenges that could be targeted by the Brazilian and South African presidencies. The goal of all actions related to tax systems should mainly be to increase tax revenue. Indeed, DRM remains a priority to achieve the SDGs. To sustainably decrease poverty, African countries need resources. While international financing is helpful, it will not provide those countries with enough revenue, especially given their vulnerability to debt crises. Hence DRM – through efficient and progressive tax systems – is crucial and should be the centre of the G20’s future decisions regarding African countries.

Recommendations

Ensure that the AU’s permanent seat makes a difference. A significant outcome of the Indian presidency is the G20 permanent membership given to the AU. This is a great opportunity to put tax issues from the continent on the negotiation table. The effective and fair participation of the AU could contribute to more favourable decisions for African countries. However, it remains to be seen how the interests of all AU members will be represented by the single voice of the AU, as this would require the AU to become better organised and ensure efficient discussion between African countries to determine key priorities of the continent. Its permanent seat can, for example, be an opportunity to defend the interests of African countries in the implementation of international taxation rules. These countries face various different challenges linked, for instance, to capacity building and the digitalisation of tax administrations. The AU can also be the voice of African countries for issues related to climate change and how tax policies can help fighting its negative effects. More generally, this seat could be the opportunity to give more power to African countries’ call for global tax policy actions and increase their chances of being adopted internationally.
Ensure African countries benefit more from international tax rules and technical assistance matters. As stressed by the OECD roadmap on the implementation of international tax rules, developing countries will need support to implement those reforms and assess their benefits.⁴⁶ This is particularly the case with Pillar Two, as well as with the effective application of consumption taxes to the digital economy. Indeed, as the ‘digital economy is becoming the economy itself’,⁴⁷ African countries need to adapt their tax systems. Moreover, international tax rules need to become more adapted to African countries’ context, with more simplicity and flexibility. In addition, equity is essential, and it is crucial to ensure a fair distribution of resources from MNEs between their base countries and those countries in which they realise their profits. This may require addressing incentives and adopting a higher global minimum tax rate (as proposed by the ATAF). Finally, it is important to enhance developing countries’ capacity to parse international tax rules, their negotiation abilities to advance proposals and contribute to agenda setting at international tax bodies, and their ability to participate in decision-making.
Ensure that the digitalisation of tax administrations increases the efficiency of the tax system. The efficient application of international taxation rules, notably the taxation of the digital economy, requires better digitalisation of tax administrations. This consists of efficient tax filing and payment platforms, control, security, etc. Furthermore, African countries would benefit from more efficient use of data from the financial sector (traditional and digital financial providers), the private sector and tax administrations to increase tax compliance – notably through progress on Common Reporting Standards (CRS) efficiency. Furthermore, technical assistance and experience sharing with G20 countries could help.
Put in place a global carbon taxation system. Tax instruments, notably an effective carbon pricing system and the fair allocation of generated resources among countries, could help in the fight against climate change. During the first African climate summit in Nairobi, countries from the continent agreed on and advocated actions favourable to a global taxation system. This includes a ‘global carbon tax on fossil fuel trade, maritime transport and aviation, as well as a global financial transaction tax’.⁴⁸ Such policies could help mitigate the negative effects of climate change through ‘dedicated, affordable, and accessible finance for climate-positive investments’.⁴⁹ The allocation of tax revenue from the global carbon taxation system proposed by African countries could be based on vulnerability to climate change relative to effective emissions. This would ensure that G20 non-member countries – notably the most vulnerable countries and countries with lower emissions – are compensated for the negative impacts of emissions from G20 countries. Furthermore, the G20 Inclusive Forum on Carbon Mitigation Approaches, aimed at assessing the effectiveness of national policies in the fight against climate change, could be a good space to table such issues. Indeed, as an inclusive framework it puts G20 member and non-member countries on an equal footing, allowing developing countries to actively participate in the global conversation on climate change.⁵⁰
Put in place tax policies that favour poverty reduction: collecting more tax revenues from the richest could finance social protection for the poorest. There are many ways in which tax policies could help in the fight against poverty. However, tax policies can also be a threat to poverty reduction. For example, tax exemptions should be evaluated according to their effectiveness in supporting vulnerable people, and more efficient policies must be put in place to efficiently target the poor. The G20 could help Africa countries to assess the efficiency of tax incentives and find more supporting policies. Moreover, African countries need a more progressive tax system to tax high incomes and ensure a fair redistribution system. To do so, regional/international consensus is needed to prevent tax competition between countries.

Conclusion

In summary, the African Union (AU) should strategically use its permanent seat at the G20 to advocate for key priorities that address pressing tax issues faced by African countries. This includes effective representation and participation, emphasizing challenges related to capacity building, digitalization of tax administrations, and climate change. The AU should stress the importance of African countries benefiting more from international tax rules and technical assistance, advocating for simplicity, flexibility, equity, and a fair distribution of resources from multinational enterprises. Additionally, the AU should promote the efficiency of tax systems through digitalization, collaborate with G20 countries for technical assistance, and actively support the establishment of a global carbon taxation system to address climate change. Finally, the AU should focus on tax policies that favour poverty reduction, advocating for progressive tax systems and regional/international consensus to prevent tax competition between countries. This comprehensive approach will contribute to creating a more equitable and supportive international tax framework for African countries, aligning with the broader goals of sustainable development and poverty reduction in the continent.

How Can the G20 Support Africa’s Tax Agenda?

The fight against base erosion and profit shifting (BEPS) is the main channel through which the G20, with the international tax agenda implemented by the OECD, helps developing countries raise more domestic revenue.

Summary

Executive summary