Global Tax System Reform – will it help to address the Plight of African Women?

This article looks into the concerns various stakeholders have raised regarding the effectiveness of the two-pillar solution to address the inherent bias within the international tax system, which hinders domestic resource mobilisation efforts by developing countries, thereby hampering their ability to address gender inequality.

The role of domestic resource mobilisation in addressing gender equality

According to recently released data from UN Women, 244 million of the 388 million women and girls living in extreme poverty in 2022 will be from Sub-Saharan Africa. That corresponds to 62.8% of extremely poor women worldwide. Women and girls have consistently borne the brunt of poverty around the world due to low wages, lack of decent work, and unpaid care work.

In 2021, the pandemic deepened the plight of women’s limited employment options and resulted in millions of women leaving the workforce. Due to poor access to the labour market, women tend to be more dependent on services offered by the public sector. As a result, women are the biggest losers when governments face challenges in mobilising domestic resources to invest in key public services. The G7 global tax deal announced in 2022 was intended to address some of the issues that hinder developing countries’ abilities to raise domestic resources; African countries have however decried it as insufficient.

Concerns about the current global tax system

Over the past few decades, digitalisation of the global economy has hindered the effectiveness of the current international system, which was developed in a “bricks-and-mortar” economic environment more than a century ago. Specifically, questions about where taxes should be paid have come to the fore, as well as about the degree to which profits should be taxed and in which jurisdiction. Additionally, countries are also finding that they must grapple with the role that new technologies are playing in exacerbating tax avoidance by multinational enterprises that are shifting their profits to low or no-tax jurisdictions.

The two-pillar solution

 In early 2022, the G7 countries reached agreement on a package they lauded as historic. The package was later endorsed by 136 members of the OECD Inclusive Framework. Various stakeholders have, however, criticised the proposed solutions for not going far enough to ensure meaningful benefits for developing countries.

In addressing concerns about allocation of taxation rights, the proposed solution, Pillar 1, will only apply to multinational enterprises with a global turnover of over 20 billion euros and profitability above 10% (measured as pre-tax profit). This means that this solution will only apply to about 100 multinational enterprises; the current approach, which has been identified as problematic, will remain the same for all other companies that operate in the global system. Furthermore, the deal does not reallocate all of the profit of the multinationals within its scope; it is only applicable to 25 per cent of residual profit. In exchange, countries will be expected not to continue imposing digital services taxes. African countries consider these present proposals insufficient to address Africa’s key tax issues and are of the view that the current imbalance in allocation of taxation rights is not addressed.

Pillar 2 of the proposal seeks to address the issues of domestic tax base erosion and profit shifting (BEPS) due to multinational enterprises exploiting gaps and mismatches between different countries’ tax systems. BEPS practices cost countries USD 100-240 billion in lost revenue annually, equivalent to 4-10% of global corporate income tax revenue. However, developing countries’ greater reliance on corporate income tax means that they suffer disproportionately due to BEPS. The current proposal to set the minimum tax rate at 15 per cent is unlikely to disincentivise multinationals from shifting profits, particularly given that African countries have corporate income tax rates of between 25 and 30 per cent. In addition, the rules that will be applicable if a jurisdiction applies a tax rate below 15 per cent grant primary taxation rights to the countries where the multinationals’ headquarters are located, which in most cases are developed countries. Provisions authorising some taxation rights for the states where income is generated, as the Undertaxed Payments Rule, will only be used as a backup when the Income Inclusion Rule (IIR) cannot be applied.

In response to these discussions, African countries have articulated that the Inclusive Framework negotiations have made clear that developed countries are not listening to developing countries’ concerns and have no intention of redressing the balance of taxation rights in any significant way.

What does this mean for investment in women?

Sadly, the proposed global tax system does not offer substantive reform to address the imbalances in the global system. In its current form, the global system inherently limits developing countries’ abilities to use taxation as a tool for sustainable development through its four functions: revenue mobilisation, redistribution, repricing, and representation. With insufficient revenue, governments are unable to invest in areas that address gender inequality, to use resources to redistribute wealth within the economy or to reprice goods to make them more affordable for women and cannot be held to account by citizens.