What is the Inclusive Framework?
In 2015, OECD and G20 set up an international framework, dubbed the OECD/G20 BEPS Project (the Inclusive Framework), to combat tax avoidance by multinational enterprises (MNEs) using base erosion and profit shifting tools. The aim of the project is to mitigate tax loopholes so that corporations cannot shift profits from a country with a high corporate tax rate to countries with a low tax rate.
The project is now in its implementation phase, 141 countries and jurisdictions are involved including a majority of developing countries. Kenya joined the Inclusive Framework in 2017 and has been an active participant since. Participating countries of the project set up 15 Action Plans (The BEPS action plan) to tackle tax avoidance, improve the coherence of international tax rules and ensure a more transparent tax environment.
Base Erosion and Profit Shifting (BEPS) refers to tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to locations with no/low tax rates and no/little economic activity. This results in little or no corporate tax being paid, as well as annual revenue losses for governments. OECD estimates that globally, governments lose at least 100 – 240 billion USD, equivalent to 4 – 10% of global corporate income tax revenue.
Implementation of the 15 Actions of the BEPS package is underway. Action 1 of the BEPS package addresses the digital economy. Participating members of the project have been working on consensus-based, long-term solutions to the tax challenges arising from the digitalization of the economy. The consultations resulted in the Statement on the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalization of the Economy that was published on 8th October 2021.
The deal offers a common approach to taxation of the digital economy globally. Interested countries and jurisdictions can participate by joining the Statement. In terms of consensus, 137 out of the 141 OECD IF countries and jurisdictions have joined the Statement.
What is the Two-Pillar Approach?
Pillar One aims to ensure a fairer distribution of profits and taxing rights among countries with respect to the largest MNEs, which are the winners of globalization. It seeks to tax the largest MNEs (those with at least 20 billion euros in revenue) and the most profitable (profit before tax of 100) where 25% of the residual profit above the 10% is re-allocated to market jurisdictions.
Pillar Two puts a floor on tax competition on corporate income tax through the introduction of a global minimum corporate tax at a rate of 15% that countries can use to protect their tax bases. It seeks to strengthen tax avoidance and harmful tax practices.
KEY ELEMENTS OF THE TWO-PILLAR SOLUTION
Taxing rights on 25% of the residual profit of the largest and most profitable MNEs. This would be re-allocated to the jurisdictions where the customers and users of those MNEs are located
A global minimum tax of 15% on all MNEs with annual revenue over 750 million euros
Tax certainty through mandatory and binding dispute resolution, with an elective regime to accommodate certain low-capacity countries
Requirement for all jurisdictions that apply a nominal corporate income tax rate below 9% to interest, royalties, and a defined set of other payments to implement the “Subject to Tax Rule” into their bilateral treaties with developing Inclusive Framework members when requested to, so that their tax treaties cannot be abused.
Removal and standstill of Digital Services Taxes and other relevant, similar measures upon joining the Two Pillar approach
The establishment of a simplified and streamlined approach to the application of the arm’s length principle in specific circumstances, with a particular focus on the needs of low-capacity countries.
Carve-out to accommodate tax incentives for substantial business activities
Has Kenya joined the Statement on the Two-Pillar approach to Address the Tax Challenges Arising from the Digitalization of the Economy
No. Kenya did not join the Two-Pillar Solution and has maintained her national position against it based on several technical grounds and fears of possible national loss of revenue.
Does Kenya stop being a member of the Inclusive Framework if it does not join the Statement?
No. Kenya is a member of the OECD/G20 Inclusive Framework on BEPS and actively participates and engages with the OECD on the tax challenges of the digital economy and global dialogue on fiscal affairs.
KRA for instance participates in the Forum on Tax Administration (FTA), the Global Forum on transparency and Exchange of Information for tax purposes, and the Inclusive Framework on BEPS - particularly on the BEPS package on transfer pricing aspects, among others.
Who are the other countries that have not joined the Statement?
The other countries that have not signed up are Nigeria, Pakistan, and Sri Lanka.
When does the deal come into effect?
The deal is expected to come into effect on 1st January 2024.
What are the next steps for Kenya?
Kenya believes in the spirit of the Inclusive Framework and the opportunities presented especially to low and middle-income economies. Kenya has continued to engage with the OECD and African Tax Administration Forum (ATAF) to ensure that a mutually beneficial solution is adopted. Kenya reaffirms her commitment to continue contributing to the global tax policy dialogue, negotiations, and processes to develop options suitable to developing economies on a multilateral basis.