Global minimum tax is one to keep an eye on - expert

This is so because multinational corporations, especially in tech and finance, have long used loopholes to shift profits to low-tax countries, slashing their tax bills. So, this tax tries to level the playing field, preventing them from using this tactic to outmanoeuvre smaller businesses that pay their fair share. The push was led by the Organisation for Economic Cooperation and Development (OECD) and backed by the G20.

 More often than not, many multinationals prefer to relocate their headquarters, a portion of their operations, or their intellectual property to a country with the lowest tax rates. This is especially true for companies operating in the tech or pharmaceutical industries, where such relocation is much simpler than an old school brick-and-mortar business.

Tax avoidance

Uganda has already faced some tax avoidance controversies involving multinationals, particularly in telecom, oil, and mining, who have been accused of transfer pricing—shifting profits to subsidiaries in low-tax countries to dodge taxes in Uganda.

For instance, MTN Uganda was ordered to pay Shs51 billion over tax discrepancies in 2018, while Heritage Oil contested a $404 million (Shs1.5 trillion) capital gains tax claim in 2013.

One notable example is that, upon Cipla India's exit from Cipla Uganda operations last year, a new majority shareholder—Africa Capitalworks—was discovered to be an investment firm with its headquarters in Mauritius. Africa Capitalworks paid $25 million for 51.18 percent of the drug manufacturer.

This implies that Uganda may lose a significant amount of money if this company chooses to sell its interest to the now-named Quality Chemicals Industries Limited because the capital gains tax will be governed by Mauritius tax regulations, according to the double tax agreement (DTA) Uganda has with Mauritius, which gives it exclusive taxing rights. This DTA was renegotiated in 2023 to give Uganda exclusive taxing rights for all hydrocarbon-based transactions.

With big businesses always seeming to be two steps ahead of the tax game, the global minimum tax seeks to put an end to this practice. I mean, think about: in the past, businesses primarily produced tangible goods, and it was very challenging to relocate large machinery and operations across international borders but today nations with advantageous tax regimes, such as Ireland, Switzerland, Singapore, the Netherlands, Luxembourg, or Hong Kong, have become increasingly attractive to these corporations. They typically secure their income-producing assets, such as intangibles like trademarks, patents, and websites, which makes it difficult for governments to determine where profits are really being made.

 As opposed to you, who is taxed on your income, corporations are taxed on their profits because that is where value is created.

“The global minimum tax focuses on the effective tax rate, not the nominal one,” says Mr Mack Mutumba, an International Tax Policy and Governance practitioner and researcher with Seatini Uganda.

The effective tax rate is the actual percentage of your income or profits that you end up paying in taxes after all deductions, credits, and exemptions. It’s not the same as the tax bracket rate, which is just a set rate; instead, it shows how much of your total earnings you really give to the government.

“The nominal rate can be 30 percent or 40 percent, but what really matters is how much you’re paying in taxes relative to your profits. Most companies in Uganda have an effective tax rate between 12 percent and 15 percent. While a lower effective rate is good for companies, it means they aren’t contributing their fair share to the country,” he elaborates.

Tax incentives 

There is no central organisation that will come knocking on multinational companies' doors if they do not pay their taxes, but in recent years, the OECD has acted as a de facto world tax organisation. It has steered global tax talks in making policy, setting standards, putting out models, for countries to adopt.

In 2022, nearly 140 countries signed onto a tentative deal. All signatories have to go home and get it approved through their legislative bodies as well. Implementation is complicated and the details are still being ironed out.

“Monitoring effective tax rates in Uganda is challenging because it requires multinationals to file detailed tax reports, including transfer pricing papers. These documents consist of a local file for Uganda and a master file outlining transactions across different countries and the taxes paid,” says Mr Mutumba.

It is easier to catch non-compliant companies when these documents are examined, he adds, because if their effective tax rate is below 15 percent, they still have to top up. 

“The tricky part for countries like Uganda is the prevalence of tax incentives. Many developing countries rely heavily on foreign investments, which can result in companies paying as little as four percent in taxes like what happened last year,” he adds.

The bare bones idea is that basically countries want big companies to reside in their borders so as to provide jobs and promote local economic growth. A large number of tax economists however opine that there is insufficient evidence to support the question of whether tax breaks or tax incentives have the desired effect of luring foreign investment. 

A 15 percent floor would, in most cases—like in Uganda—be higher than what is actually paid, forcing Uganda to tighten its tax laws in order to prevent other nations from claiming the difference.

That is undoubtedly something we have observed in certain corporate entities. For example, a business may choose to reinvest in purely incentivised industries such as manufacturing, assembling medical equipment, processing agricultural produce, and more, all of which would result in a lower tax liability. 

Yet these companies still benefit from the services that tax revenues bring to the societies they operate in—like the tax money used to build schools, to pave roads, to provide healthcare, and to pay for a defence budget.

Level playing field

The OECD estimates that the global minimum tax is to reduce tax leakages by 50 percent, or $150 billion per year. This doesn’t specify sectors but targets those firms that generate annual revenues exceeding $750 million. 

“So many of the country’s big companies aren’t paying their fair share of taxes,” he says, but expresses concern that this could further aggravate Uganda's concerns about corporate income tax because it could eventually stagnate. This is the tax that Uganda’s tax authorities averagely bag Shs1.64 trillion per year.

Discussions about the worldwide tax law have been spearheaded by the OECD countries; no African country is present to determine what would be best for them since they are not signatories. But the UN's inclusive framework contains multilateral tools that let non-OECD nations participate in talks about multinational taxes, and the profit-shifting mechanism is one of the topics that attract most developing nations into these conversations.

“That’s why many African nations advocate for a shift from the OECD to the UN for these discussions because they want to fight for policies that serve them. Currently, the global minimum tax and the Pillar Two solution are initiatives aimed at preparing developed countries for future frameworks that the UN could decide. By the time the UN convention framework is in place, developed nations are making sure groundwork will already be laid,” says Mr Mutumba.

That’s why in the negotiating of the UN framework, discussions often revolve around avoiding duplication and ensuring complementarity with existing systems. 

“This is crucial because many issues affect us. The OECD feels like a members' club for developed or capital-exporting countries, while capital-importing nations are often brought in just to endorse conventions or instruments they choose,” Mr Mutumba says.

Mixed opinions

Opinions about this are mixed. Many countries have signed on this tax rule, but it’s not entirely clear what’s motivating them. A primary concern is whether they will be pressured to abandon their tax incentive regimes. This creates a general tension surrounding these new rules.

“We should pay attention to this tax because we have double tax agreements with seven countries. These agreements are crucial for attracting foreign direct investment. If we sign and don’t incorporate this tax into our system, we’re at risk,” Mr Mutumba offers.

“When trying to attract investment, developing countries often offer incentives and tax holidays based on specific thresholds. For instance, if we have double tax agreements with countries like the Netherlands, the introduction of a global minimum tax could tremendously reduce our earnings, especially if we’re already earning little from the taxes we already have.”

This, Mr Mutumba adds, goes on to establish “a clear threshold that all companies must meet.” But what if all multinationals aim just to hit that target? 

“We’d lose out on additional revenue, particularly since a significant portion of profits is often shifted elsewhere. This attempt to address tax avoidance could, paradoxically, make it worse if we include it in our tax regime,” Mr Mutumba explains.

“But we should remember that it’s a multinational agreement, meaning it only operates in countries that are party to it. If Uganda signs onto it, the rules will apply. But I have doubts about whether they [Uganda] will sign. It’s a big risk,” he adds.

Significant hurdles

Mr Mutumba further explains that the top-up tax involved in this new tax rule could face hurdles because of the various treaties Uganda has with other countries. These treaties often contain clauses that restrict Uganda's ability to adjust its tax laws in ways that could negatively affect investors. 

As a result, investors might even sue Uganda if changes to tax policies disrupt their interests. This legal complexity and the dynamics between international treaties and domestic tax policies could undermine the effectiveness of the global minimum tax initiative in Uganda. 

“While most developing countries, including Uganda, have effective tax rates between 12 and 15 percent, openly putting a threshold to this doesn't seem practical. There are valid concerns about how this global minimum tax will affect our business investment treaties and tax revenues,” he says.

Uganda also lacks a specialised institution to track money flows, particularly when it comes to profit repatriation by firms. 

This creates challenges in gathering accurate data. Many of the companies engaged in such practices are headquartered in countries with which Uganda has DTA, like the Netherlands, Mauritius, and the UK—countries that are major sources of investment for Uganda.

There are ongoing discussions about including minimum tax rules in these bilateral agreements, which is important because developed countries often follow DTAs based on OECD guidelines, while developing countries tend to align more with the UN framework.