ITIC Oil & Gas Dialogue Meets in Washington

ITIC's Oil & Gas Taxation and Regulatory Dialogue held a series of meetings this week in Washington with organizations active in natural resource taxation issues in developing countries to foster understanding and promote balanced, fact-based discussion among government, academics, business, and international organizations. The group of international oil and gas companies also held internal meetings to review its priorities for 2017.  

One of the group's first projects in 2016 was the publication of a set of principles for developing countries to consider when they embark on natural resource development projects. Since such projects are long-term and investment intensives, it is important to establish relationships built on equity and trust. A copy of the principles is available here. 

While in Washington, the group also held a dinner discussion with ITIC Executive Committee Chairman Jim Miller (Former Director of the U.S. Office of Management and Budget) and ITIC Honorary Co-Chairman Dave Camp (Former Chairman of the Committee on Ways and Means, U.S. House of Representatives) to discuss U.S. tax and regulatory reform proposals.

The Challenges of E-Commerce Regulation for Tax Policy in Africa

The United Nations Commission on International Trade Law (UNCITRAL) defines electronic commerce (e-commerce) as “commercial activities conducted through an exchange of information generated, stored or communicated by electronic optical or analogs means…” With e-commerce now accounting for 80 percent of all global commerce[1], there is an urgent need to regulate these transactions to meet tax policy objectives of broadening the tax base and eliminating erosion. Taxing e-commerce will ensure equal treatment of national production and imports of the same product in order to avoid market distortion. The lack of a standard legal framework can lead to double taxation or double non-taxation; and different regimes for taxation of electronic goods sold electronically and sales of national products in the non-electronic market can distort overall market equity.

The main question revolving around the taxation of e-commerce business transactions is how to establish a general policy for e-commerce and specific tax regimes to ensure no loss of revenue in duties and taxes, including regulation of the market share between electronic imports and local production.

Fragmentation of business activities should derivate from the original definition of e-commerce, with an increased use of the internet to facilitate transactions involving the production, distribution, sale, and delivery of goods and services in the marketplace. To achieve a straightforward and undistorted tax policy, this needs to be complemented by an agreed categorization of goods and services involved in e-commerce transactions to determine which goods and services are targeted by the law and which are not.

African countries have significantly lagged behind in the e-commerce technological revolution, due in large part to weak infrastructure, high cost of the internet, narrow coverage of the network (including the quality of internet service), and lack of electricity. In 2013, a study by the International Telecommunications Union reported that only 9.8% of the African market was using the internet,[2] and in 2014, Africa ranked next to last, with just 1.3% of global business-to-business e-commerce spending.[3]

The use of “mobile money” (payment services performed via a mobile device) is really the only e-payment experience for goods and services across the continent. The challenge for African countries is to achieve a balance between expansion of financial services and taxation of small businesses that use mobile money.

African countries’ ability to benefit from e-commerce is dependent on the evolution of technology. The best African experience on innovation and technology was the launch of the Kenya pad for M-Pesa, a transformative mobile phone-based platform for money transfer and financial services in 2007. Since then, M-Pesa has experienced explosive growth -- in 2013, 43% of Kenya´s GDP flowed through M-Pesa, with 237 million person-to-person transactions.

M-Pesa’s success is due in large part to the financial inclusion of a range of services, including money deposit and withdrawal, remittance delivery, bill payment, and micro-credit provision, thus allowing groups that typically have limited access to formal financial services to benefit from the financial services offered through M-Pesa.

While still a growing phenomenon in developing economies, mobile payments have been especially successful in markets where consumers without bank accounts have been able to take advantage of new mobile infrastructure to improve their financial standing.

At this stage, the main question for African countries is whether to expand their internet network and aim to tax e-commerce activities, or to invest their scarce resources to regulate the taxation of mobile money transactions (which are already thriving). The best approach should result in investment in both areas, taking into account an anticipated growth in e-commerce transactions in Africa that will accompany an increase in the African population (which, according to the United Nations, is expected to reach 2.4 billion by 2050).

Extensive future demand for e-commerce facilities in Africa is both a business opportunity and a great challenge for revenue authorities, who should develop appropriate taxation strategies in terms of investment and readiness.


[1] Clayton W.Chan  - Taxation of Global E-commerce on internet: underlining issues and proposed Plan

[2] The International Telecommunications Union statistics showing internet users by region as of July 1, 2013 give the market percentages as Asia (48.4%), America North and South (21.8%), Europe (19%), Africa (9.8%), and Oceania (3.0%).

[3] The Asia-Pacific region led the global business-to-business e-commerce spending with 39.6%, followed by Europe (29.2%); North America (26.9%); Latin America (1.9%); Other, including Africa (1.3%); and MENA (1.1%). Source: ©statista 2016 www.statista.com/statistics/518739/b2c-e-commerce

ITIC Advisor Speaks on Alcohol Tax Stamps

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ITIC Program Advisor Liz Allen gave a presentation at this week’s Tax Stamp Forum in Berlin about the development of modern revenue control on alcoholic beverages. Her presentation was based on joint research conducted by ITIC and Oxford Economics into the effectiveness of different types of tax stamps used in a number of different countries. The conclusion drawn was that modern tax stamps can be helpful in tackling illicit trade, especially if they are but one component of a comprehensive national strategy to address both the supply and demand aspects of the illegal trade. The research across several countries was well received by revenue and customs officials participating in the conference.

Summary Report - Eighth Africa Tax Dialogue

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Hosted by ITIC, in cooperation the Common Market for Eastern and Southern Africa (COMESA) and the Commonwealth Association of Tax Administrators (CATA), over 60 tax officials, leading academic specialists and private-sector representatives from 18 countries convened in Cape Town on 15-17 November 2016 for the Eighth Africa Tax Dialogue to discuss the balance between domestic revenue mobilization and enhancing the investment climate.

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His Excellency Dr. Mikhisa Kituyi, Secretary General of the United Nations Conference on Trade and Development (UNCTAD), delivered a spirited opening address on “The Role of Business Investment to Deliver on the Post-2015 Development Agenda.” Dr. Kituyi, who has an extensive background as an elected official, an academic, and a holder of high government office, pointedly remarked that “smart tax reform is critical to mobilizing resources for the 2030 agenda,” a theme that reverberated throughout the discussions of the Dialogue.

The Dialogue also featured keynote remarks from the Honorable Kipyego Cheluget, Assistant Secretary General of COMESA, Mr. Duncan Onduru, Executive Director of CATA, and the Honorable Judge Dennis Davis, Chair of South Africa’s Davis Tax Committee. Commenting on the high-level participation in this year’s meeting, ITIC President Dan Witt noted: “This reinforces that taxation, and especially tax administration, has taken on a new level of urgency as a key instrument in achieving the sustainable development goals.”

Major Observations and Findings

Regional Economic Outlook

The main features of the sub-Saharan economies are the dominance of commodity-based economies, narrow tax bases, huge informal sectors, weak government and market institutions, high exposure to external shocks, low competitiveness, and a shortage of skills and capital. Recently, there has been a sharp decline in commodity prices, tighter financing conditions, and a severe drought in southern and eastern Africa. The long-term way forward for governments should not be one of “command and control,” but one of “enable and facilitate.” It is important that countries more actively increase the quality and efficiency of public investment, continue efforts to mobilize domestic resources, and pursue economic diversification. Tax systems can play an important role in achieving these objectives.

The Davis Tax Committee – Where Are We and What Lies Ahead?

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The Davis Tax Committee was installed in 2013 by the South African Minister of Finance Pravin Gordhan to inquire into the role of the tax system in supporting the objectives of inclusive growth, employment creation, development and fiscal sustainability. Considerable progress has been made with the publication of various final reports on macro analysis, small and medium-sized businesses and estate duty. Further, interim reports have been tabled for public comment on BEPS, mining and carbon taxation. While South Africa’s tax system compares favorably with those of many developed and emerging economies, the pace of globalization, the modest growth after the 2008-09 recession and significant social challenges (such as persistent unemployment, poverty and inequality) point toward the need to review what role the tax system can play in addressing these new challenges. All in all, an excellent and formidable work program is being executed which should have a lasting impact on society.

Taxing Corporations – BEPs and International Aspects

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The traditional form of taxing corporations is under review in the wake of globalization and capital market innovation. This review should be guided by neutrality and tax sovereignty considerations. Traditionally, corporate tax has been a tax on the return to equity (e.g. profits), but the increased ease with which equity can be substituted by debt has led to calls to tax equity and debt income jointly at the corporate level. Doing so, however, means that the rate of return that makes an investment worthwhile is being taxed, implying less investment and possibly economic growth. Accordingly, proposals have been made to tax economic rents only by, for instance, permitting an allowance for corporate equity.

The revenue loss due to Base Erosion and Profit Shifting (BEPS) for low-income countries is estimated at 1-2% of GDP. In 2013, the OECD committed itself to “delivering a global and comprehensive action plan based on in-depth analysis… to provide concrete solutions to realign international standards with the current global business environment.” To date, however, there has been no fundamental rethink of international tax rules and no comprehensive plan to deal with base erosion. In fact, there has been much “tinkering around the edges.” Source taxation is important for developing countries because what they lose through base erosion is not made up by greater residence taxation. There is no agreement yet on EBITDA in the OECD. Some progress has been made on the information side through agreement on country-by-country reporting, but more progress is necessary on adequate access to information and effective dispute resolution.

Retirement Savings

Models for the taxation of retirement savings are:

  1. TTE: contribution taxed, fund income taxed, pay-outs exempt;
  2. EET: contributions exempt, fund income exempt, and pay-outs taxed; and
  3. EEE: contribution, fund income and pay-outs all exempt.

Variations are also possible. EET is the most commonly used model in OECD and EU countries. Developing countries should be aware that tax concessions for retirement savings can be very costly to the budget, as evidenced by the Australian experience. The EET system is recommended for employer-provided retirement schemes, but a ceiling should be imposed on tax deductible contributions; benefits should be transferable to another employer (the portability issue), and the tax treatment of pension income should be dealt with in double taxation agreements.

South Africa reformed the tax treatment of retirement savings in 2015. Contribution requirements have been simplified, while employers’ contributions are now considered a fringe benefit for the employee. The current system can be characterized as an EET model; it could be improved by regular inflation increases on fixed amounts of tax and a capital gains tax exemption for the disposal of discretionary assets if proceeds are put into a recognized retirement income vehicle. The government should also resist re-introducing prescribed assets investments for retirement funds or any taxes on the fund build-up. The risk of not having enough capital to retire or staying retired should not be ignored. Overall, South Africa’s system for retirement savings meets most international criteria for a good system.

In South Africa, only half of the country’s formally employed workers belong to an employer-sponsored retirement fund. Of greater concern is that 86% of the formally employed earn less than the current income tax threshold, which means they receive no tax benefit for participating in retirement savings vehicles. This indicates that a broader set of tools to address inadequate savings should be made available, such as incentives, mandates and nudges.

Taxation of Mining, Oil and Gas

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Many countries are reviewing their fiscal regimes for natural resources, particularly through the IMF’s technical assistance programs. The three main fiscal regimes (sometimes blended) are (1) contractual production sharing contracts; (2) tax and royalty instruments; and (3) state participation. The recommended regimes for the mining and petroleum sectors consist of a flat rate royalty; a ring-fenced corporation tax for all sectors without immediate expensing of investments; and some form of cash flow tax to capture above-normal returns. Evaluation is essential, tax administration critical, and transparency in resource management crucial. Details of good natural resource policies can be found in various IMF handbooks (see South African Extractive Industry Fiscal Regimes and United Kingdom Fiscal Transparency Evaluation).

To create the greatest overall value from a country’s resources, the regime should be equitable to governments and investors – aligning their mutual interests through the life of projects. The tax regime should ensure that the government receives an appropriate share of the benefit realized from its resources, but this should not distort investment decisions, enable long-term planning, allow for changing economic conditions, be competitive, and administratively simple with an effective dispute resolution mechanism.

Taxing Consumption

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South Africa has one of the most modern VATs in the world, with a broad base and a single rate (mainly based on the New Zealand example). Exceptionally, 19 basic food items and illuminating paraffin are zero-rated, while exemptions are limited to non-fee related financial services, education, residential rental accommodation, and public transport. South Africa’s 2007 study on the VAT treatment of merit goods concluded that efficiency and simplicity considerations should dominate VAT design. Equity objectives should be pursued through the income tax and the social benefit system. South Africa could consider a marginally higher VAT rate, but this should not be considered if more zero rating is seen as a trade-off.

In reforming African VAT systems, much can be learned from European experience:

  1. Limit the number of exemptions which distort input choices and penalize outsourcing;
  2. Beware of rate differentiation, which tends to be of greater benefit to the rich than the poor;
  3. Provide for a high threshold, remembering that 90% of the VAT is collected from 10% of all taxpayers;
  4. Coordinate VATs in regional economic communities, but continue to base it on the destination principle; and
  5. Target enforcement controls on fraud-prone taxpayers.

The overall lesson is that African countries should not do what Europeans did, but examine VATs in countries, such as New Zealand and South Africa, which have broad-based VATs (with very few exemptions), impose a single rate, and have a sizable threshold.

SADC Excise Tax Guidelines

Excise tax cooperation in the Southern African Development Community (SADC) is a challenge as member state systems vary widely, including French and Portuguese applications. In 2010, after carrying out a study into the illicit trade in alcohol and tobacco products, the tax subcommittee agreed to drop the development of a model excise tax law in favor of guidelines as a regional framework to implement the SADC Protocol on Finance and Investment (FIP). The Guidelines are not binding on the member states but are a good benchmark to facilitate cooperation and coordination. A list of standardized excise tax rates for tobacco, alcohol and fuel will be published, while common definitions and classifications will be developed for exemptions, rebates and reliefs. Excise taxes are viewed as appropriate externality-correcting instruments. Specific rates are favored and excise tax administrations should be harmonized.

Marginal Effective Tax Rates (METRs)

The marginal effective tax rate (METR) is a measure of the tax burden on incremental investments for a profit maximizing firm and determines the scale of a project: a high METR means less investment. By contrast, the average effective tax rate (AETR) measures the average tax burden on overall investment and is an important determinant for the location of foreign direct investment. METRs should take account of deprecation, credits and allowances, tax incentives, other taxes, as well as the statutory tax rate. METRs can be calculated for different types of capital, in different sectors, in different countries; differences between METRs are then an indication of the distortions of the tax system. While METRs are a valuable summary measure of the tax system, they capture only formal tax rules, not actual practice.

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VAT Compliance Gap

The scope for VAT revenue mobilization (without raising rates) can be defined as the sum of the policy gap (exemptions and lower-than-standard rates) and the compliance gap (the difference between actual collections and collections with full compliance under existing rules and regulations). Both are captured in the VAT’s collection efficiency (C-efficiency) ratio, calculated as actual VAT revenue over potential revenue. Identifying the gaps helps indicate necessary policy and administrative actions. Following the IMF’s work on South Africa’s VAT gap, other countries should be encouraged to undertake similar analyses of their VAT’s C-efficiency.

Taxation of E-commerce

Under OECD rules, source countries have the right to tax business profits provided there is a sufficient economic presence (permanent establishment or PE) in the jurisdiction to support the taxing right. PE can be avoided by digital businesses which can derive substantial profits from dealing with customers through a “digital” presence (website) rather than a physical presence. Under BEPS, rules have been developed to attribute profits to a significant (digital) presence but they do not go to the core of the digital business model developed to avoid the PE-status. Taking exception, Australia and the UK have moved forward independently to deal with arrangements to avoid a PE. Similar problems are encountered under VAT.

Carbon Taxation

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Climate change is a major negative externality confronting humanity, but its consequences are not always visible and its effects cut across borders and regions. Accordingly, the urgency to act is not always a priority for many countries. Fortunately, the 2015 Paris Agreement (signed by nearly all countries around the world) is a significant step forward, but dealing with the consequences of climate change requires a multi-disciplinary approach. Effective coordination and cooperation between government departments within a country is important, as is consultation with all stakeholders. The intensive and often destructive lobby efforts of vested interest groups should not be underestimated. Much is to be said for using the price mechanism rather than a regulatory or command-and-control approach to curtail harmful emissions. This implies the implementation of well-designed ecotaxes and/or emissions trading schemes – a country-specific and political decision. In the end, some form of combination of instruments seems feasible.