Exploring Options: Drafting Domestic Minimum Top-Up Tax Legislation in Africa

October 10, 20230

The African Tax Administration Forum (ATAF) has taken a significant step in addressing tax challenges by releasing a comprehensive document titled “Suggested Approaches to Drafting Domestic Minimum Top-Up Tax Legislation.” This document offers three alternative models for countries to consider, marking a pivotal moment in the search for equitable taxation. This release builds upon an earlier version from January 2023. 


The ATAF’s suggested approaches represent a collaborative effort between the ATAF Secretariat’s International Tax team and the ATAF Cross Border Taxation Technical Committee (CBT). These approaches provide countries with distinct options tailored to their legislative context: 


Approach 1: Streamlined and Efficient 

This approach involves enacting a Domestic Minimum Top-Up Tax (DMTT) through primary legislation, accompanied by supplementary regulations issued by the relevant Minister. The regulations contain calculation provisions and definitions closely aligned with the Global Anti-Base Erosion (GloBE) rules. This approach not only simplifies primary legislation but also streamlines the parliamentary process. 


Approach 2: Maximizing Consistency 

Described as the “reference model,” this approach incorporates the GloBE rules by reference, with necessary modifications to adapt them to the DMTT context. It ensures maximum consistency with the GloBE rules while maintaining concise local country regulations. 


Approach 3: Comprehensive Integration 

This approach presents a comprehensive DMTT version based on GloBE rules, with all rules included in primary legislation enacted through a parliamentary process, providing parliament with maximum oversight. 


The document includes detailed explanatory notes for each approach, offering insights into the rationale behind the draft provisions. It’s essential to note that in December 2021, the Inclusive Framework, a coalition of countries and jurisdictions addressing tax challenges from digitalization, published the GloBE Model Rules, followed by accompanying commentary in March 2022. 


The GloBE rules consist of two key components: 


  1. Income Inclusion Rule (IIR): Imposing top-up tax on a parent entity concerning the low-taxed income of a member of a multinational enterprise. 
  2. Undertaxed Profits Rule (UTPR): Denying deductions or requiring adjustments when low-taxed income of a constituent entity escapes taxation under the IIR. 


The priority generally favors residence countries (often developed) over source countries (usually developing). However, these rules enable jurisdictions to collect top-up tax, irrespective of Inclusive Framework membership. 


While most African countries may not collect top-up tax under an IIR due to a limited presence of Ultimate Parent Entities (UPEs), ATAF sees a crucial opportunity through the introduction of a “Qualified Domestic Minimum Top-Up Tax (QDMTT).” This offers source countries the ability to collect revenue from low-tax outcomes, especially those driven by tax incentives within their borders. 


The GloBE rules also provide relief to African countries by alleviating the pressure to grant inefficient and often wasteful tax incentives. Effective tax rates below 15% lead to residence countries collecting the remaining tax, altering the landscape of tax competition. 


Enacting a Domestic Minimum Top-Up Tax (DMTT) in Africa requires careful consideration of its alignment with the IIR, as misalignment may impact foreign direct investment. Consultation with relevant government agencies, transparent legislative processes, and engagement with stakeholders are essential steps. 


ATAF has developed the “Suggested Approaches to Drafting Domestic Minimum Top-up Tax Legislation” to assist African countries in this endeavor. These approaches are based on international standards and best practices customized to address specific African challenges. They offer flexibility, allowing countries to select the most suitable approach based on their legislative context. 


The document also outlines considerations for the QDMTT and the need to meet the “QDMTT safe harbor” criteria, promoting ease of doing business in the African countries. 


As African countries navigate the complexities of enacting a DMTT, ATAF stands ready to provide support, ensuring equitable and effective taxation in the region. The path to a fairer tax landscape is within reach, and these suggested approaches pave the way for meaningful change. 


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