In February 2022, the South Centre—an intergovernmental organization of developing countries comprising 54 members—and the Coalition for Dialogue on Africa (CoDA) undertook a study to help Member States make informed decisions on whether to accede to the Two Pillar Solution developed by the Inclusive Framework on Base Erosion and Profit Shifting (BEPS) or to pursue alternative policy measures. Those alternative policies include taxation of income from automated digital services under the framework of Article 12B of the United Nations Model Double Taxation Convention (UN Model Treaty). In its current shape, Pillar One is focused on allocation of residual profits earned by large and profitable MNEs to end user or “market” jurisdictions by means of the “Amount A” method. Article 12B retains its focus on taxing only automated digital services.

To inform the Member States’ decision-making process, the South Centre and CoDA disseminated a call for a study comparing Member States’ estimated tax revenue gains or losses from the Amount A and Article 12B regimes (on both gross and net basis). 

The South Centre selected NERA Director Dr. Vladimir Starkov and Consultant Alexis Jin to conduct an extensive analysis as part of the study. The authors estimated the tax revenues to be gained (or lost) by the South Centre and African Union Member States under the Amount A and Article 12B regimes. Their analysis relied on sources available to private sector researchers. Our economists constructed two scenarios for the Amount A regime with minimum sales thresholds of 20 billion and 10 billion euros for MNEs in scope. They developed two additional scenarios to model the effects of the Article 12B gross method using tax rates of 3% and 4%. They also calculated the results under the Article 12B net method. The results of these scenarios were used to compare the two regimes’ tax benefits.

Dr. Starkov and Ms. Jin’s analysis suggests that a “narrow” design of the Article 12B method combining consideration of only “pure” automated digital services “ADS” businesses, an unrestricted application of the net method by taxpayers, and a relatively low tax rate under the gross method (such as 3%) may not benefit the South Centre and African Union Member States enough to prefer the Article 12B regime to Amount A (or Pillar One broadly). This conclusion may change for most Member States if Article 12B has a broader scope covering companies that engage in both “pure” and hybrid ADS functions, a higher tax rate under the gross method, and a restricted use of the net method. Notably, whether a country hosts headquarters of MNEs that may be in scope of Amount A or Article 12B taxation also affects conclusions. Finally, the authors suggest the choice between the two regimes will depend on whether relief from double taxation will be granted to domestic MNEs under each of the alternative regimes.

For more details, please visit the South Centre website here.