Is a Bad Deal Better than no Deal?: A Perspective from Africa on the G7’s Agreement to Restructure International Corporate Taxation

| November 2021
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G7 Finance Ministers’ Meeting at Lancaster House in London on June 4-5, 2021. Photo credit: HM Treasury via Flickr.

On June 5, 2021, the G7 finance ministers reached a landmark agreement to restructure the global system of corporate taxation, the first major reform of the system in nearly a century. While this has been widely hailed as a breakthrough toward a more equitable way of taxing the digital economy and a triumph of multilateralism in the first year of the post-Trump era, the truth is much more complicated than it seems, particularly for countries in Africa and the Global South. For developing countries, the G7 proposal is only the first step on the long road to tax justice and addressing the structural inequalities in the international tax system.

In Africa, the major international tax problem has never been the digital economy. Rather, Africa’s revenue authorities are hampered by the use of aggressive tax avoidance strategies by multinational corporations (MNCs) to misreport profits and losses through tax havens, masking the true scale of corporate activity in their countries and hampering the ability of states to tax the exploitation of their natural resources. The goal of the G7’s proposal, on the other hand, is to ensure that G7 governments get the share of the tax pie out of which they think they are being cheated by the Amazons and Facebooks of the world; the goal is not to distribute tax revenue to the areas in the Global South where production or extraction takes place. Thus, the G7’s one-size-fits-all approach to reforming the international tax system runs the risk of protecting these wealthy countries’ interests at the expense of remedying the structural inequalities built into the system that hinder revenue collection and poverty reduction in the Global South. The question facing Africa is this: Is a bad tax deal better than no deal at all?


The International Tax System at a Century


Part of the reason that countries are feeling the pressure to tinker with the machinery of the international tax system is that its aging foundations are creaking. Established in the years immediately following World War I, the current body of international tax rules is designed to avoid the problem of double taxation, where more than one country asserts jurisdiction to tax the same item of income. Historically, most countries exercise jurisdiction to tax on two separate bases: 1) the source of the income generated and 2) the location of the residence of the recipient of the item of income. For a MNC this presents a conundrum since its country of residence, where it is incorporated or has its principal place of business, is often different from the country or countries where it is generating income. If both the source and residence jurisdictions exercise their authority to tax, then the same income is taxed twice, resulting in much higher costs of doing business internationally.

The solution, which was agreed to by the same countries that now comprise the G7, was a compromise on how to apportion income for tax purposes between source countries and residence countries. This framework forms part of a set of draft model treaties that first appeared in 1927. To this day, bilateral tax treaties negotiated between states are the mechanism by which double taxation is avoided, and the model treaties in use today are the direct heirs of the 1927 versions.

For the better part of a century, this compromise worked. However, this system is based on a model of international commerce where MNCs are relatively immobile, and they derive value and generate income from the transfer of tangible goods and services. In today’s digital economy this is no longer the case, and the distinction between source and residence countries is incredibly blurred. The result of this ambiguity, from the perspective of revenue authorities, is that some of the biggest players in the global digital economy are able to avoid paying tax in any location.


Tax Avoidance vs. Tax Evasion


The fact that in the digital economy business can take place anywhere is not the only reason that wealthier countries are feeling a pinch in their tax coffers. MNCs have become extraordinarily savvy at tax avoidance schemes, which should be distinguished from outright tax evasion. Whereas in the popular imagination these are interchangeable terms for strategic tax planning strategies—“designed solely to minimize tax obligations, the legality of which is questionable”—the fact is that they are distinct.1 “Tax evasion” can be defined as intentionally illegal behaviors that are in direct violation of tax laws and designed to escape payment of tax.2 “Tax avoidance” strategies, on the other hand, can be defined as those “illegitimate (but not necessarily illegal) behaviors aimed at reducing tax liability.” While tax avoidance strategies do not violate the letter of the law, they certainly violate its spirit.3

While MNCs are scrupulous in their adherence to tax laws—a testament to their veritable army of lawyers, accountants, and bankers—they stretch those laws to the limit: every ambiguity and gray area is exploited for maximum benefit. Aggressive accounting practices, coupled with the use of tax havens and secrecy jurisdictions, result in a situation where the “world’s biggest multinational conglomerates manage to earn trillions of dollars around the world, yet many seem to pay virtually no tax anywhere.”4 To add insult to injury, MNCs often defend such behavior on the grounds that they have a fiduciary duty to their shareholders to aggressively avoid tax and that they are simply keeping up with their competitors in doing so.5


Reforming the System


Neither aggressive tax avoidance by MNCs nor the problems of taxing the digital economy are new. Both contribute to something called base erosion and profit shifting (BEPS), which is the more technical way of referring to “tax-avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations.”6 The “beating heart of BEPS planning—the sine qua non of the transactions that triggered the universal interest in BEPS”—is aggressive transfer pricing.7 A transfer price is the price at which divisions of a company transact with each other, that is, the price for labor, goods, and services across a vertically integrated enterprise. Corporations exploit transfer pricing to create tax benefits by reporting profits to entities in tax havens that do not correspond with actual activities in those entities.8 When affiliated companies buy or sell commodities, services, or assets internally, a transfer price must be charged for accounting purposes. In principle, transfer pricing is supposed to be measured on the basis of an arms-length transaction: the goods and services transferred internally must be exchanged at the same price as would be charged to an unrelated firm. However, MNCs manipulate transfer pricing on goods and services transferred internally. In high tax jurisdictions either they report artificially low or inflated prices to account for minimal profits or they report excessive losses. The lion’s share of profit is reported in tax havens—where none of the tangible taxable activity took place. For example, the bulk of the profits from extractive mining activities in the Democratic Republic of Congo or from cocoa production in the Ivory Coast are manipulated through transfer pricing to be reported in a tax haven such as Jersey, Luxembourg, or the Cayman Islands. As of 2017, the Organisation for Economic Co-operation and Development (OECD) made a conservative estimate that BEPS results in annual revenue losses of between $100 and $240 billion, with a disproportionate impact in developing countries of BEPS as a proportion of their total tax revenue.9 Other estimates put the figure in the range of $500 to $650 billion annually.10 While losses in OECD countries range from 2 to 3 percent of total tax revenue, in developing countries the ratio increases to 6 to 15 percent of tax revenue.11  This results in a tax justice issue since tax authorities in the developing world generally lack the administrative resources to trace the economic data and combat aggressive corporate BEPS schemes.12

Although the effects of BEPS are magnified in the developing world, it is not only a problem for poorer countries. Beginning in 2015, the Organisation for Economic Co-operation and Development (OECD) and the G20 agreed upon the “BEPS Project,” with a 15-point Action Plan to tackle tax avoidance. The next year, the same group established the OECD/G20 Inclusive Framework whereby interested countries would be able to collaborate on the implementation of the fifteen action points. While 139 countries and jurisdictions are participating in the Inclusive Framework, the key players remain the G7 countries. In fact, progress on the Inclusive Framework was hopelessly stalled for years until the United States, under the Biden Administration, reengaged the process earlier this year.13 The current G7 deal is the fruit of the six-year-old Inclusive Framework process; its novelty is that it finally has U.S. support.


What is in the Deal?


The OECD/G20 Inclusive Framework is premised on a Two-Pillar approach to BEPS. Pillar One looks at the problem presented by the digital economy, specifically how to determine the allocation of taxing rights or “nexus and profit allocation.” Pillar Two envisions a form of global corporate minimum tax in order to ensure that MNCs are paying some minimal level of tax on global profits. The G7 plan elaborates on both Pillars.

As to Pillar One, the G7 plan establishes a blueprint for the largest and most profitable MNCs in the world to pay more tax in the countries where they do business, breaking away from the strict source and residence paradigms of the last century. This is particularly attractive to European countries that have sought a greater piece of the tax pie from U.S. tech giants.

Pillar Two is the much-touted 15 percent global minimum tax to be paid by MNCs in each country where they operate. This portion of the deal is particularly attractive to the United States, which would likely see a substantial increase in corporate tax revenue.


What Africa Needs and What is Missing from the G7 Proposal


It is unmistakable that this proposal represents a major step forward, at least for the G7. The century-old international tax system, creaking under the weight of new technologies and new ways of doing business across borders, gets a facelift to meet the challenges posed by the digital economy. However, the digital economy is not the greatest tax challenge that Africa or the Global South face. As discussed above, hands down, that problem is aggressive transfer pricing resulting in BEPS. In developing economies, BEPS systematically deprives countries of tax revenues that could be used for desperately needed infrastructure and social services. The effect of this inability to collect revenue from MNCs operating within their borders means that states, particularly those in sub-Saharan Africa, are forced to borrow to cover the fiscal deficit, deepening the debt crisis already affecting many of these states. Over the last year, COVID-19 has cast into sharp relief the net effect of BEPS on African governments, placing them in precarious fiscal positions and crippling their efforts to mitigate the storm wrought by the pandemic.

Although taxing the digital economy is an issue for African states, it is far from the primary international tax problem. Addressing the imbalances in how the digital economy is taxed, and increasing revenues in American and European tax coffers, will not remedy the gross structural imbalances in the global tax system that hamper the ability of African states to collect tax revenue. Nor, on its face, will a global minimum tax by itself address these imbalances. Greater international cooperation on transfer pricing rules, as well as information sharing between revenue authorities in the Global North and South, is called for but wholly absent from the current G7 deal.

Part of this stems, no doubt, from the fact that African states are absent from these discussions. It is not insignificant that these negotiations are taking place under the auspices of the OECD, as the interests of developing countries are not well-represented there. No country in Africa is a member of the OECD, nor are China or India. Nevertheless, the Committee on Fiscal Affairs, the main OECD body dealing with international tax reform, functions effectively as an informal world tax organization, but its membership is limited to OECD members. To the extent that the interests of the Global South are represented at all in these deliberations, it is through direct lobbying of members and engagement of civil society in those states.

The question of representation for developing countries in global tax negotiations is not new, nor is it a point that the G7 and OECD have felt any pressure to concede. At the UN’s Financing for Development (FfD) Conference in Addis Ababa in 2015, which ultimately resulted in the seventeen Sustainable Development Goals (SDGs), wealthy countries stymied a call for establishing a UN international tax body, ordering that the proposal be withdrawn from the FfD final document before they would lend their support. Placing international tax disputes and policy before the UN, as opposed to the OECD, would represent not only a tremendous loss of control by the wealthiest countries, but would open up such policymaking deliberations to a level of transparency that does not currently exist.

The lack of transparency in international tax policy is manifest in the way that the G7’s proposal was developed, unveiled, and how it is being presented to states outside the G7 on a take-it-or-leave-it basis. This is in stark contrast to other negotiations that take place under UN auspices, for example the process that resulted in the Arms Trade Treaty or current negotiations on the Binding Treaty on Business and Human Rights. For these treaties draft versions of the proposed instrument are negotiated and circulated among states and civil society groups in an open, transparent manner that allows for input from stakeholders around the world. That level of transparency is missing from international tax negotiations and the wealthiest countries of the world are loath to provide it, hence their open resistance to the call by states in the Global South for a UN tax body.

Another problematic aspect of the G7 deal, which is often overlooked by all except lawyers, is in regard to dispute resolution. The questions of what happens and who decides when there are disputes over terms or interpretation of an agreement are not trivial. In this case, the G7 proposal calls for the establishment of a binding arbitration process for dispute resolution, which has been a priority of a handful of OECD members for some time.14 Although the details of how this process would work also need to be hammered out, the question of representation for the Global South again comes into play as arbitration is designed to circumvent national court systems. Instead of having tax disputes adjudicated by the courts of a given country under domestic law and procedure, that process is moved to a private for-profit venue. Given the lack of Global South representation at the OECD, the rules drafted and the governing law proposed for this arbitration process will no doubt favor the interests of those controlling the process, in this case the wealthiest countries in the world.

Accession to the framework necessarily implies surrendering a role for your court system to adjudicate disputes over this aspect of international tax policy. This part of the deal may not be getting that much press attention, but that is certainly no indication that the issue is not important from a social justice perspective.


Next Steps?


As expected, the G20 heads of state gave their blessing to the G7 tax agreement at their meeting in Rome at the end of October, following the news released by the OECD the week prior that 136 countries had already voiced their support. However, that news was quickly shifted off the front pages as those same G20 leaders immediately shuttled off to Glasgow for the COP26 climate conference. Those leaders will now face difficulties in selling the package back home. President Biden, in particular, will be hard-pressed to obtain approval by the U.S. Senate on the cusp of an election year.

For African states, however, a serious question is whether a bad tax deal is better than no deal. Two major holdouts who have not yet voiced their assent to the Inclusive Framework are Kenya and Nigeria. One of the points that both countries object to is the deal’s call for binding arbitration as the dispute resolution mechanism, arguing that this is an infringement of their sovereignty on tax issues.15 Given their respective economic and political importance on the continent, both countries have the opportunity to continue pressing for African tax interests in light of G20 approval of the framework.

At the end of the day, all of this may fail, especially if the deal fails to get through the U.S. Senate. However, the proverbial genie is out of the bottle. For the first time in a century, the major economic powers are tinkering with the mechanics of the international tax system. To ensure that the resulting structure is equitable, it is critical that states in the Global South, particularly those in sub-Saharan Africa, have a seat at the table. To date, the wealthiest countries in the world have shown no interest in providing one.

—Fernando Saldivar

Fernando C. Saldivar, S.J. is the Global Policy and Advocacy Officer for the Jesuit Justice and Ecology Network Africa (JENA) in Nairobi, Kenya. He is a Visiting Scholar in the Department of Philosophy at Loyola University Chicago. Prior to entering the USA West Province of the Society of Jesus in 2016, he was in private practice as an attorney and has been a member of the State Bar of California since 2005.
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  1. Reuven Avi-Yonah, Omri Marian, and Nicola Sartori, Global Perspectives on Income Taxation Law (Oxford: Oxford University Press, 2011), p. 101.
  2. Ibid.
  3. Ibid.
  4. Allison Christians, “Conceptualizing a New Institutional Framework for International Taxation: Avoidance, Evasion, and Taxpayer Morality,” Washington University Journal of Law & Policy 44 (2014), p. 46.
  5. Steven A. Bank, “When Did Tax Avoidance Become Respectable?” Tax Law Review 71 (Fall 2017), pp. 130-32.
  6. Jane Gravelle, “Base Erosion and Profit Sharing (BEPS): OECD Tax Proposals,” U.S. Library of Congress, Congressional Research Service, R44900 (2017), p. 1,
  7. Yariv Brauner, “What the BEPS?,” Florida Tax Review 16 (2014), p. 95.
  8. Gregory Pun, “Base Erosion and Profit Shifting: How Corporations Use Transfer Pricing to Avoid Taxation,” Boston College International & Comparative Law Review 40 (2017), p. 288.
  9. OECD, Background Brief: Inclusive Framework on BEPS, (Paris: Jan. 2017): 9,
  10. Alex Cobham and Petr Janský, “Global Distribution of Revenue Loss from Corporate Tax Avoidance: Re-Estimation and Country Results,” Journal of International Development 30 (2018), p. 207.
  11. Ibid.
  12. Diane Ring, “Developing Countries in an Age of Transparency and Disclosure,” BYU Law Review (2016), p. 1796.
  13. Joseph Stiglitz, “G7 leaders can strike a blow on global corporate tax,” Financial Times, June 1, 2021,
  14. Allison Christians, “BEPS and the New International Tax Order,” Brigham Young University Law Review 2016, no. 6 (2016): pp. 1604-5.
  15. David Ehl, “Why African nations doubt OECD tax plan,” Deutsche Welle, October 29, 2021,


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