In this episode of “GILTI Conscience,” our Skadden hosts continue their conversation with guests Lolade Ososami and Zach Pouga on the many tax intricacies throughout the African continent.
In the second of this two-part GILTI Conscience series, our Skadden tax attorneys continue their conversation with Lolade Ososami, a partner and head of the tax team at Udo Udoma & Belo-Osagie, and Zach Pouga, a partner in the International Tax Group at Ernst & Young, on the myriad tax issues faced by Africa-based companies, companies with a presence in Africa and those doing business on the continent.
Among other topics, the converstaion touches on treaty networks, the role of taxation in general, implementation of tax laws in the various countries and the potential for a unified approach to tax across the African Union.
Tune in to this second part of the discussion to hear our hosts and their guests discuss a wide array of topics on the rapidly evolving tax issues throughout the continent.
- Need for a strong treaty network. While some African countries like Nigeria have negotiated treaties with more developed countries, often in Europe or Asia, the treaty network on the content as a whole has presented numerous weaknesses.
- Countries need to do what works for them. Implementing new tax rules does not have to be an all or nothing consideration. Countries should educate themselves on the rules and then adapt them to their context.
- Potential for collective action. As it stands, the African Union does not have a tax committee. According to Lolade, it is becoming increasingly obvious that the African Union not only needs to put tax on its agenda, but that Africa, as a whole, needs to come together and form a position.
This is GILTI Conscience, casual discussions on transfer pricing, tax treaties, and related topics. A podcast from Skadden that invites thought leaders and industry experts to discuss pressing transfer pricing issues, international tax reform efforts, and tax administration trends. We also dig into the innovative approaches companies are using to navigate the international tax environment and address the obligation everyone loves to hate. Now your hosts, Skadden partners, David Farhat and Nate Carden.
David Farhat (00:35):
How's it going, all? This is David Farhat. Welcome back to International Tax in Africa and NetLook. This is a continuation of the conversation you heard in part one, so welcome to part two.
Mayte Quinn Salazar (00:50):
One of the things that I think we're all touching on is the role of taxation in general, whether it is something that can incentivize business or whether it's the right of a country to tax has to come from the ability to give its taxpayers something in return, and how you then have to put in money into the actual taxation to collect the taxation. It's just this really beautiful... I don't know, maybe not beautiful. I'm a tax nerd, I guess.
David Farhat (01:21):
But listen, listen. Embrace it. Embrace it.
Mayte Quinn Salazar (01:23):
David Farhat (01:23):
You are already on the other side.
Mayte Quinn Salazar (01:24):
I know, I know.
David Farhat (01:24):
Nate Carden (01:26):
What is going on here?
Mayte Quinn Salazar (01:27):
I know. I'm sorry. I'm sorry.
Zach Pouga (01:29):
We haven't heard tax and beautiful in the same sentence .
Mayte Quinn Salazar (01:33):
I just think it's really interesting, because the subject is really touching on the first principles of ELO, the role of taxation generally and how it affects different people, different companies across the spectrum, whether you're in the developing world or not, and then as a company, whether you're starting out or not. Yeah, this is fascinating.
David Farhat (01:58):
I agree with that, because this conversation we're having now in the context of Africa, it's the same conversation we've been having on this podcast from day one. It evolves a little bit because the issues in each jurisdiction and with each company will be different, but it's the same conversation. It's are we at a place, especially looking at all the OECD projects, are we at a place where income tax is doing what it's supposed to do? You can look at it from a US perspective, a European perspective, an Africa perspective, an Asia perspective. And the challenges will be a little different, but I think that's the fundamental question.
And then are the Pillars properly solving that problem with the income tax? I think you end up in this place where you have this bit of a circular debate, and I think that's what you're catching on. And as a tax nerd, it's beautiful to talk about, but they're real consequences to governments, to taxpayers, to multinationals and how you deal with it. One of the solutions I've always found and we've talked about is the treaty network and the map process and competent authority. We're all saying, "Okay, we know what we have with regards to the rules. We know what we have with regards to each domestic rules. But tax authority, can we sit around a table and get to some kind of rational response to this?"
So taking it in that direction, I know Lolade and Zach, you mentioned treaty networks a little bit. What's that network of treaty like on the continent, either within the continent and outside the continent, and what's the level of expertise when it comes to competent authority matters? Because I think you can deal with a wide range of problems in that forum. Are the resources there, are they sophisticated enough, and do you have the treaty network?
Lolade Ososami (03:46):
Treaty network from a Nigerian perspective, to date, we have 16 treaties that are enforced. I've been told there are about 20 that have been negotiated. I don't have any idea which countries those have been negotiated with, but that's a recent development. A lot of the treaties that we have that are enforced are treaties that have been negotiated more by the developed countries, so a lot of them tilt more towards the OECD model. In terms of how these treaties have worked, they've worked fairly well. We hardly have treaty-related controversy.
And recently, of course with the awareness that BEPS has created, we now have a map procedure in place. We've always had map provisions in our treaty, but I'm not aware of how many times that has been triggered. So you find that in interacting with the tax authorities, these are new to them, but we have these things in place. So I guess what BEPS has done, really, is just to put machinery in place, and how tested these machinery have been is a different scenario altogether. But I think right now, what they're grappling with the most is how to implement these measures in a way that it begins to generate more revenue for the country, and what I see generally is that there's a mismatch in expectation and reality.
Zach was talking about Pillar Two and I couldn't even relate to that conversation much, because my country has refused to sign onto Pillar One. And the rule is if you don't sign up to Pillar One, then you can't implement Pillar Two. So if you're going to implement Pillar Two, which offers the minimum tax which looks attractive from afar, but when you take a closer look, by the time you strip all the globe rules, you then begin to wonder whether this is really helpful. Right now, Nigeria has an alternative measure which is the Significant Economic Presence rule, which again, actually originated from the OECD.
Before the discussions and the studies evolved into the Pillar One and Pillar Two proposals, you had certain initiatives that the OECD had solutions they had proffered, and Nigeria chose the Significant Economic Presence concept. Seemed fairly straightforward and we've been implementing, and I don't even see taxpayers complain much about it, because when you look at it really, it's just like a turnover tax of sorts and then there's a threshold to it as well. So it's fairly simple and straightforward as compared to the pillar one rules which are so complex, and at the end of the day-
Zach Pouga (06:47):
I was going to jump in there, Lolade. I think the Significant Economic Presence, from a private sector perspective, has been really difficult to deal with just because of the subjectivity of it. I understand from a government perspective, it's probably a good cover, but I know a lot of companies struggle with it, specifically in Nigeria because it's been very subjectively applied, it sounds like. I can speak even from my own experience, having seen two clients where my client go to audit in Nigeria, to really not have a consistent read on that economic ...has been-
David Farhat (07:21):
But Zach, to be fair, that can be a critique of transfer pricing as a whole, no?
Zach Pouga (07:26):
Agree, agree, agree, agree. But yeah, I agree with that. I agree with that. And then going back on the treaty network, I think that's one of the biggest problem. The treaty network in Africa is very, very weak. Nigeria is probably one of the perfect pictures you will see on the continent in terms of the wide, I'll call that wide, because it's actually quite wide.
If you go for most of these countries, the treaty network is like two, four, five treaties, and that makes it extremely difficult when you're going back into the pillar tools and the way they have designed even what used to be famous with the developing countries. The subject to tax, I'm coming back to it, is that you will have to go to your treaty partners and renegotiate your treaties, but when you go to most of these countries, you have two treaties, so it's not going to make any difference whatsoever. The weakness of the treaty network is extremely worrying.
Nate Carden (08:19):
Let me play devil's advocate for a minute here and put myself in the shoes of one of these countries. I look at this, I see rules that say, "Hey, I have to sign onto Pillar One in order to get Pillar Two." But that doesn't seem to be the position that for example, the United States is taking. We've made no moves toward Pillar One and we're talking about implementing changes to GILTI that would make it Pillar Two compliant. I look at a treaty network and I see countries like the United States with David's friend, the BEAT, or the United Kingdom or Australia with diverted profits tax or other countries with digital services taxes, basically doing workarounds for their treaties.
So if I'm sitting as a government official in one of these countries, why don't I think treaty network, that's a chump move? I'll just have a gross basis tax in my country for people that are doing business here. It's simple. It's easy to collect. I don't want to do the Pillar Two math. I certainly don't want to do the Pillar One math, and dealing with these treaty partners requires me to go through a negotiation process only to have them implement a new tax that they then turn around and say is not part of the treaty. Why's that wrong?
Lolade Ososami (09:37):
I think that you can't really separate a measure of nationalism when it comes to taxation, honestly. Because at the end of the day, I think countries should be free to do what works for them. For instance, take the DSD. For instance, countries who have adopted that have simply just created that as a different kind of tax. It's not an income tax. It's just a tax. So if you're going to do business in that jurisdiction, you know it's there, so you then have to make the commercial decision as to whether or not this is a tax you are willing to pay.
And I think for countries like Nigeria, that might well be something that could happen in the future where you find that, okay, they just decide to create a different kind of tax that's not really an income tax. It's not really a consumption tax. And I don't know how they're going to create it, but create a tax that helps them still get that revenue that they're trying to get without really going through all the rigmaroling of all these Pillar One and Pillar Two. Because ultimately, I'm trying to attract business into my jurisdiction and I'm trying to get revenue to develop the country to move it forward.
I think it's going to get to a point where countries are going to have to be as audacious as the United States and say, "We're going to do what works for us and so be it." I think this whole journey will end up there. I know that it's a journey that's trying to achieve cohesion, but I think ultimately, things might get to a point where countries say, "You know what? This isn't working. Let's all go back and do what works for us."
Zach Pouga (11:17):
Yeah, yeah. I can see that, too. The caution I always get or the caution I try to give is that you are not the United States. It is great for the US to be doing that, but you not the US. The US can probably afford to do that. I'm not sure that you, and I'm going to single out Cameroon or Rwanda here, I'm not sure that you can afford to do that. The thing I usually try to push is you don't have to go against the rules necessarily, or you don't have to be on the side. Sometimes being in the rules and understanding them and applying them to your context can actually be more beneficial than being against the rules or being on the sidelines.
Some of this in the Pillar One, Pillar Two, for example, if the African countries could have used their bargaining power correctly, they could have gotten something really good. Some of them have been able to leverage the country-by-country reporting. We are right now running some of the simulation of the countries that will be affected by Pillar Two based on country-by-country reporting data, and we use that to tell them, "These are the companies that could be affected. As a country, this is who are your target sample, and how are you going to deal with that target sample?" You don't necessarily, I don't feel like you have to be on the sidelines. I feel like you have to be reading the rules, but make sure you invest enough to understand them so you can adapt them to your context, and I feel like sometimes that gives you the better outcome.
David Farhat (12:44):
But I think you guys are saying if not the same thing, very similar things. I don't think you necessarily have to be in the sidelines. I think you have to look at the rules from your country's perspective. I think part of the problem with the OECD in these large projects is too many, especially in the developing world, and I don't think this is just an Africa thing, look at it through the eyes of whether they're former colonial masters or the developed world and say, "Okay, how does this work?" as opposed to saying, "Okay, what does this work for me, and how should that implementation be for my jurisdiction?"
I don't think the delta between, "I'm going to pass rules that work for me or have a similar DST in my jurisdiction" is very different than what you're saying, Zach, is, "Okay, I'm going to be at the table. I'm not going to be a rebel for now, but I'm going to listen to what you're saying, and my implementation will be," you said Cameroon, "My implementation will be a Cameroonian implementation that takes into account what Cameroon needs and that's what we're going to go forward with." Again, I don't think those two points are that far apart.
Something you touched on that I thought was very interesting is looking at a, and you mentioned doing work with the African Union, leveraging the influence Africa can have as a whole as opposed to disparate jurisdictions. Has there been a movement towards that in the tax area? Have there been some of those conversations? Because I think some of the worries within Africa is, "Well, if they don't go here, they can go right next door," and whether it's an extractive or something else, they can get the very same thing just by taking a short trip across, so you want to make sure you behave within those borders. Has there been conversations around collective actions approaching tax?
Zach Pouga (14:27):
I know there have been talk. I know there's an effort to get the tax administrations to talk to each other, but I'm not aware of a collective continental on the specific tax area. Now, I'm going to mention the Africa Free Trade Zone, which present amazing opportunity and we can talk about that, but if we are talking specifically about tax, I'm not aware of any continental effort.
Lolade Ososami (14:49):
Yeah, yeah. It's sad, but maybe that's going to start changing, because I know that, for instance, at the AU, the African Union, they don't even have a tax committee. They don't even have a tax committee. You have a trade committee, you have an immigration, you have all sorts of committees. There's no tax committee. But on the administration side, you now have ATAF, and ATAF is the Association of African Tax Administrators. And so now, members of ATAF are going back to put pressure on their government. And so some of that pressure now is seeping through to the AU, and it's becoming obvious now to the AU leaders that they need to put tax on the agenda, and Africa, perhaps Africa now needs to come together and have a position.
The UN is the one that has been helping to fight Africa's battles, but I wouldn't say Africa. The UN is pro developing countries, but developing countries isn't just Africa. And you find that, for instance, a number of countries in the Latin region consider themselves as developing countries, but then when you compare them to developing countries in Africa, it's a different picture. When you compare developing countries in Africa to developing countries in Asia, it's still another different picture. So I think African leaders, from the pressure coming from the administrators are starting to see that. I think they now need to put tax on the agenda in the African Union and start having positions.
However, one thing also that plagues Africa is the competition that exists. Like you said, David, we all have, to one degree or another, natural resources and markets. Of course, when it comes to markets, Nigeria is one of, if not the largest markets in Africa, for instance. Not every country in Africa is able to boast of that size of markets. And when you talk about digitalization and where the world is going and the whole talk about value creation, your market size begins to become significant. These are the things.
There's some competition also within the region that sometimes hinder this sort of unified approach, where everyone is trying to be protective of their resources, protective of the access to their markets, and so on and so forth. But then again, it depends on how leaders are looking at this. If they can come to a place where they realize, like Zach said, from the same thought that drove the, it's such a long name, African Free Trade Continental Agreement. The same thoughts that drove that, where Africans are starting to see that hang on, we can trade with one another. Perhaps when they start to see that there's enough to go around, and if we can come together and be a unified force, then perhaps a place at the table when it comes to international tax issues would gain more respect.
Zach Pouga (17:59):
Yeah, right. I totally agree with that.
Lolade Ososami (18:04):
But it's a political thing.
Zach Pouga (18:05):
Yeah, and there is no tax committee, which is a big, unfortunate situation. Some of the discussions or some of the trips I've had on behalf of the African Union, they have been part of fighting illicit financial flows. It hasn't been specifically tax, but I go there to talk about tax. But because there is no tax infrastructure per se, you have to put it under something else, which was illicit financial flows. So, hoping that changes. As much as I would like some unified approach to the rules, happen to be not a big fan of unified approaches when it comes to tax, because the government of Namibia with which I work regularly doesn't have the same needs or the same concerns as the government of Nigeria.
So I see, one, Africa to be, and I foresee Africa to be that place where countries can decide to be the friendliest place for business because they want.., while others have other necessities and exigencies and they can set as policies a different place. But at baseline, I will advocate for unity of rules, approaching the rules.
Nate Carden (19:07):
Not meaningfully different from the European dynamic. You have big countries in Europe, and then you have countries that are not going to get on that train because they have a collection of different interests in terms of inbound investment.
Mayte Quinn Salazar (19:19):
And as I've said before, that adds to the complexity of the rules for us and the excitement for... As I said.
David Farhat (19:24):
And the beauty, and the beauty, Mayte.
Mayte Quinn Salazar (19:25):
David Farhat (19:26):
They don't walk away from it.
Mayte Quinn Salazar (19:29):
No. I'm thinking about also, we've been talking a little bit about limited resources and where maybe as a young practitioner, I need to be focusing my own limited resource, energy, time in where should I be spending my time studying? What do I need to be thinking about as a young practitioner?
Zach Pouga (19:49):
I can give some pointers here. Take it or leave it, but I would say if you're thinking about BEPS 2.0 in Africa, I would say pay a lot of attention to qualified domestic minimum taxes or just minimum taxes in general. I'm seeing a lot of countries develop an appreciation for that. Whether that's good or bad, I don't know. I'm just seeing what I see. I see a lot of appreciation for domestic minimum taxes. And as you work with the private sector, I think it would be good to have a good handle on the workings of these domestic taxes and how the interplay is with the BEPS 2.0, especially the global rules, the income inclusion rule, subject to tax rule, and the tax payment rule.
I see that as a very big debate and an area of interest. I also see, and again, staying with our theme here for Africa, I also see a move toward more collective action in Africa. The Free Trade Agreement is a big testament to that. It was a political big stunt. Now they're going ahead and trying to implement it. And maybe we are thinking beyond tax here, but that will have huge implications. That will have tremendous implications. So that's an area I would try to get up to speed if any interest in work in Africa, because it's going to affect every single aspect of doing business in Africa.
And then the incentives, African countries are very well-known for giving tax incentives, and all of that is being put to question today. Why would I provide you an incentive if you're going to be topped up on an income inclusion rule in France and pay the 15% there anyway? And that presents a number of issues in a lot of projects going on with these countries and companies, because some companies have been locked into this incentives for the life of their investment and now the countries are trying to question it. So there is a lot of debate, anticipated controversy on stabilization clauses, so I would really invest time with that. Those are just a couple of things that come to mind when I think about African tax.
Stefane Victor (22:00):
From the company perspective, does the changing landscape of African countries in regards to implementing transfer pricing regulation present more risk while they're still not set, or does it present more of an opportunity?
Lolade Ososami (22:14):
If I can comment on that, I think both, because my response to Mayte was going to be for her to still keep an eye on transfer pricing. It's going to remain relevant, especially with regards to intangibles given the spread of the FinTechs and the whole general concept of digitalization, intangibles becoming more and more relevant by the day. And that's one area that presents complexities, which comment to Stefane, presents opportunities and risks, risks because there are so many uncertainties.
And so when we're advising clients, sometimes it's like we're still walking on eggshells, because again, there's a lack of comparables that gives us the confidence to say it's black or white. It's still quite a gray area. Transfer pricing as it relates to intangibles is very relevant, presents risks and opportunities. Managing PE risks, permanent establishment risks is another area, because of course, that's where it all starts, isn't it? Do we have a PE? Should they even be taxing us?
Another area that's also interesting, which obviously is not a main topic for us today, is also in relation to consumption taxes, VAT, to be specific. VAT is a very popular tax in Africa. I don't know Zach has worked across Africa, but I know that quite a number of countries in West Africa have a VAT regime, and VAT is seen as a low-hanging fruit also by the government, so that's an area to look at right now. The VAT regime in Nigeria is also evolving in terms of how to draw companies, non-resident companies that don't have a taxable presence or a PE to start to help government collect VATT. So those sorts of things, again, also present opportunities as well as risks, but to keep an eye on if you are focusing on Africa.
David Farhat (24:18):
Well, I hate to be the one to say this, because I'm really enjoying this session and I wish we could go forever, but we're coming up on time. So any final thoughts from our guests before we wrap up?
Lolade Ososami (24:29):
I'll go first, then.
David Farhat (24:30):
Lolade Ososami (24:31):
Well, just to say a huge thank you to you, David and Nate and Stefane, and of course, lovely to meet you, Mayte. I've enjoyed myself. I'm chatting through all these issues just to say that tax is exciting. It's evolving very fast in Africa, and in spite of the difficulties and the complexities, we still see a lot of cross-border transactions taking place. I practice in Nigeria, a huge market economy, and so there's a lot of focus on this region. There are opportunities in the FinTech space, extractives maybe not so much on a cross-border level anymore, but also, we also have the telecom space as well as another interesting sector where we still have a lot of foreign investment. And so Africa remains relevant. Tax in Africa remains relevant. BEPS remains relevant and we'll keep an eye on that. Great to be here. Thank you so much for having me.
David Farhat (25:31):
Oh, thank you for doing this, Lolade. We really appreciate it.
Zach Pouga (25:36):
Thanks to Lolade. Thanks for having us. Nice to meet you, Mayte. I've had calls with Nate and David and Stefane before. I will just maybe parting words here. Every single client I have in the private sector that is present in Africa has seen Africa to be their fastest-growing side, their fastest-growing region. So there is something happening there, and tax comes as usually to be in the middle of it all. So every single major company that has a presence of thinking about a presence in Africa really needs to understand how these big rules that we're talking about at an international level really boils down to these African countries, some of them really large, some of them really small, and our work is cut out for us.
International tax will continue to be the major, sometimes guiding principle for these investments, and it's always a pleasure. I've had the pleasure of working on Africa, both sides, business investments from the US into Africa and some African companies coming into the US, and there has never been a dull moment and I can only anticipate that it will intensify, just because of the economics of the continent and everything happening there. I'm very excited to always be talking about this.
David Farhat (26:54):
No, thank you both so much. This was an excellent session and I can promise you we'll be chasing you guys to come back to do a follow-up, maybe even talk about VAT some more, knowing that's one of Nate's favorite topics.
Nate Carden (27:05):
Anytime you want to come back.
David Farhat (27:06):
Thank you so much to everyone. This has been another session of GILTI Conscience. Thank you for joining us. Talk to you again soon.
Lolade Ososami (27:14):
Thank you for joining us for today's episode of GILTI Conscience. If you like what you're hearing, be sure to subscribe in your favorite podcast app so you don't miss any future conversations. Skadden's Tax Team is recognized globally for providing clients with creative and innovative solutions to their most pressing transactional planning and controversy challenges. Additional information about Skadden can be found at skadden.com.