presentation - international tax academy - odari e

8/10/2019 Presentation - International Tax Academy - Odari E.

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Taxation, Investment and International Trade

INTERNATIONAL TAX JUSTICE ACADEMY

1st 6th, December 2014, Machakos, Kenya

The Political Economy of Global Value Chainsand their Relationship with Taxation

Edgar Odari, Econews Africa


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In todays global political economy, international production,

trade and investments are structured within Global Value

Chains (GVCs) where the different stages of the production

process are located in different countries.

The reality of GVCs is a strong incentive for companies to

restructure their operations internationally through outsourcing

and off-shoringof activities. Companies optimise their production processes by locating the

various stages across different sites according to the most

optimal location factors across countries.

The international dispersion of value chain activities include

design, production, marketing, distribution e.t.c.

The emergence of GVCs challenges traditional perspectives of

economic globalization and particularly the policies to be

developed around it.

Introduction and Background


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TRADE POLICY

Tariff barriers and non-tariff measures (which include

administrative and customs procedures as well as standards)

are more significantly feltwithin GVCs.

Tariff measures mean significant trade costs across multiple

jurisdictions especially when goods cross borders multipletimes.

Protectionist policies risk having a negative impact on the

integration of production processes across borders. This could

hurt the competitiveness of domestic industries within GVCs.

There is therefore a push for countries to lower their tariff

barriers. This has a negative implication on their ability to raise

revenue.

Effects of GVCs on Various Policy Domains


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YEAR Value Liberalised

(USD)

% of Trade

Liberalised

(USD

Excluded

Value (USD)

EAC

Exclusion

EC

Liberalisation

SAT No. of

Tariff

Lines

2010 1,615,331,216 65.4 % 428,818,834 17.4% 100% 83% 1,950

Within 15

years

361,011,102

14.6% 90% 1,129

2033

64,864,376

2.6% 91% 960

Exclusion 1,390

Total trade

liberalised

by EAC

2,041,206,694

82.6%

Total EAC

Importsfrom EU

2,470,025,527

TOTAL TARIFF LINES 5,429


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INVESTMENT POLICY

GVCs compel governments in their design of investment policies to

provide greater incentives aimed at particular sections of GVCs whichare seen as being more value-adding. This leads to incentives

competition for specific parts of the value chain. (TAX COMPETITION

AND THE RACETO THE BOTTOM)

TRANSFER PRICING: This is a challenge many governments face

with investors. The growth of GVCs present multinational companies

(MNCs) with opportunities to adjust their accounting of value-addedso

as to maximize earnings in the lowest-cost tax jurisdictionswithin their

international investment framework. (BITs, DTAs, RTAs, Bali)

DEVELOPMENT POLICY

To achieve integration into GVCs, countries need to adjust their border

(trade and investment) and behindthe borderpolicies in areas such

as innovation, skills and infrastructure.

However, integration into GVCs is mostly done through affiliates of

MNCs. This approach therefore risks the burden of increasingly

footloose investors(Investor-State Arbitration)



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COMPETITIVENESS POLICY

GVCs have redefined the conventional wisdom of national

competitiveness. This is because companies and countries have become embedded in

international networks of production.

Increasingly, global exports rely on technology, labour and capital

embodied in intermediate goodsimported from other countries.

The drivers of competitiveness today largely entail factors outside thescope of national policies. This limits the direct influence of policy

makers on growth and job creation within their national borders.

RISK MANAGEMENT

Increased connectivity within GVCs has resulted to greater

interdependence between economies. With this comes the increasedrisk of breakdowns in the system. (Chinese bailouts)

Global value chains (GVCs) can facilitate the spread of local risks into

global risks. Financial Crisis.



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EAC/US Bilateral Investment Treaty: Negotiations ongoing; EACcommissioned study; process of developing model text.

In March 2013, Ecuador took concrete steps towards annullingEcuador-US BIT saying favor foreign investors over human beings.

(Bolivia, Ecuador, Venezuela) Australia has decided not to include investor-state arbitration in future

BITs;

The Transatlantic Trade and Investment Partnership (TTIP) betweenthe US and the European Union (EU) had to be suspended for

PUBLIC CONSULTATIONS on the inclusion of investor-state disputesettlement. (fracking, agribusiness). Policy space?

US is revisiting the scope of protection it accords foreign investors inits BITs;

South Africa, the DTI admits that prior to 1994, South Africa had nohistory of negotiating BITs,did not fully appreciate the risks that BITs

posed, and as a result entered into agreements that were heavilystacked in favour of investors without the necessary safeguards to

preserve flexibility in a number of critical policy areas.

Implications for PIDA?


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The World Investment Report 2010 identified Mauritius as afavourable and tax efficient platform for African investments.

The country is also listed on the white listwhich entailsjurisdictions

that have implemented the internationally agreed tax standard and aretherefore not considered tax havens by the OECD.

Being the choice country for many cross-border investments intoAfrica has to do with the countrys incentive for companies to reducetheir tax burden in countries they invest in within Africa.

Mauritius currently has DTTs with 13 African states (Botswana,Lesotho, Madagascar, Mozambique, Namibia, Rwanda, Senegal,Seychelles, Swaziland, South Africa, Tunisia, Uganda, Zimbabwe andKenya).

It has signed DTTs with three other states (Congo, Zambia andNigeria) which are awaiting ratification and is negotiating with Burkina

Faso, Algeria, Tanzania, Egypt, Gabon, Malawi and Ghana. Implications for MNCs and their role and impact on regional and

Africasvalue chains in total.

Implications for PIDA?


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Tax avoidance


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Challenges: Africas GVCs Activity Limited to MNC Affiliates

Category 1 Global Business License Companies

Aircraft Financing and Leasing Consultancy services

Employment services Financial services

Assets management ICT Services

Funds management Operational headquarters

Insurance Pension funds

Logistics, Licensing and

franchising of marketing

Shipping trading and ship management


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THE MAURITIUS SPECIAL ECONOMIC ZONES

Zero tax rate on corporate profits. The country has exempted such entities fromincome tax payable for income years up to and including the income year

ending 31 December 2013. The corporate tax rate applicable to processing and

transformation activities is 15%.

Exemption from Customs duties and Value Added Tax (VAT) on all goods and

equipment imported into the Freeport zone. A reduction in fees related to port handling charges for all goods destined for re-

export

Free repatriation of profits from the Freeport operations.

Full ownership (100%) where no immoveable property is to be held in Mauritius.

An allowance to sell a quota of 20% of total goods re-exported into the local

market where normal tax rates will apply.

Challenges: Africas GVCs & Special Economic Zones


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Mauritius belongs to regional RECs including SADC, COMESA and IOR-ARC.

The nature of Special Economic Zones established by Mauritius have made the

country attractive to exogenous countries or private equity funds to establishany Africa Fund, holding companies or trading companies.

The fastest growing economies today see Mauritius as a gateway to tapping

the African continent. China, for example, is making a wave of strategic

investments to take advantage of the COMESA and SADC FTAs. The country

recently invested USD 700 million in a Special Economic Zone (SEZ) inMauritius to service its expansion in Africa. (Regional Value Chain

Development?)

India plans to build a logistics and services hub in the SEZ within the

Mauritius.

South Africa has a similar strategy for Africa. (policy think-tank)

Challenges: Africas GVCs & BRICS Threat


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Exemption From Capital Gains Tax (CGT): Most jurisdictions on the African continent

levy CGT at a rate ranging from 30-35 per cent. In Mauritius DTTs, restriction on

taxation rights on capital gains to the country of residence of the sellers assets.Mauritius CGT is 0%.

Limitation of Withholding Tax on Dividends: In many African countries, dividends

paid out to non-residents attract withholding tax ranging from between 10% and

20%. In Mauritius DTTs, rates are generally 0%, 5% or 10%. This therefore enables

companies resident in Mauritius to make savings of ranging from 5% to 20%

depending on the country they are investing in.

SUMMARY: Low tax rates, generous tax credits; no withholding tax on

dividends, interest and royalties paid; no Capital Gains Tax; free repatriation

of profits, capital and interest; no estate duty, inheritance, wealth or gift tax

as well as full protection of assets.

Global companies are liable to Corporate tax at 15% but may claim a foreign tax creditin respect of the actual foreign tax suffered or 80% presumed foreign tax credit,

WHICHEVER IS HIGHER (legal language for raising ceilings).

This effectively means that a Global Business License Company is taxed at a MAXIMUM

EFFECTIVE RATE OF 3%.

Benefits of Mauritius DTTs to MNCs


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Mauritius FDI in Africa: Sector


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Mauritius Investments Abroad


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FDI and FDI (from Africa) into Mauritius


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Mauritius-Africa Business Footprint

P f I f D l i Af i (PIDA)


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In 2012, PIDA was adopted by African Heads of State as a strategic

framework that will run through 2040, for the development of continental

infrastructure (energy, transport, information and communication

technologies (ICT) and trans-boundary water resources).

It is governed by the African Union Commission (AUC), the New Partnership

for Africas Development Planning and Coordination Agency (NEPAD

Agency), and the African Development Bank (AfDB).

PIDA Governance: Panel of Experts, Steering Committee, Technical

Committee , e.t.c. including:

The Business Working Group comprised of about 16 transnational

corporations in mining, metals, energy, chemicals, and infrastructure; 8investment and financial services companies, 5 multilateral banks, and

others, including experts (e.g., the office of Gordon and Sarah Brown).

Program for Infrastructure Development in Africa (PIDA)


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C


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1. Batoka Gorge Hydropower Project $2,800 million

2 Ruzizi III 450

3 Rusumo Falls 360

4 Northern Multimodal Corridor 1,000

5 North-South Multimodal Corridor 2,325

(Dar es Salaam Port Expansion

Zambia-Tanzania-Kenya Transmission Line)

6 Djibouti - Addis Corridor 1,000

7 Central Corridor 840

8 Beira-Nacala Multimodal Corridors 4509 Lamu Gateway Development 5,900

10 Uganda-Kenya Petroleum Products Pipeline 150

11 Great Millennium Renaissance Dam 8,000

Total Value (US$ millions) 23,275

EAC Projects

C l Af i P j


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1 Central African Interconnection $10,500 Million

2 Central Africa Air Transport 420

3 Central Africa Hub Port and Rail Programme 1,400

4 Inga III Hydro 6,000

5 Central African Inter-Capital Connectivity 800

6 Kinshasa-Brazzaville Bridge Road and Rail

Project & Rail to llebo 1,650

7 Palambo Dam 155

8 Douala-Bangui Douala-N'djamena Corridor 2909 Pointe Noire, Brazzaville/Kinshasa, Bangui,

N'djamena Multimodal Corridor 300


Central African Projects

W t Af i P j t


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1 West Africa Hub Port and Rail Programme $ 2,140 Million

(Modernization of Dakar-Bamako Rail Line)

2 West Africa Air Transport NA

4 West Africa Power Transmission Corridor 1,200

5 Nigeria-Algeria Gas pipeline NA

6 Gourbassy Dam NA7 Praia-Dakar-Abidjan Multimodal Corridor 150

8 Sambagalou Hydropower Project 300

9 Kaleta Dam 179

10 Fomi Dam 38411 Abidjan-Lagos Coastal Corridor 290

12 Dakar-Niamey Multimodal Corridor 590

13 Abidjan-Ouagadougou/Bamako 540


West African Projects

SADC P j t


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1 Southern Africa Hub Port and Rail Programme $2,270 million2 Multisectoral Investment opportunity Studies 1

3 North - South Power Transmission Corridor 6,000

4 Mphamda-Nkuwa Dam 2,400

5 Lesotho HWP phase II hydropower component 8006 Lesotho HWP Phase II - water transfer component 1,100


SADC Projects

C l i


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Africa should rethink its regulatory frameworks on tradeand investment.

We should define infrastructural needs based on what is

able to promote linkages in the African economy.

Need to create coherent policy that feed into promotingregional integration.

The signing of Double Taxation Agreements should follow

a carefully thought process that looks at national needs

before committing to Mauritius-style agreements.

Conclusions

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