INTERNATIONAL TAX JUSTICE ACADEMY
1st – 6th, December 2014, Machakos, Kenya
The Political Economy of Global Value Chains
and their Relationship with Taxation
Edgar Odari, Econews Africa
Taxation, Investment and International Trade
Introduction and Background
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In today’s 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-shoring of 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.
Effects of GVCs on Various Policy Domains
TRADE POLICY
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Tariff barriers and non-tariff measures (which include
administrative and customs procedures as well as standards)
are more significantly felt within GVCs.
Tariff measures mean significant trade costs across multiple
jurisdictions especially when goods cross borders multiple
times.
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.
YEAR
2010
Value Liberalised
(USD)
1,615,331,216
Within 15
years
% of Trade
Liberalised
(USD
65.4 %
Excluded
Value (USD)
428,818,834
EAC
Exclusion
EC
Liberalisation
17.4%
100%
SAT
No. of
Tariff
Lines
83%
1,950
14.6%
90%
1,129
2.6%
91%
960
361,011,102
2033
64,864,376
Exclusion
1,390
Total trade
liberalised
by EAC
82.6%
2,041,206,694
Total EAC
Imports
from EU
2,470,025,527
TOTAL TARIFF LINES
5,429
Effects of GVCs on Various Policy Domains
INVESTMENT POLICY
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GVCs compel governments in their design of investment policies to
provide greater incentives aimed at particular sections of GVCs which
are seen as being more value-adding. This leads to incentives
competition for specific parts of the value chain. (TAX COMPETITION
AND THE “RACE TO 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-added so
as to maximize earnings in the lowest-cost tax jurisdictions within their
international investment framework. (BITs, DTAs, RTAs, Bali)
DEVELOPMENT POLICY
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To achieve integration into GVCs, countries need to adjust their border
(trade and investment) and “behind the border” policies 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)
Effects of GVCs on Various Policy Domains
COMPETITIVENESS POLICY
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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 goods imported from other countries.
The drivers of competitiveness today largely entail factors outside the
scope of national policies. This limits the direct influence of policy
makers on growth and job creation within their national borders.
RISK MANAGEMENT
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Increased connectivity within GVCs has resulted to greater
interdependence between economies. With this comes the increased
risk of breakdowns in the system. (Chinese bailouts)
Global value chains (GVCs) can facilitate the spread of local risks into
global risks. Financial Crisis.
Issues: Low Tax Jurisdictions (Mauritius)
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EAC/US Bilateral Investment Treaty: Negotiations ongoing; EAC
commissioned study; process of developing model text.
In March 2013, Ecuador took concrete steps towards annulling
Ecuador-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) between
the US and the European Union (EU) had to be suspended for
PUBLIC CONSULTATIONS on the inclusion of investor-state dispute
settlement. (fracking, agribusiness). Policy space?
US is revisiting the scope of protection it accords foreign investors in
its BITs;
South Africa, the DTI admits that prior to 1994, South Africa “had no
history of negotiating BITs,” did not fully appreciate the risks that BITs
posed, and as a result “entered into agreements that were heavily
stacked in favour of investors without the necessary safeguards to
preserve flexibility in a number of critical policy areas.”
Implications for PIDA?
Issues: Low Tax Jurisdictions (Mauritius)
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The World Investment Report 2010 identified Mauritius as a
favourable and tax efficient platform for African investments.
The country is also listed on the “white list” which entails jurisdictions
that have implemented the internationally agreed tax standard and are
therefore not considered tax havens by the OECD.
Being the choice country for many cross-border investments into
Africa has to do with the country’s incentive for companies to reduce
their 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 and
Kenya).
It has signed DTTs with three other states (Congo, Zambia and
Nigeria) 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
Africa’s value chains in total.
Implications for PIDA?
Tax avoidance
Challenges: Africa’s 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
Challenges: Africa’s GVCs & Special Economic Zones
THE MAURITIUS SPECIAL ECONOMIC ZONES
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Zero tax rate on corporate profits. The country has exempted such entities from
income 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 reexport
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: Africa’s GVCs & BRICS Threat
• 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 establish
any 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) in
Mauritius 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)
Benefits of Mauritius DTTs to MNCs
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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 seller’s 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.
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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.
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Global companies are liable to Corporate tax at 15% but may claim a foreign tax credit
in 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%.
Mauritius FDI in Africa: Sector
Mauritius Investments Abroad
FDI and “FDI” (from Africa) into Mauritius
Mauritius-Africa Business Footprint
Program for Infrastructure Development in Africa (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 Africa’s 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; 8
investment and financial services companies, 5 multilateral banks, and
others, including experts (e.g., the office of Gordon and Sarah Brown).
[1]
LAPSSET CORRIDOR PROJECT
See Table 1: PIDA stakeholders from the PIDA official site at: http://www.pidafrica.org/about_us.html
PROJECT COMPONENTS
1 Lamu Port
2 Railway Line
3 Highway
4 Crude Oil Pipeline
Product Pipeline
5 Oil Refinery
6 Resort Cities
7 Airports
8
SUPPORT
INFRASTRUCTURE
High Grand Falls
9 Lamu Metropolis
STANDARD GAUGE RAILWAY MASTERPLAN
EAC Projects
1. Batoka Gorge Hydropower Project
2 Ruzizi III
3 Rusumo Falls
4 Northern Multimodal Corridor
5 North-South Multimodal Corridor
(Dar es Salaam Port Expansion
Zambia-Tanzania-Kenya Transmission Line)
6 Djibouti - Addis Corridor
7 Central Corridor
8 Beira-Nacala Multimodal Corridors
9 Lamu Gateway Development
10 Uganda-Kenya Petroleum Products Pipeline
11 Great Millennium Renaissance Dam
Total Value (US$ millions)
$2,800 million
450
360
1,000
2,325
1,000
840
450
5,900
150
8,000
23,275
Central African Projects
1 Central African Interconnection
$10,500 Million
2 Central Africa Air Transport
420
3 Central Africa Hub Port and Rail Programme
1,400
4 Inga III Hydro
6,000
5 Central African Inter-Capital Connectivity
800
6 Kinshasa-Brazzaville Bridge Road and Rail
Project & Rail to llebo
1,650
7 Palambo Dam
155
8 Douala-Bangui Douala-N'djamena Corridor
290
9 Pointe Noire, Brazzaville/Kinshasa, Bangui,
N'djamena Multimodal Corridor
300
Total Value (US$ millions)
21,515
West African Projects
1 West Africa Hub Port and Rail Programme
(Modernization of Dakar-Bamako Rail Line)
2 West Africa Air Transport
4 West Africa Power Transmission Corridor
5 Nigeria-Algeria Gas pipeline
6 Gourbassy Dam
7 Praia-Dakar-Abidjan Multimodal Corridor
8 Sambagalou Hydropower Project
9 Kaleta
Dam
10 Fomi Dam
11 Abidjan-Lagos Coastal Corridor
12 Dakar-Niamey Multimodal Corridor
13 Abidjan-Ouagadougou/Bamako
Total Value (US$ millions)
$ 2,140 Million
NA
1,200
NA
NA
150
300
179
384
290
590
540
6,193
SADC Projects
1 Southern Africa Hub Port and Rail Programme $2,270 million
2 Multisectoral Investment opportunity Studies 1
3 North - South Power Transmission Corridor
6,000
4 Mphamda-Nkuwa Dam
2,400
5 Lesotho HWP phase II hydropower component 800
6 Lesotho HWP Phase II - water transfer component
1,100
Total Value (US$ millions)
12,571
Conclusions
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Africa should rethink its regulatory frameworks on trade
and 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 promoting
regional integration.
The signing of Double Taxation Agreements should follow
a carefully thought process that looks at national needs
before committing to Mauritius-style agreements.