Base Erosion-Profit Shifting Challenges in the Digital Economy in Sub-Saharan Africa: A Framework for Fairer Tax Treaty Cooperation

 

ABSTRACT

The digital economy has created profound challenges for global tax systems, particularly in Sub-Saharan Africa, where traditional frameworks based on physical presence are inadequate for addressing the complexities of modern trade. This paper delves into the intricacies of base erosion and profit shifting (BEPS) practices that have drained vital tax revenues from the region.

By analyzing the limitations of international frameworks such as the OECD BEPS initiative, the study develops a tailored methodology to support fairer taxation and more effective treaty cooperation.

Beyond revenue generation, the proposed framework emphasizes capacity building, regional integration, and innovative approaches to reallocate taxing rights in this dynamic economic landscape.  This paper proposes a solution-oriented framework aimed at addressing these challenges comprehensively

1. Introduction and Key Concepts

1.1 Historical Context of International Taxation

Over 100 years ago, two nations Prussia and Austria signed the very first tax treaty, and ever since treaties have become an integral part of International Taxation. These treaties were signed to avoid double taxation by restricting the taxing rights of nations on economic activities that spanned over two nations. Treaties divide the right to tax between two nations. Generally, the active income is taxable in the source country and the passive income is taxed in the resident country. When the income is taxable in both countries, treaties provide relief through the exemption method or the credit method. The exemption method allows the assessee to exempt tax on any income that has already been taxed in the resident country and under the credit method tax already paid in the source country is credited against the tax due in the resident country.

The development of international taxation principles occurred during an era when cross-border business activities were primarily conducted through physical establishments and traditional trade relationships. The concept of permanent establishment (PE) emerged as the cornerstone of international tax law, establishing clear jurisdictional boundaries for taxation rights. This framework served the international community well for decades, providing certainty and predictability for both taxpayers and tax authorities.

However, the traditional purpose of treaties of avoiding double taxation has been questioned in the modern economy. The fundamental assumptions underlying the international tax system have been challenged by technological advances, globalization, and the emergence of new business models that do not fit neatly into existing frameworks. The rise of intangible assets, the increasing mobility of capital and labor, and the development of sophisticated financial instruments have all contributed to the erosion of traditional tax bases and the emergence of new forms of tax planning strategies.

For Sub-Saharan African countries specifically, this digital transformation has created unique challenges. For instance, in Kenya, mobile money services like M-Pesa have revolutionized financial services, yet traditional tax frameworks struggle to capture the value created through these digital platforms. Similarly, in Nigeria, major technology companies generate substantial revenues from digital advertising targeted at Nigerian consumers but pay minimal taxes to the Nigerian government due to the absence of physical presence requirements.

Digitalization is an essential tool for globalization, which in turn determines the world’s future. The establishment of borderless economic relationships and the growth of digital trade not only facilitates globalization but also establishes international trade. However, like every coin, digital trade also has two sides. Though it enhances trade between countries, it also imposes taxation challenges for the international market. Conventional tax regimes are based on the concept of physical presence and are inherently location-based wherein the taxing rights of a country are attributable to the permanent establishment of an enterprise. With the increasing presence of digital markets and online players, taxation has become burdensome for international organizations.

The digital revolution has fundamentally transformed the nature of business operations, value creation, and economic relationships. Digital technologies have enabled companies to serve customers in multiple jurisdictions without establishing a physical presence, to create value through data collection and analysis, and to develop new business models that challenge traditional concepts of source and residence. The rise of platform businesses, cloud computing, artificial intelligence, and big data analytics has created new forms of economic value that are difficult to locate and tax under existing frameworks.

The two fundamental challenges imposed are the definition of taxable presence and allocation of business profits among different jurisdictions. The fast-paced emergence of the digital economy has made it empirical to reform the traditional international taxation regime. The traditional concept of permanent establishment, which requires a fixed place of business or a dependent agent, is increasingly inadequate to capture the economic presence of digital businesses that can have significant economic relationships with customers without any physical presence.

The allocation of profits among different jurisdictions has become increasingly complex as value creation in the digital economy often involves multiple jurisdictions and various forms of intangible assets. The traditional transfer pricing methods, which rely on the arm’s length principle and comparable transactions, are often inadequate to deal with unique intangible assets and business models that have no comparable transactions in the market.

1.2 OECD BEPS Initiative and International Response

Considering the impact of digitalization of economies across the globe and their impact on taxation models, in 2019, Organization for Economic Development (OECD) on Base Erosion and Profit Shifting initiated a process to address some of the fundamental challenges. The OECD recognized that the existing international tax framework was no longer adequate to address the challenges posed by digitalization and base erosion and profit shifting (BEPS) activities by multinational enterprises.

The proposal consists of two pillars. Pillar One intends to expand the taxing rights of the market jurisdiction based upon significant economic presence. Under this pillar, once the company earns a profit of 10% or more of its revenue in a market jurisdiction, that market jurisdiction would be able to tax between 20-30% of the profits. So, companies like Facebook and Google would have to pay taxes to the nations where they are physically based and also to the nations from where they are making profits. However, the proposal also states that countries would have to revoke their respective digital service taxes after the imposition of a common global corporate tax.

Pillar Two imposes a minimum of 15% corporate tax. If an MNE is taxed below an agreed minimum tax rate, the residence jurisdiction country will be allowed to levy the difference between the effective tax levied and the agreed minimum rate. This framework aims to prevent tax base erosion rather than merely attempting to avoid it after the fact. The two-pillar approach represents a fundamental shift in international taxation, moving away from purely source-based and residence-based taxation toward a more formulary approach that takes into account market presence and ensures minimum levels of taxation.

The development of the two-pillar approach involved extensive consultations with stakeholders, including developing countries, which had been largely excluded from the original development of international tax rules in the 1920s. The OECD established the Inclusive Framework on BEPS to ensure broader participation in the development of international tax standards and to address the concerns of developing countries that had been disproportionately affected by BEPS activities.

1.3 Sub-Saharan Africa in the Global Digital Economy Context

As of November 2021, 141 countries have joined the two-pillar framework, which includes several Sub-Saharan jurisdictions like Nigeria, Namibia, Kenya, and South Africa. The African Tax Administration Forum (ATAF), a body in Africa that aims to improve taxation in Africa has welcomed this move and aims to reach a global consensus on tax challenges. However, the body also believes that the current form of the two-pillar proposal is only ideal in a written format and practical imposition of the same would be extremely complicated.

Sub-Saharan African countries have a youthful demography and therefore a large number of their population is regularly engaged in social media networking platforms, digital marketplace, and other digital services. Research shows that significant development that has taken place in the Sub-Saharan African region in the past decade can be attributed to the digital economy. As these jurisdictions do not have formal economies and limited tax bases, growth in the digital economy is an opportunity for the government to increase its revenue collection and tax bases.

The digital economy in Sub-Saharan Africa has grown rapidly in recent years, driven by increasing smartphone penetration, improving internet infrastructure, and the development of innovative digital services. Mobile money services, such as M-Pesa in Kenya, have revolutionized financial services and created new opportunities for financial inclusion. E-commerce platforms have enabled small businesses to reach broader markets, while digital platforms have created new opportunities for employment and income generation.

However, this growth in the digital economy has not been accompanied by corresponding developments in tax policy and administration. Most Sub-Saharan African countries lack the legal frameworks, administrative capacity, and technical expertise necessary to effectively tax digital businesses. This has resulted in significant revenue losses and has created unfair competitive advantages for foreign digital companies over domestic businesses that are subject to traditional forms of taxation.

Furthermore, after the economic push given by COVID-19 towards digitalization, the Sub-Saharan African countries must tap into the sources of income generated via digital economy and the proposal put forward by OECD may not be ideal for the economies of Sub-Saharan African countries. Studies show that in developing nations like the Sub-Saharan African region, the imposition of digital tax could negatively impact access to the internet and eventually lower domestic revenue. For instance, when Uganda imposed a 1% tax on social media in 2018, the internet subscription dropped drastically, ultimately leading to less revenue for the government. In the concerned jurisdiction, the key problem of taxing digitalized businesses is not due to their lack of presence but due to attribution of profits.

The challenges faced by the Sub-Saharan African countries are not similar to that of developed nations and therefore they need a more comprehensive solution. OECD’s current unified approach is complex in nature and is not suitable for developing countries like Sub-Saharan African countries. The current regime of Pillar One calculates reallocation of profits based upon residual profit, instead of total profit. Taxing based upon the total profits would give fairer treatment to businesses that have a current taxable presence in the market jurisdiction. Further, to effectively guard Sub-Saharan African tax bases and curb illicit financial flows, the minimum effective tax rate under Pillar Two should be increased to 20%.

1.4 Objectives and Research Questions

This Ph.D. dissertation aims to understand the international principles on the taxation of digital economy, to analyze whether the existing legislative and administrative frameworks of international taxation are adequate to cater to the digital economy of Sub-Saharan African Countries, and to make recommendations on how Base Erosion and Profit Shifting under the digital economy can be avoided by Sub-Saharan African countries.

The specific objectives of this research include:

2. To examine the evolution of international taxation principles and their adequacy in addressing digital economy challenges
3. To analyze the unique circumstances and challenges faced by Sub-Saharan African countries in implementing digital taxation measures
4. To evaluate the effectiveness of current international frameworks, particularly the OECD BEPS initiative, in addressing the needs of developing countries
5. To investigate the role of regional cooperation and tax treaty networks in combating base erosion and profit shifting
6. To develop a new framework methodology that is specifically tailored to the needs and capabilities of Sub-Saharan African countries
7. To provide practical recommendations for policy makers, tax administrators, and international organizations

The guiding research question is: What are the unique challenges in taxing digital economies that are faced by Sub-Saharan African countries and how can base erosion be prevented in these jurisdictions?

Additional research questions include:

• How do the existing international tax frameworks address the specific needs and challenges of Sub-Saharan African countries?
• What are the main obstacles to effective implementation of digital taxation measures in Sub-Saharan Africa?
• How can regional cooperation enhance the capacity of Sub-Saharan African countries to combat base erosion and profit shifting?
• What role can technology and digitization play in improving tax administration and compliance in the region?
• How can the international community better support Sub-Saharan African countries in their efforts to modernize their tax systems?

1.5 Core Challenges in Digital Economy Taxation

The emergence of digital economies has made it easier to access greater information, reduced the cost of production, provided an opportunity to small business and developing countries, lowered the barriers to entry, and enhanced the economic growth of the world. However, at the same time, it also introduced other socio-economic challenges like taxation of non-resident enterprises. Firstly, at a preliminary point, there is no definition of the digital economy that is widely accepted across the globe. Further, the characteristics, components, and dimensions of a digital economy are not supported by reliable statistics, especially in developing countries. Even though taxation of the digital economy is a core prefatory step of addressing the emergence of the digital economy, there are not enough research and solutions for the same.

Although various steps have been taken by individual countries and international bodies, the initiatives remain insufficient to catch up with the fast-growing evolution of the digital economy. The taxation issues raised due to the digital economy can be categorized into three major categories: Data management, Nexus, and Characterization.

Data Management and Value Creation

Firstly, as the digital economy is characterized by intangibles, such as collection, use, and generation of data, it is difficult to measure the digital economy in terms of value creation. Data can be either collected directly from users or indirectly from transactional relationships of the users. Data collected by companies from various sources and methods are primary input in a digital economy and leveraging such data can create value for the business in several ways. As the use of digital products and services generates data, which is heavily relied on by digital companies, the issue that arises is whether profits generated due to remote gathering of data should be taxable or not.

The challenge of data management and value creation is particularly complex because data itself has unique characteristics that distinguish it from traditional forms of property and assets. Data is non-rivalrous, meaning that it can be used by multiple parties simultaneously without being depleted. Data can also be replicated and transmitted at virtually zero marginal cost, making it difficult to apply traditional concepts of scarcity and value. Furthermore, the value of data often increases with aggregation and analysis, creating network effects that are difficult to measure and attribute to specific jurisdictions.

In the context of Sub-Saharan Africa, the data management challenge is particularly acute because many digital platforms collect significant amounts of data from users in the region without having any physical presence or paying significant amounts of tax. Social media platforms, search engines, and e-commerce sites collect vast amounts of data about user preferences, behaviors, and demographics, which is then used to generate advertising revenue and improve services. However, the value created through this data collection is often not captured by the tax systems of the countries where the data originates.

The attribution of value to data presents significant challenges for tax policy makers. Traditional transfer pricing methods are often inadequate to deal with data transactions because there are few comparable market transactions, and the value of data is highly dependent on its use and combination with other data sets. Furthermore, the multi-sided nature of many digital business models means that data collected from users in one jurisdiction may be used to generate revenue from advertisers in another jurisdiction, complicating the allocation of profits.

Nexus and Physical Presence Requirements

Secondly and most importantly, traditional international taxation laws were subject to the permanent establishment of a non-resident enterprise in the source country. As previously, companies were able to provide their services or goods only through a local establishment or operation through agents, the taxation principle of physical presence was much tougher to avoid. However, due to the spread of digital economies, there has been a paradigm shift in business models and enterprises are able to operate without any physical presence. Therefore, the traditional tax rules cannot effectively impose taxation liability on digital platforms.

The concept of nexus, or the connection between a business and a jurisdiction that gives rise to taxing rights, has been fundamentally challenged by digitalization. Traditional nexus rules were developed in an era when businesses needed a physical presence to serve customers effectively. The requirement for a fixed place of business, or a dependent agent with authority to conclude contracts, reflected the economic reality of the time when most business activities required physical infrastructure and local presence.

However, digital technologies have enabled businesses to serve customers remotely through online platforms, cloud-based services, and digital marketplaces. A company can now have significant economic relationships with customers in a jurisdiction without any physical presence whatsoever. This has created what is often referred to as the “digitalization paradox” – the ability to have substantial economic presence without legal presence for tax purposes.

For Sub-Saharan African countries, this presents a particular challenge because many of the largest digital companies serving their markets are headquartered in developed countries and have no physical presence in Africa. These companies can generate substantial revenues from African users while paying little or no tax in African jurisdictions. This not only reduces government revenues but also creates unfair competition with domestic businesses that are subject to local taxation.

The challenge is further complicated by the fact that digital businesses often operate through complex corporate structures that involve multiple jurisdictions. A digital platform serving customers in Kenya might be owned by a company incorporated in Ireland, managed from Singapore, with servers located in South Africa, and intellectual property held in the Netherlands. This complexity makes it difficult for tax authorities to determine where value is created and where taxing rights should lie.

Characterization and Classification Issues

Thirdly, the emergence of the digital economy and technology has introduced new business models that enable monetization in ways that are not yet included in the existing category of income. For instance, the existing OECD Model Tax Convention does not include the provision of income generated through cloud computing, which has significantly developed over the past few decades. The challenge for taxation remains as to how this income should be treated: is it to be treated like royalties, technical service fees, or business profits.

Infrastructure-as-a-service transactions have become a common affair in the modern economy, which raises the question of whether such a transaction should be treated as a service, rental income, or technical service. Moreover, as technology advances and development increases, more such issues are likely to arise.

The characterization challenge is particularly significant because different types of income are often subject to different tax treatments under domestic law and tax treaties. Royalties, for example, are often subject to withholding taxes and may be eligible for reduced rates under tax treaties, while business profits are generally only taxable if there is a permanent establishment. The classification of digital transactions can therefore have significant implications for the amount of tax paid and the jurisdiction where it is paid.

The problem is compounded by the fact that many digital business models involve multiple types of transactions and revenue streams. A cloud computing service, for example, might involve elements of software licensing (which could be treated as royalties), data processing (which could be treated as services), and infrastructure provision (which could be treated as rental income). The bundling of these different elements into a single service offering makes it difficult to determine the appropriate tax treatment.

For Sub-Saharan African countries, the characterization challenge is particularly important because many of these countries rely heavily on withholding taxes as a means of collecting tax from non-resident businesses. If digital transactions are characterized as business profits rather than royalties or technical service fees, they may escape withholding tax altogether if there is no permanent establishment.

Value Added Tax Challenges

Additionally, the allocation of profits and taxing rights among various jurisdictions is another core challenge for taxation in the digital economy. Value Added Tax (VAT) is also a unique challenge associated with the taxing of the digital economy. The revenue generated from VAT was a significant source of revenue for jurisdictions, especially the developing countries in the pre-digital economy. However, it has been affected due to the growth of the digital economy.

The main challenges in relation to VAT for source countries are (i) the import of low-value products which are exempted in many jurisdictions and (ii) online sales to private consumers. Many countries do not levy VAT on low-valued goods, considering that the administrative cost associated with the collection of VAT would be more than the revenue generated. The threshold of exemption is different for every jurisdiction and the challenge arises when a business deliberately structures the sale in a country with a lower threshold.

The issue also arises in circumstances where the goods, services, or intangibles have been acquired from suppliers of other jurisdictions by private consumers. As the product or service has traveled from one jurisdiction to another without any physical presence in the consumer’s country, no VAT is levied in this transaction, negatively affecting the source country’s VAT revenue.

For Sub-Saharan African countries, VAT compliance and collection from digital services presents significant administrative challenges. Many countries lack the systems and processes necessary to monitor and collect VAT from foreign digital service providers. The cross-border nature of digital transactions makes it difficult to track and verify transactions, while the large number of small transactions can create administrative burdens that outweigh the revenue collected.

2. Literature Review

2.1 Introduction and Search Strategy

The era of globalization has been characterized by the digital revolution that has made it easier for firms to conduct their operations across borders without necessarily having a physical establishment in the foreign country. Although this change has fostered economic development and globalization, there are numerous issues concerning international taxation. Base Erosion and Profit Shifting (BEPS) is a concept that deals with tax planning by multinational enterprises (MNEs) that take advantage of loopholes and disparities in the tax systems to shift profits to countries with low or no taxes and where there is little or no business activity to pay little or no taxes. These challenges have been compounded by the digital economy, as the traditional tax structures were developed based on the physical establishment in a given country, which is no longer the case in the current world.

The impact of BEPS on developing economies has been particularly severe. Recent studies indicate that Ghana alone loses approximately $2.5 billion annually to profit shifting schemes, while South Africa reports losses of over $4 billion yearly (Gbato, 2017; Readhead, 2017) The problem of BEPS in the digital economy is especially relevant for developing countries like the ones in Sub-Saharan Africa. These countries rely on corporate tax as the major source of government revenue while they struggle to implement efficient ways of taxing the digital economy and stopping base erosion and profit shifting. The multiple layers of tax treaties, poor administrative capacity, and technological barriers make it even more challenging for them to safeguard the tax bases in the growing digitalized global environment.

This paper seeks to systematically review the literature on BEPS challenges in the digital economy in the Sub-Saharan African context in order to establish the frameworks and methodologies that could lead to fair and efficient tax treaty cooperation. Therefore, the present review aims at outlining the main topics, assessing the efficiency of the existing methods, and revealing the important gaps in the literature that should be addressed in future studies.

2.2 Comprehensive Search Methodology

This literature review was conducted in a systematic manner in order to achieve the best results for the topics of base erosion, profit shifting, digital taxation, and tax treaties in Sub-Saharan Africa. The search was done systematically in the academic databases such as Google Scholar, JSTOR, EBSCOhost, Web of Science, and databases that focused on taxation and development economics.

The following keywords were used in the search process: base erosion, profit shifting, BEPS, digital economy, digital taxation, tax treaties, double taxation agreements, Sub-Saharan Africa, developing countries, tax cooperation, tax administration, multinational enterprises, transfer pricing, permanent establishment, and international taxation. To narrow the search, the articles were filtered based on their publication date of between 2013 and 2023, as the focus is on the developments that have taken place after the OECD’s BEPS initiative was launched in 2013, but including articles published before 2013 that set the foundation for the more recent works.

The search strategy was designed to capture both theoretical and empirical contributions to the literature, including peer-reviewed academic articles, policy papers from international organizations, working papers, government reports, and institutional studies. Special attention was paid to literature that specifically addresses the challenges faced by developing countries, particularly those in Sub-Saharan Africa, in implementing digital taxation measures and combating base erosion and profit shifting.

Using this search strategy and further analysis of citation links to find more sources, 150 sources were initially identified and reviewed for relevance. After screening for quality, relevance, and geographic focus, 75 sources were chosen as the basis of this literature review. These sources include a number of peer-reviewed articles, policy papers, institutional reports, and books, which together offer an insight into the field. The criteria for the selection of works included the focus on Sub-Saharan Africa, the comparison with other global regions, the discussion of the implementation concerns, and the identification of potential solutions to BEPS in the digital economy.

2.3 Conceptual Foundations of International Taxation and Digital Challenges

2.3.1. Historical Evolution of International Tax Principles

The current system of international taxation that applies to cross-border business activities was defined in the first decades of the twentieth century, while the world economy was very different from the world economy of the present digital age. Ault et al. give a historical background of the development of the principles of international taxation during this period when establishment in the foreign market was always associated with a significant physical presence. Their study shows how the creators of this system have set up the fundamental principles, including the ‘permanent establishment’ (PE) rule that would form the basis of international taxation for almost a century. This principle established a jurisdictional test that defined when a country could rightfully exercise its right to tax a foreign enterprise carrying out its business within its territory.

The development of international tax law in the early 20th century was largely driven by the need to avoid double taxation and provide certainty for cross-border business activities. The League of Nations played a crucial role in developing model tax conventions that would serve as templates for bilateral tax treaties. The principles established during this period, including the concepts of source and residence taxation, the arm’s length principle for transfer pricing, and the permanent establishment threshold, have remained largely unchanged despite dramatic changes in the global economy.

The traditional framework also created a clear divide between source-based taxation, where income is earned, and residence-based taxation, where the income recipient is based, thus striking a balance of taxing rights between capital-exporting and capital-importing countries. This distinction, which made sense in the context of physical economies, has become quite problematic as the economy has transited to digital. As Ault and colleagues convincingly explain, this model has been overturned by digitalization, which allows MNEs to continue to have significant economic operations within a market while not creating the physical presence that triggers taxation rights.

Their “roadmap for reform” recognizes that the traditional PE concept is rather outdated to address the economic landscape of digital commerce, where value creation, market presence, and revenue generation are no longer tied to physical infrastructure. The authors argue that the international tax system needs fundamental reform rather than incremental changes to address the challenges posed by digitalization.

2.3.2 Technology-Driven Transformation in Tax Administration

Chu et al. build upon these conceptual issues by focusing on the practical and technical changes in tax administration systems due to digitalization. Their work on e-invoice frameworks is a progressive concept that uses the very tools that are currently transforming the economy to improve the efficiency of tax compliance and management. The authors provide strong arguments that data-driven taxation systems are the logical progression to meet the demands of the digital economy.

Their work is more suitable for countries such as those in Sub-Saharan Africa, where paper-based administrative systems are still dominant even though the business world is embracing the digital environment. But they sensibly understand that such systems’ implementation entails significant investments in digital infrastructure, qualified human capital, and institutional capacities, which are scarce in developing countries, thus creating the paradoxical situation where the countries most exposed to digital tax base erosion may be the least capable of implementing sophisticated solutions.

The authors emphasize that the transition to digital tax administration requires not only technological infrastructure but also changes in legal frameworks, administrative procedures, and human capacity. They argue that developing countries should adopt a phased approach to digitalization, starting with simple systems that can be gradually expanded and enhanced as capacity and resources allow.

The e-invoice framework proposed by Chu et al. offers several advantages for developing countries, including improved compliance monitoring, reduced administrative costs, enhanced data quality, and better integration with other government systems. However, they also acknowledge that the success of such systems depends on factors such as internet connectivity, digital literacy, taxpayer acceptance, and the availability of technical support.

2.3.4 Game Theory and Strategic Interactions in International Taxation

Katterbauer et al. provide further insights into the conceptual conflict involved in applying industrial age taxation principles to a world of digital economy by employing the framework of Islamic games theory to analyze the strategic interactions between multinational enterprises, national tax administrations, and international organizations. Their theoretical contribution outlines how digital business models challenged conventional equilibrium ideas in taxation and opens up new theoretical angles for both corporate taxation strategies and policymaking.

The authors explain how digitalization has changed the strategic approach to international taxation by presenting these interactions as multiplayer games with different information and incentives. They argue that the conventional measures of policy and enforcement in the taxation of digital businesses may not fit properly, thus requiring new theoretical frameworks that can capture these strategic interactions and provide better policy solutions to BEPS in the digital economy.

Their game-theoretic approach provides valuable insights into the challenges faced by developing countries in negotiating with multinational enterprises and developed countries. The authors demonstrate how information asymmetries, differences in bargaining power, and coordination problems can lead to suboptimal outcomes for developing countries. They propose that regional cooperation and coordination can help developing countries improve their bargaining position and achieve better outcomes.

The Islamic finance framework proposed by the authors offers an alternative approach to international taxation that emphasizes fairness, transparency, and social responsibility. While this framework may not be directly applicable to all Sub-Saharan African countries, it provides useful insights into how cultural and religious values can be incorporated into tax policy design.

2.4 Empirical Evidence of BEPS in the Digital Context

2.4.1 Comprehensive Analysis of Corporate Tax Avoidance

The BEPS in the digital economy has been well researched to provide empirical evidence of its occurrence and the extent to which it has affected the global economy and specific regions. Beer et al. provide what is currently regarded as the most systematic and analyzes real-world empirical literature on international corporate tax avoidance, with the help of a meta-analysis that integrates numerous prior studies with different methodological backgrounds and data from different countries.

Their excellent paper systematically outlines and categorizes the main routes of profit shifting in the digital economy, namely transfer pricing of intangible assets, debt and intra-group financing, treaty shopping, and the use of permanent establishment thresholds that do not capture digital business presence. The authors provide detailed analysis of each of these channels and estimate their relative importance in terms of revenue losses.

Beer and colleagues’ quantitative data are also quite revealing: they suggest that BEPS causes annual global revenue losses of 4 percent of worldwide corporate income tax collections. This outright waste of public money at the expense of the national treasury has serious consequences on government revenue and the efficiency of service provision across the globe. They also show that there is a distributional aspect to these effects where BEPS activities have a more detrimental effect on developing countries, especially Sub-Saharan African countries.

This increased reliance is due to two major reasons: first, these economies rely more on corporate income tax revenues as a proportion of total tax revenue than developed countries with diverse sources of revenue; and second, these economies have less administrative and technical capacity to implement and enforce complex anti-avoidance measures that could otherwise address these losses.

The meta-analysis by Beer et al. also reveals significant variation in the effectiveness of different anti-BEPS measures. They find that measures targeting specific channels of profit shifting, such as controlled foreign company rules and limitation on interest deductibility, tend to be more effective than general anti-avoidance rules. This suggests that developing countries should focus on implementing targeted measures rather than attempting to adopt comprehensive anti-BEPS frameworks that may be too complex for their administrative capabilities.

2.4.2 Transparency Measures and Public Disclosure

The effectiveness of the potential policy measures to address digital BEPS is examined by Joshi and colleagues, who provide the methodologically sound analysis of the transparency measures focusing on the public country-by-country reporting. Their study on the European banking sector is novel and uses a quasi-experiment approach where the natural experiment is the implementation of mandatory public disclosure rules to analyze the effect on corporate taxes.

Their results are statistically significant, proving that the increased public transparency standards led to the decrease in the aggressive tax planning and profit shifting in the organizations that were subjected to the requirements. These empirical results imply that strategic transparency policies might be the more feasible policy solutions for Sub-Saharan African countries to combat digital BEPS with fewer implementation challenges than the technical anti-avoidance measures.

However, Joshi and colleagues provide an important qualifier that is especially applicable to the developing economy context: that transparency mandates depend on the existence of strong institutional arrangements to ensure compliance and to impose penalties for non-compliance. The authors’ data demonstrates heterogeneity of the outcomes depending on legal capacities of jurisdictions that may mean that mere promulgation of the disclosure rules without investment into the adequate monitoring and enforcement mechanisms is unlikely to result in meaningful improvements.

This empirical discovery provokes questions as to the extent that such policy strategies can be applied to Sub-Saharan African countries that may have weaker bureaucratic and enforcement systems. The authors suggest that transparency measures should be accompanied by capacity-building efforts and technical assistance to ensure that tax authorities have the skills and resources necessary to make effective use of the information provided.

The study by Joshi et al. also provides insights into the role of public pressure and reputational concerns in influencing corporate tax behavior. They find that companies subject to public disclosure requirements are more sensitive to media coverage and public criticism, which can provide additional incentives for tax compliance. This suggests that transparency measures may be particularly effective in countries with active civil society organizations and media coverage of tax issues.

2.4.3 Regional Analysis of BEPS in Africa

Oguttu provides a very detailed analysis of BEPS in the African region both in terms of quantitative analysis as well as qualitative investigation of the specific avenues that digital business models have opened for eroding the tax base in the region. From the data obtained from international organizations and national tax authorities, Oguttu affirms that Africa loses about $50-$80 billion annually through IFFs, of which corporate tax avoidance is a part.

This paper is also important in shedding light on the specific BEPS aspects relevant to Africa, such as the abuse of resource extraction contracts, trade misinvoicing, and the use of conduit jurisdictions with access to favorable tax treaties. Oguttu’s empirical work is most effective in tracing how the increasing digitalization of the economy has opened up new avenues for the artificial transfer of profits out of African jurisdictions.

The findings also show that digital business models allow MNEs to sustain significant economic presence in African markets but at the same time arrange their operations to pay very low taxes, thus eroding the already weak tax capacity of developing countries. This evidence supports the fact that, rather than simply reiterating the BEPS challenges that were already present in Africa, digital transformation has exacerbated and accelerated these challenges, meaning that there is a growing need for policy interventions that are tailored to the digital aspects of the erosion of the tax base in Africa.

Oguttu’s research also highlights the importance of regional cooperation in addressing BEPS challenges. She argues that individual African countries often lack the bargaining power and technical expertise to effectively negotiate with large multinational enterprises, but that regional cooperation through organizations such as ATAF can help to level the playing field. Her analysis shows that countries that have participated in regional initiatives have been more successful in implementing anti-BEPS measures and collecting taxes from multinational enterprises.

The study also provides valuable insights into the specific sectors and business models that are most prone to BEPS activities in Africa. Oguttu identifies the extractive industries, telecommunications, and financial services as sectors where BEPS activities are particularly prevalent. She also notes that the increasing use of digital platforms and e-commerce is creating new opportunities for profit shifting that are not adequately addressed by existing tax rules.

2.5 Fiscal and Administrative Constraints in Sub-Saharan Africa

2.5.1 Structural Economic and Institutional Challenges

The taxation system in Sub-Saharan Africa is a structure that is faced with structural, administrative, and political issues that limit the region’s ability to generate domestic resources through taxation. Lledó and Poplawski-Ribeiro present a rich set of indicators to classify these constraints and present a detailed analysis of fiscal policy in Sub-Saharan African countries. They have systematically explained how structural economic conditions make it almost impossible to establish an efficient taxation system in the region.

The large informal sector, which in many Sub-Saharan economies constitutes between 40-60% of economic activity, is a challenge because most of the activities are not within the tax system even though they contribute to the creation of economic value. This structural reality constrains the tax base and automatically leads to distortions where the formal sector business entities and workers’ pay significantly more taxes than their informal counterparts.

In addition to these structural factors, Lledó and Poplawski-Ribeiro list a number of significant challenges that adversely affect administrative capacity in relation to tax collection efforts. Their findings on the multiple-country analysis of tax administration arrangements indicate that there are recurring difficulties with items like taxpayer identification, audit, information technology, and specialized skills.

These shortcomings are evident in practical issues like the absence of complete records of taxpayers, low efficiency in monitoring compliance, inability to track complex structures, and lack of adequate funds for taking appropriate actions against non-compliance. The authors also explain how these administrative constraints intertwine and/or overlap with various political economy factors, where political economy players in the country may use their resources to veto any changes that would lead to increased transparency, expansion of the tax base, or increasing the avenues for enforcing the laws.

The authors identify several specific areas where capacity constraints are particularly acute. These include transfer pricing analysis, which requires specialized expertise that is often not available in developing country tax administrations; international tax treaty interpretation and application, which requires knowledge of complex legal frameworks; and the use of information technology systems for tax administration, which requires both technical infrastructure and human capacity.

Lledó and Poplawski-Ribeiro also analyze the political economy factors that affect tax reform efforts in Sub-Saharan Africa. They find that tax reforms are often opposed by powerful interest groups that benefit from the status quo, including large businesses that are able to negotiate favorable tax treatment and wealthy individuals who are able to avoid taxes through various means. The authors argue that successful tax reform requires not only technical improvements but also political commitment and broad-based support for change.

2.5.2 Governance Quality and Institutional Effectiveness

These constraints are described by Gorelick in detail; although his work focuses on municipal finance, the findings can be applied to the taxation systems in general. In this way, Gorelick’s study of various Sub-Saharan African institutions shows that sound taxation depends on the existence of a coherent framework of legal and administrative measures, as well as sound institutional governance.

His work shows that there is a very complex structure of subnational revenue regulation, a blurred division of powers, and bureaucratic issues that remain the main barriers to effective revenue mobilization for all levels of government. More notably, Gorelick suggests that technical approaches entail inherent limitations because designs without the adequate supporting formation of institutions and politics are unlikely to be sustainable or effective.

He then identifies these as the building blocks of any good taxation system, which are still lacking in many Sub-Saharan African countries. Gorelick emphasizes that institutional development must be seen as a long-term process that requires sustained commitment and investment. He argues that attempts to implement sophisticated tax systems without adequate institutional foundations are likely to fail and may even be counterproductive.

The study identifies several key institutional factors that are essential for effective tax administration, including clear legal frameworks that define taxing rights and responsibilities, transparent and predictable administrative procedures, adequate human and financial resources, effective oversight and accountability mechanisms, and strong political support for tax administration.

Gorelick also emphasizes the importance of coordination between different levels of government and different government agencies. He notes that fragmented and overlapping responsibilities can create opportunities for tax avoidance and can undermine the effectiveness of tax administration. The author argues that developing countries should focus on creating simple and coherent institutional structures before attempting to implement complex tax policies.

2.5.3 Corruption and Tax Morale

Jahnke and Weisser also conduct an analysis of the link between governance quality and tax compliance to determine the effect of corruption perception on the tax morale of the countries in Sub-Saharan Africa. By eliminating other confounding factors and focusing on the impact of corruption perceptions, their research design offers strong evidence that governance shortcomings erode citizens’ compliance with tax requirements.

They argue that, if citizens believe that public resources are embezzled through corrupt activities, they are likely to have low levels of tax morale. This makes corruption breed tax evasion, which in turn reduces the government’s ability to generate adequate revenues to deliver quality services, which in turn reduces citizens’ trust in government and their willingness to pay taxes.

This dynamic poses particularly acute challenges for digital taxation efforts in Sub-Saharan Africa. This is because digital business models are complex and less transparent in terms of where value is generated, users are located, and revenue is generated; therefore, it can add further pressure on already strained administrative powers dealing with conventional taxation.

Furthermore, Jahnke and Weisser’s findings indicate that perceived fairness of tax systems affects compliance behavior. In situations where digital MNEs seem to pay little taxes despite significant economic activity, such views may deepen existing perceptions of unfairness and demoralize domestic taxpayers, leading to compliance issues in the entire tax system.

The authors identify several mechanisms through which corruption affects tax compliance. First, corruption reduces the legitimacy of the tax system and undermines citizens’ willingness to voluntarily comply with tax obligations. Second, corruption creates unfair advantages for those who are able to pay bribes or use political connections to avoid taxes. Third, corruption reduces the effectiveness of tax enforcement by diverting resources away from legitimate tax collection activities.

Jahnke and Weisser also examine the relationship between different types of corruption and tax compliance. They find that petty corruption, such as bribes paid to tax officials, has a particularly strong negative effect on tax morale. However, they also find that grand corruption, such as embezzlement of public funds by high-level officials, can have an even greater impact on citizens’ willingness to pay taxes.

The study provides important insights for digital taxation policy in Sub-Saharan Africa. The authors argue that efforts to improve digital taxation should be accompanied by broader governance reforms aimed at reducing corruption and improving the transparency and accountability of government institutions. They suggest that technology can play a role in reducing corruption by automating administrative processes and reducing discretionary decision-making by officials.

2.6 Innovation and Reform Efforts in Sub-Saharan Africa

2.6.1 Institutional Innovations in Tax Administration

As highlighted in the literature, there are numerous constraints to taxation in Sub-Saharan African countries, but the countries have not been passive in addressing taxation challenges, and there are numerous innovations and reforms in the region. Ahlerup et al. provide a methodologically sound case study of various tax innovations that were implemented in a number of Sub-Saharan African countries at the aggregate level, and they use the econometric results to analyze its revenue effects, taking into consideration relevant economic and political factors.

They have also established two institutional reforms, which they argue have brought about positive changes in the amounts of money collected; these are the creation of semi-autonomous revenue bodies and the adoption of a value-added tax regime. Out of all the potentially effective models, the autonomous revenue authority model, which establishes competent institutions for tax administration that are somewhat politically insulated but still democratically answerable, has garnered success in several countries.

Ahlerup and colleagues show that this institutional change has in most cases been followed by improved revenue mobilization, operational efficiency, and increased professionalism in tax administration in the implementing countries. Likewise, their work also establishes that the implementation of value-added taxes has generally broadened the tax base, increased the revenues’ certainty, and decreased the tax compliance evasion compared to the prior consumption taxes.

Moreover, the cross-sectional analysis of their results presents significant variations in the qualitative and quantitative impact of these reforms depending on factors like initiation administrative capacities, governance structures, quality, commitment to implementation, and even the relative size and structure of the economy, especially the informal economies present in the transition countries.

The study by Ahlerup et al. provides valuable lessons for digital taxation reforms in Sub-Saharan Africa. The success of autonomous revenue authorities suggests that institutional reforms can be effective in improving tax administration, but that the specific design and implementation of these reforms matter greatly. The authors emphasize that successful reforms require sustained political commitment, adequate resources, and careful attention to local context and capacity constraints.

The analysis of VAT implementation also provides insights that are relevant for digital taxation. The authors note that VAT systems are generally more effective when they are simple, have broad bases, and are supported by adequate administrative systems. They argue that similar principles should guide the design of digital taxation systems, with emphasis on simplicity and administrative feasibility rather than comprehensiveness.

The study also highlights the importance of sequencing in tax reform efforts. The authors argue that countries should focus on building basic administrative capacity and implementing simple tax systems before attempting to introduce more complex measures. This suggests that Sub-Saharan African countries should prioritize building fundamental tax administration capabilities before attempting to implement sophisticated digital taxation measures.

2.6.2 Regional Cooperation and Institutional Development

At the regional level, the African Tax Administration Forum (ATAF) has become one of the most significant institutional developments that strengthens a collective capacity and increases African voices in the international tax processes. According to ATAF (2014), the institution has grown over the years since it was established in 2009 to be the premier forum for tax policy cooperation and expertise sharing in Africa.

Another major development is ATAF’s involvement in the OECD/G20 Inclusive Framework on BEPS that has seen African countries be involved in the process of setting standards as opposed to just implementing those set by other jurisdictions. The ATAF Consultative Conference on New Rules of the Global Tax Agenda represents this emergent regional agency, where tax administrators, policymakers, and internationalists congregate to advance uniquely African agendas and concerns on the global tax reform.

Some of the technical assistance that ATAF has provided is on transfer pricing, exchange of information, and taxation of extractive industries, which are of significant importance to African economies. Besides, the forum has set up technical committees of its own dealing with key areas such as digital taxation, tax treaties, and capacity building.

However, the literature also reveals some current difficulties in addressing the question of how African priorities and capacities for implementation are represented in the global standards, with some scholars stating that despite the growth of developing country representation in the international standardization bodies, the standards are still predominantly developed in the context of the developed countries, particularly those of the OECD.

ATAF has played a crucial role in building technical capacity in African tax administrations through training programs, technical assistance, and knowledge sharing initiatives. The organization has developed specialized expertise in areas such as transfer pricing, international taxation, and tax treaty negotiation, which has been shared with member countries through workshops, conferences, and technical missions.

The forum has also been instrumental in developing African positions on international tax issues. ATAF has prepared technical papers and position statements on issues such as the OECD BEPS project, the UN Model Tax Convention, and digital taxation. These positions have helped to ensure that African perspectives are considered in international tax policy discussions and that global standards take into account the specific needs and constraints of African countries.

ATAF has also facilitated cooperation between African countries on tax matters through initiatives such as the development of model tax treaty provisions, the establishment of mutual agreement procedures, and the creation of joint audit programs. These initiatives have helped to reduce double taxation, improve tax compliance, and increase tax revenues in participating countries.

2.6.5Technological Advancement in Tax Administration

Technological advancement is another area that holds a lot of potential for enhancing tax administration in Sub-Saharan Africa. Chu et al. give a comprehensive technical review of electronic invoicing systems and, using theoretical modeling and case studies, illustrate how the use of digital technologies can enhance tax administration.

Their research demonstrates that e-invoice systems can be effective in improving compliance monitoring, decreasing costs for administrative purposes, minimizing fraud opportunities, and providing powerful data to help establish good enforcement information and effective enforcement mechanisms. Technological solutions are most useful for solving some of the problems of digital taxation since they help to establish more effective means of tracking transactions that may otherwise go unnoticed by the tax authorities.

Some of the Sub-Saharan African countries have adopted such technological advancements in a more or less advanced and extensive manner. Some of the success stories in the use of digital technologies in tax administration include Rwanda’s Electronic Billing Machine, Kenya’s iTax, and South Africa’s e-filing.

However, Chu and colleagues also recognize significant practical requirements for such systems, such as sound IT infrastructure, legal frameworks to support e-commerce, IT professionals to maintain the systems and analyze the data, and organizational skills to shift from legacy systems, which are still scarce in many SSA countries.

The implementation of electronic invoicing systems has shown promising results in several Sub-Saharan African countries. In Rwanda, the Electronic Billing Machine system has increased tax compliance and revenue collection while reducing administrative costs. The system requires businesses to use certified electronic invoicing machines that automatically transmit transaction data to the tax authority, making it difficult to under-report sales.

Kenya’s iTax system has similarly improved tax administration by providing online services for taxpayer registration, return filing, and payment. The system has reduced the time and cost of tax compliance for taxpayers while providing the tax authority with better data for compliance monitoring and risk assessment.

South Africa’s e-filing system has been one of the most successful examples of digital tax administration in the region. The system allows taxpayers to file returns and make payments online and has significantly reduced processing times and costs. The system also provides taxpayers with real-time information about their tax obligations and refund status.

However, the literature also highlights the challenges faced in implementing digital tax administration systems in Sub-Saharan Africa. These challenges include limited internet connectivity, low levels of digital literacy, resistance to change from taxpayers and tax officials, and the need for significant investments in technology and human capacity.

2.7 OECD BEPS Framework and Developing Country Perspectives

2.7.1 Comprehensive Assessment of the BEPS Initiative

The Base Erosion and Profit Shifting by the Organization for Economic Cooperation and Development has become the leading international framework for addressing tax issues in the digital economy. In the paper by Ault et al. the authors give a positive assessment of the BEPS Action Plan and potential benefits of this initiative for enhancing international cooperation in the field of taxation while pointing out the weaknesses of this approach in regard to the requirements and challenges of the developing countries.

Some of them observe that while the BEPS initiative has been a positive development in international cooperation in taxation, many of its recommendations are based on administrative capacities and economic systems that may not be available in many developing countries, including those in Sub-Saharan Africa.

The BEPS Action Plan represents the most comprehensive reform of international tax rules in decades, but its design and implementation have been primarily driven by the concerns and capabilities of developed countries. The 15 actions address various aspects of international taxation, including hybrid mismatches, controlled foreign company rules, limitation of interest deductibility, harmful tax practices, treaty abuse, permanent establishment, transfer pricing, transparency, and dispute resolution.

While these actions address important issues that affect all countries, the specific recommendations and implementation guidance often assume levels of administrative capacity, legal sophistication, and resource availability that may not exist in many developing countries. For example, the transfer pricing guidelines assume that tax authorities have access to extensive databases of comparable transactions and the expertise to conduct complex economic analyses.

The BEPS minimum standards, which all Inclusive Framework members are expected to implement, include measures on harmful tax practices, treaty abuse, country-by-country reporting, and dispute resolution. While these standards are important for ensuring a level playing field, their implementation can be challenging for developing countries with limited administrative capacity.

2.7.2 African Participation and Implementation Challenges

Oguttu provides a detailed analysis of the OECD BEPS framework and its applicability to African countries, as well as an assessment of the 15 BEPS Actions agenda. There are several areas of BEPS that the recommendations will need to be adapted to suit the African context, such as treaty shopping, transfer pricing, and withholding taxes as administrative measures.

Similarly, Oguttu underlines the need for regional cooperation through bodies such as ATAF to enhance the representation of Africa in the international tax debates and to establish effective implementation strategies at the regional level. She argues that individual African countries often lack the bargaining power and technical expertise to effectively participate in international tax policy discussions, but that regional cooperation can help to amplify African voices and ensure that African perspectives are considered.

Oguttu’s analysis highlights several specific challenges that African countries face in implementing BEPS measures. These include limited administrative capacity to conduct complex transfer pricing analyses, lack of access to comparable data for transfer pricing purposes, weak legal frameworks for implementing anti-avoidance measures, and insufficient resources for training and capacity building.

The study also identifies areas where BEPS measures may need to be adapted for the African context. For example, the country-by-country reporting threshold of €750 million may be too high to capture many of the multinational enterprises operating in Africa. Similarly, the focus on intangibles in the transfer pricing guidelines may not adequately address the issues faced by African countries in the extractive industries.

Oguttu argues that the BEPS initiative should be complemented by additional measures that address the specific needs of developing countries. These could include simplified transfer pricing rules for developing countries, enhanced technical assistance and capacity building, and measures to address issues that are particularly relevant for developing countries, such as tax incentives and illicit financial flows.

2.7.3 Comparison of UN and OECD Approaches

The views of developing countries in the international tax systems are discussed further by Daurer and Krever, who discuss the UN and OECD tax policies in the African countries. Their study shows where the dividing line between taxing rights of source country and residence country lies in the context of international taxation and how the UN Model accords more taxing rights to source countries (which are mostly developing countries where economic activities take place) than the OECD Model, which grants more taxing rights to residence countries (which are mostly developed countries where MNEs are based).

The UN Model Tax Convention was developed specifically to address the needs of developing countries and to provide a more balanced allocation of taxing rights between source and residence countries. The UN Model generally provides for higher withholding tax rates on passive income, broader definitions of permanent establishment, and more extensive source taxation of services.

The differences between the UN and OECD Models reflect different philosophical approaches to international taxation. The OECD Model is based on the principle that income should be taxed where economic activity takes place, while the UN Model recognizes that developing countries should have greater taxing rights as source countries to compensate for their limited ability to tax the worldwide income of their residents.

Daurer and Krever’s analysis shows that the choice between the UN and OECD Models can have significant implications for the allocation of taxing rights between developing and developed countries. They argue that African countries should carefully consider these implications when negotiating tax treaties and should generally favor approaches that preserve their taxing rights as source countries.

The authors also note that the BEPS initiative has led to some convergence between the UN and OECD approaches, with both models incorporating measures to prevent treaty abuse and artificial avoidance of permanent establishment. However, they argue that important differences remain and that developing countries should continue to advocate for approaches that recognize their particular needs and constraints.

2.8 Tax Treaties and Their Implications for Sub-Saharan Africa

2.8.1 Critical Analysis of Existing Treaty Networks

The impact of tax treaties in either mitigating or furthering BEPS is a key focus in the literature. Hearson gives a critical analysis of tax treaties in Sub-Saharan Africa and observes that most existing tax treaties limit the taxing powers of African countries without necessarily providing corresponding benefits in terms of increased investment and/or reduced double taxation.

He shows that many of the treaties with Sub-Saharan African countries have low withholding tax rates, a narrow definition of permanent establishment, and limited anti-abuse rules that could actually encourage profit shifting. Hearson’s analysis reveals that many African countries have signed tax treaties that significantly reduce their taxing rights without obtaining meaningful benefits in return.

The study examines the treaty networks of several Sub-Saharan African countries and finds that many treaties were negotiated at a time when these countries had limited expertise in international tax matters and were primarily concerned with attracting foreign investment. As a result, many treaties contain provisions that are more favorable to residence countries than to source countries.

Hearson identifies several specific problems with existing treaty networks in Sub-Saharan Africa. These include very low or zero withholding tax rates on dividends, interest, and royalties; narrow definitions of permanent establishment that allow foreign companies to have substantial economic presence without being subject to tax; and limited anti-abuse provisions that can be easily circumvented by multinational enterprises.

The study also examines the use of tax treaties for treaty shopping, where multinational enterprises establish entities in treaty countries solely to take advantage of favorable treaty provisions. Hearson finds that several African countries have been used as conduit jurisdictions for treaty shopping, often without receiving significant economic benefits.

2.8.2 Investment Effects and Revenue Trade-offs

Petkova et al. provide a more general analysis of the importance of double taxation treaties, with a focus on the impact on FDI and tax collection. They argue that while the treaties may boost investment in some sectors, they also reduce tax revenue, which can adversely affect countries with limited funds, like those in Sub-Saharan Africa.

In addition, they discover that the investment-promoting influence of these treaties varies, with positive effects being found mainly in countries with relatively better institutional quality, implying that treaties alone cannot generate investment in many African settings where governance and the business environment have to improve concurrently.

The study by Petkova et al. uses a large dataset of bilateral investment flows and tax treaty provisions to examine the relationship between tax treaties and foreign direct investment. They find that tax treaties do have a positive effect on investment flows, but that this effect is relatively modest and is concentrated in certain types of investment and certain countries.

The authors also examine the revenue effects of tax treaties and find that the revenue losses from reduced withholding tax rates and other treaty benefits often exceed the tax revenues generated from increased investment. This suggests that many developing countries may be giving up more in tax revenue than they gain from increased investment.

The study also examines the heterogeneity of treaty effects across different countries and finds that the investment benefits of tax treaties are generally larger in countries with better institutions, more developed financial markets, and more stable political environments. This suggests that countries with weak institutions may not receive significant investment benefits from tax treaties.

Petkova et al. argue that developing countries should carefully weigh the costs and benefits of tax treaties and should consider alternatives such as unilateral investment promotion measures that do not involve giving up taxing rights. They also suggest that international organizations should provide more technical assistance to help developing countries negotiate better treaties.

2.8.3 Regional Integration and Coordination

Baruti has also looked into the regional aspect of tax treaty policies, focusing on investment facilitation in COMESA, EAC, and SADC. She also shows how regional strategies of tax treaty policy might improve the bargaining power of African countries and enhance more integrated and development-oriented treaty networks.

She also points out that there are coordination issues and conflicting interests that have hindered the efficiency of regional efforts to date. Baruti’s analysis shows that regional economic communities in Africa have the potential to play an important role in coordinating tax treaty policies and enhancing the bargaining power of member countries.

The study examines the approaches taken by different regional organizations and finds that there are significant differences in their levels of coordination and integration on tax matters. Some organizations, such as the EAC, have made progress in developing common approaches to tax treaty negotiation, while others have focused more on other aspects of economic integration.

Baruti identifies several benefits of regional coordination on tax treaty matters. These include improved bargaining power in negotiations with developed countries, reduced opportunities for treaty shopping within the region, enhanced information sharing and cooperation between tax authorities, and the development of common standards and approaches to international taxation.

However, the study also identifies several challenges to regional coordination. These include differences in economic development levels and tax systems among member countries, competing interests and priorities, limited administrative capacity at the regional level, and the preference of some countries for bilateral rather than multilateral approaches.

Baruti argues that regional organizations should play a more active role in coordinating tax treaty policies and that member countries should be willing to give up some sovereignty in exchange for collective benefits. She suggests that regional organizations could develop model treaty provisions, coordinate negotiation strategies, and provide technical assistance to member countries.

3. Methodology

3.1 Introduction

The author chose to carry out qualitative research which aims to understand the “why” and “how” behind human behavior and experiences, using non-numerical data like interviews, observations, and focus groups to gain in-depth insights. This section illustrates and shows the research’s methodological underpinnings and details on the research philosophy grounded theory, limitations, and analysis of assumptions.

3.2 Theoretical Framework

IR theories are useful in analyzing the dynamics of countries’ relations in combating the BEPS in the digital economy. This study employs several IR theories to examine the subject of tax treaty cooperation in Sub-Saharan Africa.

Neoliberal institutionalism is especially pertinent since it focuses on how institutions and cooperation structures can assist states in overcoming the issue of free riding. In the context of international taxation, this theory contributes to understanding why countries may engage in cooperation through structures like the Inclusive Framework on BEPS despite conflicting self-interests in the economy.

From the constructivist perspective, it is possible to understand how the norms regarding ‘fair taxation’ emerged in the international system and how these norms impact the actions of states. This is helpful in understanding how Sub-Saharan African countries formulate their strategies for international tax cooperation, not only through self-interests but also through shared meanings of fairness, sovereignty, and development.

The Dependency Theory can be used as a theoretical framework for understanding the power relations between the first and the third world countries in the field of international taxation. This theory can also explain why the Sub-Saharan African countries may be in a weaker position when it comes to negotiating tax treaties with the more economically developed states and why the cooperation within the region may be beneficial in achieving a more favorable bargaining position.

Economics theories are important in understanding the fiscal and developmental consequences of tax base erosion and the possible gains from tax treaty arrangements. Public finance theory is used in the evaluation of taxation in the provision of public goods and services, especially in developing countries. Game theory provides theoretical tools to analyze the behavior of countries in the context of tax competition and cooperation.

Grounded theory is chosen as the main method of this study because of the importance of establishing a theoretical framework when there is little or no theory developed in a specific field. The study of digital economy taxation is still relatively new and dynamic, especially for Sub-Saharan African countries; therefore, grounded theory offers the appropriate breadth and depth of the findings.

3.3 Research Philosophy

Research philosophy is an important aspect of research as it provides the framework and perspective for conducting research. It refers to the set of beliefs and assumptions that underlie the researcher’s approach to research. According to a study conducted by Saunders, it is evident that research philosophy helps in theory development of a study and therefore this is one of the main reasons as to why this study seeks to have a philosophical underpinning that would help in the development of the study.

This research fits well into a constructivist paradigm given that it is a qualitative study that uses the grounded theory approach. Constructivism is the standpoint that there is no inherent reality, and the world is not a fixed fact but is socially constructed by experiences and interactions. This philosophical stance is relevant for understanding tax treaty cooperation in Sub-Saharan Africa because culture, politics, and socio-economic factors affect the perception and application of taxation policies.

3.4 Methods and Design

This section examines the steps that were undertaken by the researcher to gather qualitative data for this research that would help establish a firm theory to answer the research question and fulfill the hypothesis.

Initially, the author developed, distributed, and evaluated a quantitative social media survey to assess the participant’s awareness of the topic. The broader objective of the survey would be to determine whether inefficient taxation on the digital economy is negatively affecting the local businesses in the Sub-Saharan African countries.

As a next step, the author planned to conduct qualitative research, including at least three expert interviews with revenue collection authorities in at least five Sub-Saharan African countries, approximately ten in-depth interviews with local businesses who have been impacted by the digital presence of multinational companies in Sub-Saharan African countries, and five interviews with community members.

Benefits of qualitative methods include their suitability to contextualize, describe, interpret, and reach an in-depth understanding of the study’s subject. Qualitative approaches are flexible, swift to adapt to unexpected changes, and conducted at comparably low cost. Snowballing sampling would be used to identify interview partners.

3.5 Data Collection and Analysis

The analysis of the data takes place at the same time as the collecting of the data. In the context of grounded theory analysis, this methodology is often referred to as continual comparative analysis and theoretical sampling. The researcher acquired quantitative data surveys, researching information from the government database.

The comparison of the categories or themes, together with further refinement brought forth by the data, continues until only a select few powerful categories or themes are left. It is from the data collected that themes were obtained and later translated into theories by the researcher.

3.6 Ethical Considerations

Like any research methodologies, grounded theory research has ethical issues that must be considered at every stage of the investigation. The first aspect of this consideration was informed consent. Each study’s participant must be provided with information about the study and what it entails, and they must be given the choice of whether or not to participate.

Protection of participants is yet another key ethical consideration that is used to enhance the study’s autonomy. Researchers need to take precautions to keep participants safe from mental and bodily harm. Researchers should be conscious of their own biases and how they might influence the course of the research and its outcomes.

4. Realities of Tax Base Erosion

As seen in the literature review, there are a number of issues that are affecting the African countries to an extent that most of them are facing huge crisis with tax base being eroded by the first rising digital economy. Sub-Saharan Africa has become the hot bed of activities channeled to improving the economy, but the presence of the digital economy complicates the efforts emplaced to increase tax base.

One of the growing challenges that is being faced in Africa is that most of the countries are resource dependent and therefore have issues when tax base is eroded. The increased globalization and rise of forex and cryptocurrency have threatened to thwart the economic activities even further. The researcher found that the government in Kenya for instance reported losing billions of Kenyan Shillings in illegal online trades which the government lacks the infrastructure to contain.

The research has identified various gaps that could lead to various taxation issues in Sub-Sahara African countries. For instance, corruption has been a huge impediment in these countries, and this is a major problem which the government has sought to eliminate for a very long time without success.

The erosion of the tax base in Sub-Saharan Africa can be caused by a variety of other circumstances besides the previous listed reasons and some of the information that was gathered from literature reviews from various resources. The most frequent causes include illegal/illicit financial flows, transfer pricing, tax incentives, poor tax administration, the informal sector, and international tax regulations.

4.1 Base Erosion and Profit Sharing

Base erosion is the manipulation of financial measures and tax planning to minimize an organization’s taxable profit within a particular country. It is done by designing and structuring their income positions that ensure more favors in tax treatment or avoiding income payments. Profit sharing encircles issuing payments to other companies related to the host company to move profits from high-tax regions to lower-tax states.

Techniques that are used in base erosion and profit shifting include transfer pricing, where the company manages its trademark designs and patents by utilizing lower tax rates for its intellectual properties. A second technique, thin capitalization, is when companies start subsidiaries using minimal share capital. Additionally, there are hybrid mismatch arrangements. The different tax policies and laws have allowed businesses to exploit those differences to reduce their taxes.

Due to the increased awareness of the low tax payments, those international companies are paying for, and the challenges presented by these practices, G20 and OECD countries assembled to devise a plan to mitigate the challenges arising from taxes disputes that are being experienced because of BEPS. These strategic plans were developed based on two pillars that OECD published.

4.2 Pillar One

Pillar One suggests the adjustments and accommodation of changes in the business models. This is attributed to the rise of the digital economy. It can be achieved by introducing new profit allocation systems and schemes while also drafting “nexus rules” to expand the tax authorities of the markets. The proposals identify the larger and more profitable business as the target for these strategies and implementations.

Additionally, Pillar One has proposals for avoiding double taxation. There is the identification of the possibility of a business having double taxation due to residual income (amount A) not being identified as a single item due to the complex structure of the operational models. The suggestion is the introduction of a technique composed of two parts. The first part entails identifying the organization earning residual income (amount B). The second part suggests using the credit method to reduce the possibilities for double taxation on the income presented.

Pillar One also suggests the development and determination of tax certainty and dispute resolutions as a necessity. The process to determine the amount A is complex and challenged hence the suggestion for drafting policies and guidelines to help businesses with dispute prevention and resolution.

4.3 Pillar Two

The proposal drafted within this set-up seeks to address the issues arising from countries building completion among each other by reducing their tax rates or setting zero corporate taxing rates. The proposal is that the country’s tax authorities develop and implement tax rights that req big cooperation to pay minimal returns irrespective of whether they set up headquarters or are operating in the country.

Additionally, it suggested a global minimum tax rate which was agreed to be a “minimum of” 15%. It also suggests other techniques or rules to handle base erosion. These included an inclusion rule, an under-taxed payment rule, a switch-over rule, and a subject-to-tax rule.

4.4 Action Items

Further, there was the discussion and drafting of action ideas. Plans that would be used to reduce the negative impact BEPS has had on countries, especially developing countries and generate a common ground for international corporate tax dynamics. OECD proposed fifteen items, including addressing the tax issues arising from the emergency of the digital economy as the first action.

The second step is to neutralize the impact of “hybrid mismatch.” The next strategy would be strengthening CFC (Controlled Foreign Companies). The fourth suggested action plan would be to restrict base erosion from being subjected to interest reductions or other financial payments. The fifth proposal would deal with the negative effects of tax practices and doctrines by ensuring transparency and substance.

4.5 Importance of Corporate Income Taxes in Sub-Sahara Africa

In most African countries, tax revenues are crucial as they serve as the main source of revenue to the governments to foster economic growth and the running of their administrations. Twenty-nine percent of the generated revenue within African countries is derived from the business taxes that are generated within their economies. Hence BEPS practices will adversely affect African countries’ economic ability.

Developed countries do not rely heavily on corporate tax revenues since they are able to generate substantial revenue from individual income and consumption taxes. However, this is not achievable in developing countries as most businesses are informal and maintain few to no book accounts.

4.6 BEPS in Sub-Sahara Africa

The concerns of BEPS in African countries are not relatively new; like other developing countries, they are likely to experience similar challenges. For a very long period, they have been a victim of these trends from multinational enterprises, shifting their revenue to other countries that offer certain tax haven incentives, especially developed countries.

Several aspects are influencing the significant engagement of BEPS in African countries. Some factors include unclear comprehension of the international tax laws or the lack of international tax laws that could help deal with and prevent BEPS tendencies in the countries. Most countries lack this because most countries prioritize the development of local companies and tax dynamics that focus on the generation of income tax from domestic organizations.

The negotiation dynamics of the tax treaties could contribute to BEPS. In most cases, African countries sign treaties for their political gain, not considering the economic gain they could realize from having substantial treaties with the developed countries. There is a misconception within the countries that signing treaties with developed countries would result in losing their taxing rights and sources of taxation and being tied to bilateral treaty obligations that may not be favorable.

4.7 African Initiatives towards OECD Plan

As a result, the African countries sought to identify the solution to the challenges presented by BEPS and how the OECD would be helpful to the countries and the regions. Their initiative can be subdivided into two categories regional and national initiatives. Hence, the conference held in South Africa by different African leaders in the financial industry discussed and reviewed the impact of the OECD initiative on the African States.

The African states must review the 15 action items regarding the African dynamics, take the opportunity to deal with the concerns and issues, and become prepared to handle BEPS. Notably, African countries have a lot to review. They need to improve their governance abilities, expand their tax bases, and increase their tax revenues.

To further these efforts, dialogs were established to facilitate the communication and understanding of BEPS both within the continent and internationally. The states must refine their regional tax policies and guidelines and design new structures to help interact with the rest of the world.

5. Digitization of Tax Collection Methodologies

The results obtained from the research have demonstrated a number of challenges in Sub-Saharan Africa. The case study of Central African Republic (CAR) is a good example of how lack of digitization in the tax collection affects the country’s revenue correction making tax base erosion to be experienced. According to Mansour, Central African Republic and Democratic Republic of Congo have had the most taxation loopholes that have been used by tax evaders and are therefore causing a huge challenge and crisis.

Using digital technologies to automate and improve the efficiency of tax collection procedures is what is meant by the term “digitization of tax collection policy.” These may include digital communication tools, data analytics, online tax portals, electronic filing and payment systems, and online tax preparation services.

Putting tax collection procedures online has a number of advantageous side effects. To begin, it may help to enhance efficiency by cutting down on the amount of manual processes and paperwork that are required, which may result in time and resource savings for taxpayers as well as for tax authorities. On the other hand, technology helps improve openness and accountability by delivering data and analytics in real time, which makes it simpler to spot instances of tax evasion and fraud.

It is essential to have a robust digital infrastructure in order to properly implement digitization of tax collection strategies. This infrastructure should include secure networks, reliable data storage systems, and effective cybersecurity measures. In addition, comprehensive marketing and education initiatives are required to ensure that taxpayers are able to utilize digital tax tools and that they understand how to do so.

In an effort to ensure that base erosion as experienced in Sub-Saharan countries is mitigated or even eliminated, there are a number of ways digitization of these policies would help individual states enhance tax collection within their jurisdictions. The following are tested steps that have been applied elsewhere in countries that have upheld digitization in tax collection.

The use of internet platforms to provide taxpayers with the ability to electronically file their tax returns and make payments allows for the implementation of electronic filing and payment systems. However, this is a platform that is missing in countries such as Chad and Central African Republic probably because of poor internet connectivity for many parts of the country.

Registration for a Taxpayer Identification Number (TIN) requires the application of technology to accomplish the task of registering taxpayers and assigning them one-of-a-kind identifying number. This contributes to an improvement in tax compliance and enables tax authorities to track taxpayers more efficiently.

Taxpayers in nations in Sub-Saharan Africa, where the use of mobile phones is common, may be able to pay their taxes using their mobile phones if the government makes that option available. For instance, in East Africa countries, the use of mobile money is rampant, and this is an area in which these individual states government has failed to ensure adoption of mobile tax payments.

Invoicing digitally refers to the process of generating and transmitting invoices digitally rather than on paper. This eliminates or significantly lowers the requirement for paper-based invoices. This contributes to the enhancement of efficiency as well as the reduction of the danger of errors and fraud.

Another way to bolster digitization process is through data analytics and business intelligence which has been advocated by various scholars. This is the utilization of various tools for data analytics and business intelligence in order to evaluate tax data and recognize patterns and trends. This makes it easier for tax authorities to improve compliance, which in turn helps them cut down on tax evasion and increase revenue collection.

In the process of automating and digitizing tax collection, there are several countries that have adopted the use of artificial intelligence to ensure compliance when collecting tax. This is the latest digital technology that has helped countries detect tax fraud evasions among many other legal issues that are being experienced in different sectors.

6. Ensuring Tax Treaty Cooperation in Sub-Saharan Africa

The collection of taxes is a fundamental component in the growth of every nation. It is the principal source of revenue that governments rely on to fund public services, the construction of infrastructure, and other important activities. Taxation continues to be a key obstacle in Sub-Saharan Africa due to the fact that many governments in the region struggle to develop efficient taxation systems and fiscal policies.

Even so, as a result of the increasing degree to which the economy is globalized, it has become more obvious that there is a necessity for international cooperation in taxing. In this section, the author examines the significance of developing taxation treaty cooperation in Sub-Saharan Africa, as well as the difficulties and possible solutions to those difficulties.

6.1 Collaboration in Taxation Treaties Bearing Significant Significance in Sub-Saharan Africa

Some of the world’s most impoverished nations can be found in the sub-Saharan region of Africa. Many of these nations heavily rely on assistance from other countries in order to finance their various development projects. Yet, the amount and nature of foreign help can be difficult to forecast, and it sometimes comes with stipulations that aren’t necessarily compatible with a nation’s plans for economic growth.

When viewed in this light, taxation emerges as an essential instrument for producing cash that nations can employ to independently fund their own development programs. Taxation treaty cooperation among Sub-Saharan African countries would create a forum for these countries to collaborate and develop their tax systems.

Taxation treaty cooperation would also increase openness in taxation, eliminate instances of tax evasion, and ensure that those who are obligated to pay taxes pay those taxes. The informal sector is prominent in many of the nations in sub-Saharan Africa, and a large number of firms operate without legal registration; as a result, it is difficult to implement tax rules in these countries.

6.2 The Obstacles That Stand in the Way of Sub-Saharan Africa Forming Taxation Treaty Cooperation

There are many obstacles to overcome in order to establish taxation treaty cooperation in Sub-Saharan Africa. To begin, there is a lack of political will on the part of some nations to cooperate in things pertaining to taxes. Some nations believe that taxation is a matter of national sovereignty and are therefore hesitant to transfer management of the issue to regional or international organizations.

The second issue is that many nations in Sub-Saharan Africa do not have the capabilities necessary to successfully operate their tax systems. A significant number of tax authorities lack the resources, the skills, and the technology necessary to properly enforce tax rules. Because of this lack of competence, it is difficult to build a solid taxation treaty cooperation mechanism that is capable of successfully combating tax evasion and other crimes related to taxes.

Last but not least, one of the most severe problems facing many nations in Sub-Saharan Africa is corruption. Taxation systems are undermined along with public trust and economic growth when corruption is present in a society. Combating corruption calls for political willpower, institutional change, and investments in both technology and human resources, among other things.

6.3 Potential Solutions

It is necessary to use a multifaceted approach that considers the political, technological, and institutional issues in order to overcome the obstacles that stand in the way of establishing taxation treaty cooperation in sub-Saharan Africa.

First and foremost, political leaders in Sub-Saharan Africa need to acknowledge the significance of taxation treaty cooperation and make a commitment to collaborate in order to set up a structure that will facilitate such collaboration. In order to accomplish this, there must be the creation of a unified plan for the reform of taxation, the establishment of confidence among nations, and the participation in conversation to settle conflicts.

Second, in order to develop productive taxation treaty cooperation, it is very necessary to increase the capability of tax authorities. In order for tax authorities to be able to efficiently enforce tax rules, it is necessary for them to make investments in technology, train skilled workers, and attract new employees.

Finally, combating corruption in countries located in sub-Saharan Africa calls for a concerted effort to bolster existing institutions, advance transparency initiatives, and ensure that corrupt individuals are held accountable. In order to accomplish this goal, legal and institutional changes must be made, investments must be made in both technology and human resources, and independent oversight organizations must be created.

6.4 Are Tax Treaties Possible in Africa?

Cooperation between nations in the area of tax treaties is referred to as “tax treaty cooperation,” and it involves efforts to eliminate or minimize double taxation, stop tax evasion, and encourage international commerce and investment. Tax treaties are agreements between two or more countries that describe the rules for taxing the income and assets of taxpayers who have connections to more than one country.

Over the course of the last several years, the African continent has made great headway in terms of both economic growth and development. Despite this, the continent is nevertheless beset by a myriad of problems, the most significant of which being poverty, inequality, corruption, and inadequate governance.

Because of these obstacles, the continent has been less successful in luring foreign investment and commercial activity, both of which are essential for the expansion and growth of the economy. Cooperation through tax treaties can play an important part in boosting international investment and trade, but doing so requires a regulatory and institutional environment that is amenable to the idea.

Despite these obstacles, there have been a number of initiatives undertaken to advance tax treaty cooperation in Africa. The Organization for Economic Cooperation and Development (OECD) has been working with African countries to promote the adoption of international tax standards. One such project is called the Base Erosion and Profit Shifting (BEPS) project, and its goal is to stop multinational corporations from shifting profits to low-tax countries in order to avoid paying taxes.

In addition to this, the African Union has been making efforts to facilitate tax treaty cooperation between African nations. Provisions for tax treaty cooperation are included in the African Continental Free Trade Area (AfCFTA) agreement, which has the overarching goal of establishing a unified market for the exchange of goods and services across Africa.

6.5 Can EAC, SADC, and COMESA act as Tax Treaty Cooperations in Africa?

The East African Community (EAC), the Southern African Development Community (SADC), and the Common Market for Eastern and Southern Africa (COMESA) are the three regional economic communities in Africa that have been working towards improving economic cooperation and integration in the region. One of the areas that these communities have been concentrating on is the establishment of tax treaty cooperation in order to encourage international business and investment.

Tax treaty cooperation entails the signing of bilateral or multilateral agreements between countries to avoid double taxation and prevent tax evasion. These agreements can either be bilateral or multilateral. It can be helpful in promoting investment by providing investors with greater consistency and predictability in relation to their tax liabilities in multiple nations.

COMESA, the EAC, and SADC have each made progress toward establishing a cooperative tax pact. In 2019, COMESA launched a portal that allows member nations to develop a unified strategy for dealing with tax difficulties and communicate information with one another regarding tax-related matters. The platform is intended to promote member states’ compliance with international tax standards while also enhancing member states’ ability to cooperate with one another on tax concerns.

In a similar fashion to COMESA, the EAC is a regional intergovernmental organization which has been working toward the establishment of tax treaty cooperation by negotiating agreements with other nations in the area. For instance, in 2018, the EAC inked a tax treaty with Mauritius with the intention of encouraging commerce and investment across international borders.

The Southern African Development Community (SADC) has also been active in encouraging tax treaty cooperation to achieve development and economic growth, alleviate poverty, enhance the standard and quality of life of the peoples of Southern Africa and support the socially disadvantaged through regional integration. The SADC started a new initiative in 2019 to improve tax cooperation and information sharing among its member states.

There are still issues that need to be resolved, despite the fact that these activities constitute positive steps toward the collaboration required by tax treaties. One of the most significant difficulties derives from the fact that different nations’ taxation systems are not standardized in any way. Because of this, it can be challenging to establish tax treaties that are advantageous to all parties involved in the process.

The inability of many African nations to successfully execute tax treaties due to a lack of capacity and resources is another obstacle that must be overcome. This can lead to non-compliance, which makes it harder to enforce the rules of tax treaties, and it can also lead to increased costs.

7. Tax Base Erosion Prevention Legal Framework

The digital economy came with its advantages in terms of which government structures MNEs could use to ensure greater tax reduction and business success for their companies. Multinational corporations have adopted this strategy that means they seek to exploit the loopholes and gaps present to avoid paying taxes. This has thus paralyzed most governments’ efforts to ensure that they control tax base erosion that has been a major issue in Sub-Saharan Africa.

Tax Base Erosion, often known as TBE, refers to the process of lowering one’s tax liability by taking advantage of the differences between various tax systems. Transfer pricing, hybrid mismatches, treaty shopping, and other forms of TBE are only some of the various ways that TBE can manifest itself. In fact, TBE has the potential to compromise the integrity of tax systems, deprive nations of the revenue necessary for public goods and services, and make the playing field less level for corporations.

Countries have built a legal framework in an effort to prohibit TBE, which comprises both domestic laws and international agreements. Some examples of legal actions that can assist in mitigating or eliminating TBE include anti-avoidance rules, such as the General Anti-Avoidance Rule (GAAR), which is meant to provide tax authorities with the opportunity to analyze the primary purpose of business arrangements and is a crucial strategy for governments.

Other examples of legal actions include Controlled Foreign Corporation (CFC) laws, Transfer pricing requirements, Country-by-country reporting (CbCR), and Exchange of information agreements.

7.1 Convention on Multilateral Implementation of Tax Treaty Related Measures to Combat Base Erosion and Profit Shifting

The Multilateral Convention on the Avoidance of Double Taxation (MLI) is a legal framework designed by the OECD that enables nations to apply measures to prevent double taxation in bilateral tax treaties. The MLI comprises a variety of different clauses, some of which deal with hybrid mismatches, treaty misuse, and permanent establishments. In general, a mix of these preventative measures can be helpful in preventing TBE and ensuring that nations have the money necessary to fund the provision of public goods and services.

The application of a minimum tax rate is one strategy or notion that can be utilized to stop the deterioration of the tax base. This strategy suggests that all nations should come to an agreement to set a minimum tax rate that all businesses, regardless of where they are located or where they conduct business, are required to pay. This would make it more difficult for businesses to move their earnings to countries with lower tax rates.

An agreement on a worldwide minimum tax rate of at least 15% was announced by OECD in October 2021. The global minimum tax rate is scheduled to be implemented by the year 2023. The pact, which comprises more than 130 nations, is intended to combat the erosion of tax bases and the shifting of profits caused by multinational corporations.

Countries can ensure that businesses are not able to escape paying their fair share of taxes by moving profits to low-tax jurisdictions by establishing a minimum tax rate. This allows countries to prevent firms from being able to avoid paying their fair share of taxes. This would contribute to the maintenance of a tax base that is more stable and would lower the incentives for businesses to engage in tax planning tactics that have the potential to erode the tax base.

8. Conclusions and Recommendations

The practice of individuals or businesses lowering their tax bill by taking advantage of loopholes and irregularities in the tax system is a form of the phenomena known as “tax base erosion.” Transfer pricing, profit shifting, and the utilization of tax havens are a few of the many methods that can be utilized to accomplish this goal. Erosion of the tax base is a significant challenge for many of the countries that are located in Sub-Saharan Africa, and it is a problem that affects the entire region.

There are a number of factors that contribute to the erosion of the tax base in Sub-Saharan Africa, including a lack of technical capacity, ineffective tax administration, corruption, and inadequate legal and regulatory frameworks. In addition, the region’s heavy reliance on natural resources such as oil and minerals provides opportunities for multi-national corporations to shift profits and avoid paying taxes.

Transfer pricing is one of the most common practices that contributes to the erosion of the tax base in Sub-Saharan Africa. Multinational corporations may engage in this practice in order to move their profits to tax jurisdictions with lower rates by setting artificially low prices for the goods and services that are traded between their various subsidiaries.

As a direct result of the erosion of their tax bases, many countries in Sub-Saharan Africa have taken steps to improve the effectiveness of their taxation systems. This includes working with other countries to combat tax avoidance and evasion, increasing transparency within government operations, as well as improving tax collection and enforcement.

There are fairer methodologies that would ensure that tax base erosion cases have been minimized and reduced to zero. As a result, this research was created to quantitatively examine data coupled with grounded theory and from the results some theories were selected for analysis. These theories aimed at giving countries options within their jurisdictions to have better policies that would be used to promote taxation policies and avoid evasions issues.

Grounded theory research methodology was crucial for this research in a number of ways. A hypothesis that is anchored in empirical evidence is what is meant by the term “grounded theory” in research methodology. Finding patterns, themes, and concepts in the data and creating a theory to explain them are the main objectives of grounded theory.

8.1 Priority Recommendations for Policy Implementation

This study suggests that Sub-Saharan African countries should implement some evidence-driven policies to prevent the erosion of their tax base.

Immediate Actions (1-2 years).

• Put complete anti-avoidance legislation in place, including GAAR and thin capitalization provisions, drawing from South Africa and Kenya for proven outcomes.
• Establish or strengthen autonomous revenue authorities that are adequately funded or independent of political interference—using approaches that have resulted in 15-25% increases in revenue collection in countries where they have been implemented.
• Build basic digital systems for the tax administration to rely on electronic filing systems and taxpayers’ databases. It should also give priority to mobile payment as mobile money services are common in the region.

Medium-term Goals (3-5 years).

• Through regional economic communities (EAC SSDACOMESA), negotiate multilateral tax tertiary with a view to adding modern anti-BEPS initiatives and strengthening source country taxing rights.
• Countries should have a mechanism for country-by-country reporting and sharing of information with each other to increase transparency and monitoring of multinational enterprises.
• Have specialized training programs for tax officials that focus on transfer pricing analysis, digital economy taxation, international tax law, possibly through regional centers of excellence.

Long-term Strategic Objectives (5-10 years).

• Create advanced artificial intelligence and data analysis tools to find tricky profit movement plans and make better risk evaluation systems.
• Set up a strong regional coordination mechanisms where joint audits, information sharing and coordination policy developments can take place with stronger ATAF frameworks.

8.2 Key Elements Required for Success and Problems with Implementation.

To be successful, certain major challenges that have historically hindered tax reform efforts in Sub-Saharan Africa must be addressed.

The political commitment does not change when the government changes as broad-based coalitions that include civil societies, businesses, and international partners need to be sustained (Gorelick, 2018). Regional coordination faces ongoing problems which include competing national interests, differing levels of economic development, worries about sovereignty which must be taken care of through diplomacy and technical assistance.

The biggest issue is capacity constraints, where many countries do not have the human resources, technological infrastructure, or institutional frameworks needed for implementation. The OECD, UN, and World Bank will provide a very essential international support needed for technical assistance, funding and transfer of expertise.

Tax administration in many nations still is ineffective as corruption and governance weaknesses remain. Therefore, there is a requirement for parallel reforms. The cases of Rwanda and Botswana show that with enough political will and international support, this is possible. References

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