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Tax challenges from digitalisation of the economy

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The international community reaffirmed its commitment to reach a consensus-based long-term solution to the tax challenges arising from the digitalisation of the economy, and will continue working toward an agreement by the end of 2020, according to the Statement by the Inclusive Framework on BEPS released by the OECD today.

The Inclusive Framework on BEPS, which groups 137 countries and jurisdictions on an equal footing for multilateral negotiation of international tax rules, decided during its Jan. 29-30 meeting to move ahead with a two-pillar negotiation to address the tax challenges of digitalisation. 

Participants agreed to pursue the negotiation of new rules on where tax should be paid (“nexus” rules) and on what portion of profits they should be taxed (“profit allocation” rules), on the basis of a “Unified Approach” on Pillar One, to ensure that MNEs conducting sustained and significant business in places where they may not have a physical presence can be taxed in such jurisdictions. The Unified Approach agreed by the Inclusive Framework draws heavily on the Unified Approach released by the OECD Secretariat in October 2019.

Endorsement of the Unified Approach is a significant step, as until now Inclusive Framework members have been considering three competing proposals to address the tax challenges of digitalisation. A Programme of Work agreed in May 2019 has been replaced with a revised Programme of Work under Pillar One, which outlines the remaining technical work and political challenges to deliver a consensus-based solution by the end of 2020, as mandated by the G20. Inclusive Framework members will next meet in July in Berlin, at which time political agreement will be sought on the detailed architecture of this proposal.

The Statement by the Inclusive Framework on BEPS takes note of a proposal to implement Pillar One on a “safe harbour” basis, as proposed in a December 3, 2019 letter from US Treasury Secretary Steven Mnuchin to OECD Secretary-General Angel Gurría. It recognises that many Inclusive Framework members have expressed concerns about the proposed “safe harbour” approach. The Statement also highlights other critical policy issues that must be agreed under Pillar One before a decision can be taken. The “safe harbour” issue is included in the list of remaining work, but a final decision on this issue will be deferred until the architecture of Pillar One has been agreed upon.

The Inclusive Framework also welcomed the significant progress made on the technical design of Pillar Two, which aims to address remaining BEPS issues and ensure that international businesses pay a minimum level of tax. They noted the further work that needs to be done on Pillar Two.

“It is more urgent than ever that countries address the tax challenges arising from digitalisation of the economy, and the only effective way to do that is to continue advancing toward a consensus-based multilateral solution to overhaul the international tax system,” said OECD Secretary-General Angel Gurría. “We welcome the Inclusive Framework’s decision to move forward in this arduous undertaking, but we also recognise that there are technical challenges to developing a workable solution as well as critical policy differences that need to be resolved in the coming months.”

“The OECD will do everything it can to facilitate consensus, because we are convinced that failure to reach agreement would greatly increase the risk that countries will act unilaterally, with negative consequences on an already fragile global economy,” Mr Gurría said.

The Inclusive Framework’s tax work on the digitalisation of the economy is part of wider efforts to restore stability and increase certainty in the international tax system, address possible overlaps with existing rules and mitigate the risks of double taxation.

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Africa Today

Lithuanians Pave Way for EU’s Legal Migration Initiatives with Sub-Saharan Africa

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The European Union is facing a shortage of specialists. The reality of demographic characteristics and the labour market dictate that legal migration of talents to the EU is an inevitable need. Still, current pathways of specialist migration are not up to par. Thus, the EU is seeking new ways to connect European companies with foreign labour markets, brimming with young, talented job-seekers, and launched a slew of pilot projects to test the waters. Quite unexpectedly for many, Lithuania was the first to join the initiative and its Digital Explorers became one of the most successful in delivering tangible results.

The main goal of the Digital Explorers—contracted by ICMPD on behalf of the European Commission—was filling vacancies in Lithuanian technology companies with Nigerian ICT talent; consequently, it explored models of international collaboration between business and governments, with a non-governmental organisation as an intermediary. In the light of limited previous engagement between Lithuania and African countries, it has truly been a ground-breaking experience, both participants and partners agree.

While the current European mobility tool for professionals, the Blue Card Initiative, provides a simplified set of legal migration requirements for highly skilled workers from non-EU countries, the numbers of attracted talents are low. A recent revision of the Initiative aims to address this by expanding access to the framework for more qualified young specialists, yet amending the regulation might not be enough. A significant bottleneck is real and perceived risks for the private sector related to hiring talent from outside the EU.

“Pathways of legal migration for young specialists into the Union can solve multiple problems, including the shortage of talents in the EU, the lack of opportunities for young specialists in non-EU countries, and address the unknowns faced by the private sector. They could also help building mutually beneficial partnerships with third countries on overall migration management. We are looking for ways to facilitate the process together with EU member states, in line with the New Pact on Migration and Asylum” says Magdalena Jagiello, Deputy Head, of the Legal Pathways and Integration Unit, Directorate-General for Migration and Home Affairs (DG HOME).

A success story to build upon

Even though EU-based companies willing to hire abroad are inevitable initiators of personnel migration, mobility projects act as catalyzers by providing a missing link between participating countries as well as between business and the public sector.

“While private companies at first were sceptical that this unexpected connection can work, we spoke their language—one that is close to the heart of ICT companies. People in our team had diverse ICT and law backgrounds and firsthand knowledge of the African tech market. Therefore, we managed to address concerns of hiring companies and had answers to key questions, including recruitment and matching strategies, and potential skill level,” says Mantė Makauskaitė, project lead of Digital Explorers.

“We also had a long-term vision that the project will give us the means to build further mutually beneficial connections between Baltic and African ICT markets, and stakeholders were excited about that path forward,” she continues.

Thanks to the Digital Explorers pathway, 26 young men and women have relocated from Nigeria to Lithuania through two mobility models: 1-year employment and 6-months paid traineeship. They joined 13 companies working in ICT, engineering, fintech, and data science markets. Both sides were supported throughout the program—Nigerians went through technical and soft skills training to further enhance their career prospects, while companies were consulted on integrating internationals and diversity management practices. After the program, 18 participants were retained by Lithuanian ICT companies, while others continue their careers in Nigeria, making it a win-win initiative.

“Lithuanian ICT sector is rapidly growing and the shortage of specialists is difficult to address by depending on local talent only. We were willing to hire talents outside of the EU, but needed help at establishing contacts, aligning with prospective employees from third countries, and facilitating the paperwork,” says Vaidas Laužeckas, CEO of Metasite Data Insights.

With help from Digital Explorers, Metasite Data Insights initially welcomed one junior data scientist; after the programme, the company has hired another one. Both of the Explorers started as junior specialists in internship positions and ended up as mid-level specialists in the span of 6 months.

Another Lithuanian company that benefited from a connection to Nigeria, Telesoftas, was deeply impressed by new possibilities offered by the African IT talent market and has made a strategic decision to create a Nigerian branch and opened an office in Abuja with the aims to hire at least 30 engineers by the end of 2022 and up to 100 in 2023. “The potential offered by Nigeria is just too big to ignore. A subsidiary on the spot might act not only as our key delivery center but also as a connection, allowing Lithuanian teams to search for talents to fill their ranks and create new business opportunities” says Algirdas Stonys, CEO of Telesoftas.

Way forward

A collaboration between Lithuania and Nigeria has established itself as an excellent example demonstrating the importance and mutual benefits stemming from legal migration. Drawing on lessons learned from the Digital Explorers and other projects, the EU is working towards establishing Talent Partnerships. “The Digital Explorers have demonstrated a successful way of internationally connecting business, employees, and governments, and may become an example for future cooperation. Better matching of skills from outside of the EU with labour market needs within the EU is direly needed and benefits every stakeholder in multiple ways. It would be the key aspect of Talent Partnerships that would enhance legal pathways to the EU, while engaging partner countries strategically on migration management,” Jagiello says.

A collaboration between Lithuania and Nigeria has established itself as a go-to example for larger scale projects in Talent Partnerships. “The Digital Explorers have demonstrated a successful way of internationally connecting business, employees, and governments, and may become an example for future projects. Better matching of skills from outside of the EU with labour market needs within the EU is direly needed and benefits every stakeholder in multiple ways,” Jagiello says.

According to Makauskaitė who is already exploring ways to expand Digital Explorers from Lithuanian to Baltic scale, including other African countries, such partnerships could create even more European value-added if our legal systems were more harmonized and scaling across borders would not require understanding a completely different regulation. However, for now, at least in-depth knowledge of matching the existing talent pool with business needs can be used by other European countries.

“The match might not be perfect straight away, but it’s important to know ways for perfecting it,” the leader of Digital Explorers concludes.

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Guterres Calls on Private Sector to Help Developing Countries with Post-Pandemic Recovery

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In a special address at the virtual World Economic Forum Davos Agenda 2022 on Monday, United Nations Secretary-General António Guterres outlined three urgent areas that need to be addressed for the world to emerge from the ongoing global economic and health crisis and to ensure the UN Sustainable Development Goals are achieved.

“Recovery remains fragile and uneven amid the lingering pandemic, persistent labour market challenges, ongoing supply chain disruptions, rising inflation and looming debt traps,” he said. “To chart a new course, we need all hands on deck, especially the global business community.”

The first area that needs immediate attention is confronting the COVID-19 pandemic with equity and fairness. Citing the World Health Organization’s global target to vaccinate 40% of people in all countries by the end of 2021 and 70% by the middle of 2022, Guterres said the world is nowhere near these targets. “If we fail to vaccinate every person, we give rise to new variants that spread across borders and bring daily life and economies to a grinding halt,” he said.

To ensure vaccine equity, he called on countries and manufacturers to prioritize vaccine supply to the global programme COVAX and to support the local production of tests, vaccines and treatments around the world. He also asked pharmaceutical companies to stand in solidarity with developing countries by sharing licences, know-how and technology to find a way out of the pandemic.

The second challenge is the need to reform the global financial system, especially as low-income countries are at a huge disadvantage and are experiencing their slowest growth in a generation. “The burdens of record inflation, shrinking fiscal space, high interest rates and soaring energy and food prices are hitting every corner of the world and blocking recovery, especially in these low- and middle-income countries,” Guterres said. This is stifling any hope of growth by making it even more difficult for governments to invest in the sustainable and resilient systems.

He urged business leaders to help shape a global financial system that works for all countries. This includes working to restructure the long-term debt architecture, addressing corruption and illicit financial flows, ensuring that tax systems are fair and designed in a way that reduce inequalities, and bringing together governments, businesses, the financial sector and international financial institutions to build up private investment in developing countries.

Supporting climate action in developing countries is the third area that needs immediate attention, especially as global emissions are set to increase by 14% by 2030.

“Even if all developed countries kept their promises to drastically reduce emissions by 2030, global emissions would still be too high to keep the 1.5 degree Celsius goal within reach. We need a 45% reduction in global emissions this decade,” Guterres stressed.

Climate shocks, including extreme weather events, forced 30 million people to flee their homes in 2020 alone – three times more than those displaced by war and violence. And 1 billion children are at an extremely high risk of the impacts of climate change. “Turning this ship around will take immense willpower and ingenuity from governments and businesses alike, in every major-emitting nation,” he said. “We see a clear role for businesses and investors in supporting our net-zero goal.”

This, he said, calls for the creation of coalitions of government, public and private financial institutions, investment funds and companies with the technological know-how to provide targeted financial and technical support for every country that needs assistance.

The World Economic Forum’s Climate Action Platform is helping businesses, governments and NGOs accelerate and scale ambition and partnerships needed to drive a sustainable and inclusive future, and its Alliance of CEO Climate Leaders is engaging policy-makers to help deliver the transition to a net-zero economy.

Guterres concluded by saying that many countries need the support, ideas, financing and voice of the global business community.

“If we fail to provide debt relief and financing to developing countries, we create a lopsided recovery that can send an interconnected global economy into a tailspin,” he said. “If we fail to reduce inequalities, we weigh down economic progress for all people in all countries.”

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Modi Urges All Countries to Embrace Sustainable Lifestyles

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NarendraModi

Prime Minister Narendra Modi of India used his address to the Davos Agenda 2022 to call on all countries to shift from a throwaway culture towards more sustainable lifestyles. Modi emphasized that while India is home to 17% of the world’s population, it contributes only 5% of global emissions.

“It is very essential that we move away from today’s take-make-use-dispose economy and towards a circular economy,” he said. India, which co-launched the International Solar Alliance at COP26 to ensure universal access to affordable solar energy, today generates 40% of its energy from non-fossil sources. Modi underlined that the next phase of India’s growth will be “green, clean, sustainable and reliable”.

The prime minister questioned the ability of the world’s multilateral organizations to meet challenges that did not exist when they were created. He said that reforming these institutions is “the responsibility of every democratic country”. In a clear call for greater global cooperation, he said: “Today, more than ever before, countries need each other’s help – this is the only path to a better future.” He offered India’s vision of One Earth One Health as a means of responding to global challenges, from the COVID-19 pandemic to climate change.

India is an entrepreneurial powerhouse that has created 10,000 new start-ups in the past six months and over 40 unicorns in 2021, Modi said, propelling the country into the top three in the world for billion-dollar new ventures. Its digital infrastructure is developing rapidly, with over 4.4 billion transactions taking place on its United Payments interface in the past month alone. Over the period 2020-2021, India attracted $82 billion in foreign direct investment – a new record. Modi said India is committed to becoming a trusted partner for global supply chains.

In a bid to improve the ease of doing business, Modi outlined the measures his government is taking to reduce government intervention to the minimum. He has done away with over 25,000 tax compliances in the past year and deregulated most sectors for investment, except for defence, aerospace and telecoms. His government is investing $1.3 trillion on connectivity-related infrastructure through its GatiShakti National Master Plan, which includes connecting over 6,000 villages through optical fibre. The plan’s aim, he said, is to “give new impetus to seamless connectivity for movement of goods, people and services”. India is also investing $26 billion to boost manufacturing and resilient supply chains.

The Prime Minister also spoke to the importance of collective and synchronized action to face global challenges. He highlighted new technology as an important area for countries to act together, “Another example is cryptocurrency. Given the kind of technology it is associated with, the decisions taken by a single country will be insufficient to deal with its challenges.”

Modi said India enters 2022 “infused with self-confidence”. Its economic growth is projected to hit 8.5%. It has already administered 1.6 billion COVID-19 vaccines. And, he added: “Our multilingual, multicultural environment is a great strength [that] teaches us not just to think of ourselves in times of crisis but to work in the best interests of the world.”

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