David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: the view from the global south.

At the end of October the podcast team traveled to Cape Town, South Africa, for the International Fiscal Association Annual Congress. While there, we recorded several interviews — as well as penguins at Boulders Beach, which you heard at the beginning of the episode. We'll be releasing those interviews over the next month.

This week's episode features Afton Titus, an associate professor at the University of Cape Town. Our discussion focuses on developing countries and their relationship with the tax initiatives and projects coming from the OECD and the United Nations. And one note before we get to the interview: Since we had to leave the studio for this, the audio may sound a bit different than our usual interviews.

All right, let's go to that interview.

Afton, welcome to the podcast.

Afton Titus: Thank you. It's a pleasure to be here.

David D. Stewart: So why don't we start off with, could you tell us about your area of study? What issues in taxation are you most interested in right now?

Afton Titus: Thank you. So my focus is on regionalism and international tax developments. So my basic interest is I look at what is happening in international tax at the moment, I consider how it may affect developing countries, and then I answer my questions with a consideration of how regionalism could really provide a solution to everything, almost everything. So in that respect, I like to look at digital service taxes, but my most recent research interest is tax governance. So what is happening at the United Nations is very exciting for me.

David D. Stewart: OK. Well, let's get into that. Let's talk about what is it that's happening at the United Nations that might assist the taxation issues of the African region?

Afton Titus: I think that it'll make the most difference to developing countries because it allows them something that has been long denied them in international fora, and that is just to be heard. Like, the basic human need to have your concerns heard and then addressed would be provided at the United Nations. And it sounds so basic to say something like this. So you would think that at a country level, with such big issues on the table, that we wouldn't need to deal with such a basic concept, right? The idea that if a country has a concern, that it would be heard. But unfortunately, that's where we are; that's the very first point when it comes to international tax governance, and for there to be an improvement is just for developing countries' concerns to be heard and then addressed, just like those that affect developed countries are. So I think that would be the biggest difference at the United Nations.

David D. Stewart: OK. So I'm sort of interested in the, not really counterargument, but the counter-question, I suppose, which is that at the OECD they've been doing this inclusive framework. Do you see that as not being fully inclusive?

Afton Titus: Yes, that's exactly what I believe, and it's not just me. There are loads of studies that have actually proven this, that when they've analyzed what is happening at the inclusive framework, they have concluded that it's basically a rubber-stamping exercise, that decisions have been made elsewhere by more developed countries and then basically just given to developing countries to agree to without really having any say about their composition. So that's not really inclusivity, and I'm hoping that at the United Nations it would be different, although at this point I guess anything would be an improvement.

David D. Stewart: So is it sort of a sense that the developing countries are allowed to speak, but they're still not being heard?

Afton Titus: Yes, that's exactly what's happening at the inclusive framework. And it's to the point where, I mean, there wouldn't even really be a reason to speak because the decision has already been made. The only word that technically there is space for you to say is "yes."

David D. Stewart: Let's talk about what the U.N. is up to. What sort of projects are they working on that could help developing countries?

Afton Titus: That's an interesting question. So what they are doing at the moment that I think would be the most relevant is the work that they are doing on the U.N. Convention on International Tax Cooperation, so the framework convention, that would be the most concrete. And then I'm very excited to say that this convention is also coming out with protocols that would have a direct impact on developing countries, not least of all the taxation of the digital economy, and specifically cross-border services. So I think that those issues speak directly to developing countries, and I'm very excited that this is going to be one of the first to be decided at the United Nations.

David D. Stewart: Is there a sense that a solution designed by the U.N. would be accepted by developed countries the way that OECD solutions can be?

Afton Titus: OK, this is an interesting question. So you're asking me whether a proposal or an instrument designed by developed countries in their own forum that they dominate would be as acceptable to them as an instrument created at a democratic U.N. forum, whether the U.N. forum would be palatable to them. And the answer is probably not. If you look at what the U.N. is supposed to be, which is a democratic body in the fullest sense of the word — and by that I mean that the U.N. and other countries from the north don't have the opportunity to dominate the discussion and the policies — then it's more than likely that what is ultimately produced is not going to be to their liking.

David D. Stewart: So is there going to be a clash of ideas where you have developing countries pushing an OECD solution to global problems?

Afton Titus: I think that would ultimately be what would be the result. I think that is what is happening at the moment. So even when you look at the voting for the U.N. framework convention itself, and we look at the draft terms of reference, the lines across the voting suggest that there's already a clear divide between developing countries and the developed countries in the north. So I think this is already playing out. The only saving grace I could say is that at some point developed countries are going to have to get to the understanding that it would be in their best interest to work with developing countries rather than against them.

David D. Stewart: I'm curious what you see as the difficulty of developing countries in implementing what the OECD is proposing. What are the main hang-ups that make it not work for the region?

Afton Titus: So the first thing is that these policies are not designed for a developing country context. And when I say that, it's because some of the stuff is not rocket science, right? If you have a new proposal that encompasses a new tax, basically, or a new way of administering a tax that we already know, the first thing you have to ask is, "Who is going to implement this tax?" That would be the revenue officials at the developing countries.

Then you have to ask, "Is it simple enough so that it can simply be implemented by the revenue authorities in the developing countries?" And if it's not, then that means that they have to train people to become familiar with this tax and then implement it. Training people takes time, and it costs money, and it's also money that developing countries don't have. So the very first concern that most developing countries have with what comes out of the OECD is that it's complex, it's complicated, it's not simple, and often enough it's meant to replace something else. It's meant to operate on top of the existing complexity of the international tax system.

So I think often the main problem with what comes out of the OECD is that it's too complex.

David D. Stewart: Is there anything that the OECD could do? I'm not trying to be an advocate for them; I'm just wondering, is there any way of fixing what's there, given that sort of bridging the gap in order to make them work for developing countries?

Afton Titus: I think yes. The first thing they would have to do — for example, with pillar 1 — is they need to simplify it. I think we're all in favor of formulary apportionment across the different regions where the activities are actually conducted, however you define those activities. I think that would be something that most developing countries would agree. What they don't agree with is taking that taxing right and reducing it to not just all the profits that may be attributable to that company operating in that country, but then to reduce it to only the excess profits, however that is defined, and then a percentage of the excess profits. I think now we are getting into the area where you would consider it to be unfair.

So if you just gave a blanket opportunity, set out what the rules are — that if a company operates in this country and we have established nexus through the following ways, then you are entitled to tax a percentage, a set percentage of the profits that we can attribute to that particular jurisdiction — that would make it easier than having to take a percentage of a percentage of a percentage.

David D. Stewart: So I understand that countries are not just waiting for solutions. What have African countries been doing in order to adapt to the digital age? What are they doing to get more tax revenue from these companies?

Afton Titus: Oh, that's interesting. I find it fascinating that African countries have worked towards establishing digital service taxes across many of their jurisdictions. Some of them are more simple than others in that they are basically like a flat, basic tax that's imposed on a gross amount. Others are a little bit more refined in that they define exactly which services would be subject to them and how those payments would be flagged.

So I think that African countries moving forward unilaterally in designing their own digital service taxes, I think it's a good thing, and I think it's fascinating.

David D. Stewart: Is that going to result in conflict with other economies as they're implementing these unilateral taxes?

Afton Titus: Absolutely. So the first conflict anyone could see would be that with the United States. The fact that many would argue that these taxes have been formed specifically to target U.S. companies, like they are victims deserving of compassion, I guess. And so the idea is then that these digital service taxes would introduce some level of unfairness, I think would be the argument, if they target only a very small group of the society that's actually operating in a particular jurisdiction.

And to that I would say that to my mind there isn't really so much of a conflict because while the digital service taxes may only apply to those big U.S. companies that are operating in African jurisdictions, for example, the other companies that render similar services pay their taxes, but under a different type of tax — corporate income tax, for example, is what they would pay. And then these big U.S. companies manage to find a way not to pay the corporate income tax. And this is a way for African countries to claw back the taxes that they need to collect based on the activities of those U.S. companies in their jurisdictions.

David D. Stewart: Going back to what you mentioned as your area of study about regionalism, how does that factor into international tax?

Afton Titus: I've been more and more surprised by how much regionalism does actually factor into international tax, and that is because a lot of what is proposed in international tax circles at the moment would mean that countries should work collectively because they have collective interests. So there is real credence to this idea that there's strength in numbers.

So if you have a domestic African country designing policies that would work for it, it just so happens that its policies would probably be the same as its neighbor's because they share a lot of commonalities. And if that is the case, then it makes so much sense for the two of them, the three of them, the four of them to work together to make that a reality, because they all have a thread of commonality across their tax policies.

This is necessary because we work in a world where the very large, influential countries like the U.S. has its own agenda. And of course, a large country like that would find it much easier to persuade and bully a small jurisdiction to give up what it needs in favor of what the U.S. needs. And what I found with regionalism is that the more countries you have band together with some sort of commonality, the more likely it is that they would be able to withstand the influences of a huge country like the U.S.

David D. Stewart: Is there a danger in that a larger country could use pressure points of difference between the countries within the region in order to sort of hive off some of the jurisdictions that they want more favorable terms of a tax treaty with?

Afton Titus: That is exactly true, and I've seen it in my study — for example, when I did my PhD. So my PhD focused on the policies of the East African community, which is a band of now seven countries who have come together to form a regional community. And Kenya is one of those countries. And as it so happens, the East African community had decided that it would be best for the region to implement a digital service tax.

Then, not long after the region decided this, Kenya decided to repeal its existing digital service tax on the back of the U.S. promising it that it would receive certain trade benefits if it repealed its digital service tax. So then the U.S. was successful in breaking the ranks of the East African community, separating Kenya from its regional community in order to bring about that result.

David D. Stewart: So I guess I would like to conclude by asking, what do you think policymakers should focus on over the next couple of years? What things would be best able to help developing countries in the short term?

Afton Titus: I think what policymakers should do is to focus on which policies would work best within their particular context. I think there is finally a little bit of space in international tax to allow for divergence, to allow for difference. And I think they should lean into that.

I think now would be the time to work on their ideal best policy proposals and then work with their neighbor countries, work within their regions, to flesh this out, to make them work on a regional level. And then, once that is in place, I think it would be more helpful for them to work together as a region to protect it, to enforce it. And I think what is happening at the United Nations could well protect that ability.

David D. Stewart: Well, Afton, this has been a great conversation. Thank you so much for being with me.

Afton Titus: Oh, thank you so much.

David D. Stewart: And now, coming attractions. Each week we highlight new and interesting commentary in our magazines. Joining me now is Acquisitions and Engagement Editor in Chief Paige Jones. Paige, what do you have for us?

Paige Jones: Thanks, Dave. The submissions period for the Tax Notes Student Writing Competition is now open! This annual award recognizes superior student writing on unsettled questions in tax law or policy. Eligible students must be enrolled in an accredited undergraduate or graduate program during the 2024-2025 academic year. Visit taxnotes.com/students for more details.

In Tax Notes Federal this week, Paul Carman reviews traditional financial transactions such as loans and cryptocurrency lending. William Stetson explores strategies for clients concerned with the sunsetting of transfer tax exemptions. In Tax Notes State, three Brann & Isaacson practitioners argue that states can and should apply existing law to tax issues relating to the internet. Billy Hamilton offers advice on creating a successful ballot measure campaign. In Tax Notes International, Elizabeth Stevens and David Rosenbloom provide an overview of how U.S. tax policy enabled multinational enterprises to use cost-sharing arrangements to their gain. Alexandra Karadima explains the crucial role of tax advisers as tax administrations expand their use of AI. And finally, in featured analysis, Marty Sullivan examines how President-elect Trump's campaign proposals could affect the federal debt.

David D. Stewart: That's it for this week. You can follow me online @TaxStew, that's S-T-E-W. And be sure to follow @TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.

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