Better tax implementation allows governments raise the same revenue with lower taxes (more efficiency) or to increase more tax revenue with the same taxes. The digitalisation of the economics has brought important benefits to all of us. As the global health crisis disrupts economies worldwide, companies in the traditional industries, such as mining and manufacturing, are struggling to contain losses and avoid cutting jobs.
The economic slowdown naturally translates into declining revenues for tax administration across the globe, which will most likely lead to revenue authorities across the world look at other sources from which to collect taxes. From an African perspective, this will be exacerbated by the fact that most countries on the continent have commodity-based economies that are reliant on high commodity prices which in turn are dependent on supply and demand.
Prior COVID-19 pandemic, France, Italy, and others enacted Digital Sales Taxations (DSTs) because they thought digital multinationals were paying too little in their jurisdictions. Today, in the wake of the coronavirus pandemic, a prevailing argument is that countries don’t want to wait and potentially miss out on much-needed tax revenue, especially because business is booming for digital multinationals in our socially distanced world.
African economies are rapidly getting more digitalised and that digitalisation often enables multinational enterprises (MNEs) to carry out business in African countries with no or very limited physical presence in those countries. Mobile money is increasingly being used to conduct transactions for essential services, and as such, becoming part of everyday life on the continent Africa. For example, 1 in 3 monthly accounts now receive their salaries via mobile money while utility payments account for 55% of the total value of bill payments processed via mobile money.
The advent of digitalised business models has considerable potential to improve trade in Africa, however, it has greatly exacerbated the two central challenges of international tax. The first challenge is the definition of taxable presence, and the second is the allocation of business profits of multinational enterprises (MNEs) among the different jurisdictions where they operate. This has generated much debate and has seen the rise in unilateral measures in different jurisdictions.
This trend has increased due to the use of digitalised services necessitated by the COVID-19 pandemic that has seen most MNEs with physical presence in a country close their premises and move to online trading. This makes it difficult for countries to establish taxing rights over the profits the MNE is making from those business activities.
Beyond individuals making use of mobile money, businesses and governments are increasingly partnering with mobile money providers. For instance, mobile money providers in the region are on average integrated with 35 government agencies and 73 per cent of providers have partnered with agribusinesses and cooperatives to digitise value chain payments to smallholder farmers.
E-commerce is a natural area to target given its growing potential in Africa: The sector is projected to increase its revenues by 41 percent this year, according to the ATAF, while the tax-to-GDP ratio in 26 African countries reporting to the African Union is just 17.2 percent, compared to 32.2 percent in developed countries that belong to the OECD.
Such stark figures are becoming harder to ignore with Africa’s digital economy now growing at a fast clip. For instance, Jumia Group, an online marketplace founded in Nigeria, is present in 14 countries on the continent, providing services to 81,000 merchants and has received investments from Rocket Internet in Germany, Goldman Sachs, MTN and Orange.
At the continental level, harmony looks like a tax policy platform with a coordinated approach to DSTs, according to an outcome statement published by the African Tax Administration Forum (ATAF). The organization supports a global solution but recognizes that some individual countries are interested in DSTs. As such, it is creating a suggested approach to drafting DST legislation. But it is important to note that an Africa-wide DST strategy may not include all countries.
The United Nations Conference
on Trade and Development (UNCTAD) noted that, African governments therefore need to stay innovative to sustain revenues from international production and GVCs. The agency indicate that, three major transformations underway hold significant opportunities for enhancing revenue collection by African government.
- The digital transition merits more attention. Governments can look closely at taxes on digital transactions and digital business. The crisis has accelerated the shift from face-to-face to online interactions. Digitalization across GVCs will become ever more prominent over the coming years. The importance of data provided by developing countries and managed by developed countries MNEs will increase exponentially. The profits of the digital mega-MNEs are expected to skyrocket, boosted by strong network effects. African governments must get their fair share and they can, by taxing digital transactions and digital business generally untapping a new revenue pool for Africa.
- The sustainability imperative must be explored as a new source of revenue. “Pro-SDG” taxes are an important possibility to be considered. MNEs are increasingly adjusting their operations to the sustainability imperative. For transition to the green and blue economy to further accelerate, governments can tax less sustainable MNE activities, such as taxes and royalty payments on depleting natural resources, taxes on emissions and pollution and “sin” taxes on tobacco, alcohol, etc.
- More should be done to crack down on illicit financial flows out of Africa. African government can more closely together to close gaps in international corporate taxation and trade mis-invoicing. UNCTAD estimate illicit financial flows generate nearly $90 billion in lost financing in Africa alone every year, accounting for nearly half the SDG investment gap in the region. Increase transparency in customs systems and tax collection, and by forging a common African position in the international tax debate, governments can renew efforts to bring that $90 billion in lost revenue back to Africa.
In 2019 and 2020, the governments of over 130 countries, led by the OECD and G20, are considering radical reforms to international rules that shape the taxation of transnational corporations. To begin with a response to the political outcry when it was reported that large companies such as Google and Facebook pay less tax in many countries in which they run, it has become an agenda for potentially radical reform to adapt a century-old set of tools to the 21st century economy.
The first African country to introduce digital taxes is South Africa in 2014, implemented a 14% value-added tax (VAT) on digital imports. They do have a lower-limit however, below which VAT is not required to be charged or registered for. That is ZAR 1000,000. Unlike other countries, South Africa does not make a distinction between B2C and B2B sales – all are subject to their 14% VAT charge. Pretty much any kind of digital service you can think of is in-scope for their electronic VAT rules. By February 2019, this digital tax had generated approximately $208 million in revenue.
Tanzanian government introduced the Electronic and Postal Communications (Online Content) Regulations, 2018. The new law required bloggers and online radio and television services to pay an annual fee of up to $900.The new law also introduced a license fee for content publishers (blogs, podcasts, videos) of Tsh100,000 ($43), an initial license fee of Tsh1 million ($429) and an annual license fee of Tsh1 million ($429).
The Zambian government announced a daily tariff of $0.03 on internet phone calls in August 2018. Same year, the Ugandan government joined the league by introducing 18% VAT on all online transactions, with no threshold which means from the very first sale. According to reports, more than 60 online platforms including Facebook, WhatsApp and Twitter were impacted by the tax in Uganda. Between March and September 2018, Uganda lost nearly 30 percent of internet users.
Kenya in its Finance Bill 2020, proposed a 1.5% DST on gross revenue earned by digital marketplaces providing services, and also taxing many applications developed and downloaded in the country. In 2020, Cameroon’s government announced it would apply a VAT to goods and services sold on a Cameroonian territory through e-commerce platforms.
The enactment of the Finance Act 2020 on 13 January 2020 introduced various changes to principal tax legislations in Nigeria, among which are the commencement of a new regime of exposure to Nigerian companies income tax for non-resident companies (NRCs) providing digital services and products to persons in Nigeria, and the imposition of VAT on intangible supplies. Nigeria introduces 7.5% VAT on online transactions for foreign providers whose services rendered exceeds the threshold of ₦25 million.
The Algerian Finance Law for 2020 includes VAT on foreign electronic services. They will initially be subject to reduced VAT at 9%. There will be a 12-month period in which partially exempted businesses may collect VAT credits.
Angola has a 14% VAT for all sales. There is no registration threshold for foreign providers of digital services, so you must register for VAT as soon as you have a single Angolian customer. To register for Angola VAT as a non-resident digital service provider, you must appoint a local tax representative. The country will eventually offer a simplified registration system on its website. For B2B sales, there’s the option of using the reverse-charge mechanism.
Along with the VAT, Senegalese mobile consumers have to pay an additional tax charged on telecoms services at 5% of revenue, and operators also have to pay additional sector-specific taxes
This is caused by the fact that the current international tax rules only allocate taxing rights to a country where a non-resident enterprise creates sufficient physical presence in that country i.e. creating a “nexus” in that country. However, business models of highly digitized businesses enable MNEs to carry out business in an African country with no or very limited physical presence in that country; thus, causing significant tax risk.
The substantial increase in digital transactions through online platforms are driven by emerging economies in the continent and increasing access to the internet and use of mobile phones. Covid-19 pandemic has further accelerated the growth of digital transactions as the pandemic has compelled people to work from home and many business transactions have to be undertaken through digital platforms. Whilst these transactions are increasing and the profits of the companies involved continue to exponentially grow, no African country is taxing the revenues of these companies as they do not create a physical presence in these countries.
Also the problem of lack of nexus, digitalisation of the business models and the larger economy is increasingly impacting on the value chains of a wide range of businesses including the highly digitalized businesses. For instance, new value streams such as user data and user participation have become critical. Additionally, digitalization has increased reliance on intangible assets such as Technology, Intellectual Property and global Trademarks. These intangible assets can now be exploited in mass markets where the owner has no or little physical presence.
The current international rules on profit allocation do not address these new value streams. Hence, African countries will not have an opportunity to tax income associated with these value streams under the existing profit allocation rules (which are based on transfer pricing principles). However, if African countries decide to impose taxes on transactions, they should be progressive to reduce the regressive impact. Therefore, it will be imperative that companies, operating in multiple jurisdictions across Africa, keep abreast of the developments around digital taxes and in particular pay careful consideration as to whether their actions may result in a tax liability.