Taxing the Digital Economy: Is Africa Ready?
17 OCT, 2019 - 00:10
Davison Kaiyo
Correspondent
“Uber, the world’s largest taxi company, owns no vehicles. Facebook, the world’s most popular media owner, creates no content. Alibaba, the most valuable retailer, has no inventory. And Airbnb, the world’s largest accommodation provider, owns no real estate… Something interesting is happening.”
The world of business is fast changing with the advent of and continued advancement of the information communication technologies and the innovations startups that are being born every day.
This has revolutionarised the way we do business as most economies are gravitating towards being more digital this is further supported by the Fourth Industrial Revolution which is technology based to create what is known as the digital economy.
Digital economy is a term used to describe all of those economic processes, transactions, interactions and activities that are based on digital technologies. The digital economy is internet based it is more broadly based on any of the many digital tools used in today’s economic world.
The backbone of the digital economy is hyper connectivity which means growing interconnectedness of people, organisations, and machines that results from the Internet, mobile technology and the internet of things.
The rise of digital economy had given birth to a number of digital businesses such as Uber, Amazon, Ebay effectively replacing traditional businesses. This has undermined conventional notions about how businesses are structured; how firms interact; and how consumers obtain services, information, and goods.
Digital business are effective to operate and maximise profit with limited balance sheet assets and this has given them competitive advantage over traditional businesses. Examples of digital businesses which have effectively replaced traditional businesses include Uber replacing the metered taxi, AirBnb vs Guesthouse, Booking.com vs Hotel, Expedia vs Travel Agent, Amazon vs postal service, LinkedIn vs Labour broker, Alibaba vs marketplace among other examples.
The transformation of world’s economy has created loopholes for many companies to operate and denying nations of the much needed revenue through taxes as most of these businesses do not have physical presence and thus it is difficult to tax them. These multinational digital businesses are often accused of crowding out local companies without paying taxes in some African countries they operate in.
African countries continue to lose revenue from not taxing the digital economy and therefore there is need for them to come up with disruptive tax policies that respond to the disruptive technologies and businesses in order to stop the companies from tax evasion, tax avoidance and other forms of illicit financial flows.
Digital multinational businesses profit sans-frontier, they have no boundaries on where it reaps and reports say these tech companies operating in the continent are benefiting from the African economy but are not paying taxes, and have no offices on the continent.
Most of these businesses don’t have physical presence — they do not have to be in your country to supply the service and make profits.
These battles have seen services such as Uber being banned in Algeria and in some European countries. Another example is Netflix. It is a US-based company which offers streaming services for example in South Africa where one streams content on their phones or smart TV or download content to watch later. The question arises on where should that company be taxed? Is it in the USA or South Africa?
Closer home in Zimbabwe many people have bought cars online through platforms such as beforward.jp and paid directly to those companies without paying the necessary taxes. This resulted in serious outflows of the much needed money from the Zimbabwean economy. In the digital economy money flows out of the country both through legal and illegal means.
Speaking at the just ended 7th Pan-African Conference on Tax and Illicit Financial Flows held in Nairobi, Kenya, executive secretary of the African Tax Administration Forum Logan Wort stressed the need for African governments to come up with disruptive tax policies that will enable the African states to tap into the digital economy through taxation.
“Though the digital economy is disruptive and has many benefits, which Africa can’t hide from, the countries in the continent need to redefine their tax policies and practices in order to tax the multinational digital businesses,” he said.
Africa needs to understand taxation of the digital economy in the context of domestic resource mobilisation. In Zimbabwe the introduction the Intermediated Money Transfer Tax popularly known as the 2 percent transactional tax is an example or an effort to tax the digital economy and improve domestic resource mobilisation.
Uganda has also introduced a related tax mostly on social media usage.
Nigeria is the latest country to join the trend, with a new 5 percent tax on items bought online. It wants banks to deduct the tax from online transactions for the government. In Kenya, the government has been increasing taxes on mobile money transfers. And this month the Kenya Revenue Authority said it will start taxing many applications developed and downloaded in the country.
The issue of illicit financial flows is big in Africa more so when states emphasise on domestic resource mobilisation and tax evasion and avoidance is allowed to continue.
This gives rise to the notion that as African states are we ready to tax the digital economy? Is Africa speaking with one voice when it comes to taxation of the digital economy? Are our current fiscal regimes updated for the new form of economies? Africa needs to be proactive in advancing African issues.
Currently most of the global proposals on taxing the digital economy tend to sideline taxing rights for African countries and there is a serious need for African countries to secure taxation rights to the fast growing global digital economy. Political pressure can be used to achieve this.
The digitalisation of the economy and other technological advances has enabled business enterprises to be heavily involved in the economic life of a jurisdiction without a significant physical presence. These technological advances have rendered the existing tax laws and policies ineffective.
As the digital economy sector grows, countries increasingly demand reforms of the international rules under tax treaties and a fair allocation of taxing rights. Many conversations are going on in different fora including the pan-African conference on how best to tax the digital economy for the betterment of the African states. The recently launched Africa free trade area is an opportunity for African states to come up with a common position on taxing the digital businesses. Currently, there is no single authority of the African tax governance architecture and Africa needs to move with speed in coming up with such architecture in line with regional integration ethos.
The Fourth Industrial Revolution where data is the new oil is here to stay and African states need to embrace it and benefit from it. In most cases African countries are reactionary in their responses. There is therefore need to be proactive and disruptive in their response to the new normal and make sure the continent does not continue to lose the much needed revenue. Digital businesses should be taxed without impeding their growth.
Davison Kaiyo
Correspondent
“Uber, the world’s largest taxi company, owns no vehicles. Facebook, the world’s most popular media owner, creates no content. Alibaba, the most valuable retailer, has no inventory. And Airbnb, the world’s largest accommodation provider, owns no real estate… Something interesting is happening.”
The world of business is fast changing with the advent of and continued advancement of the information communication technologies and the innovations startups that are being born every day.
This has revolutionarised the way we do business as most economies are gravitating towards being more digital this is further supported by the Fourth Industrial Revolution which is technology based to create what is known as the digital economy.
Digital economy is a term used to describe all of those economic processes, transactions, interactions and activities that are based on digital technologies. The digital economy is internet based it is more broadly based on any of the many digital tools used in today’s economic world.
The backbone of the digital economy is hyper connectivity which means growing interconnectedness of people, organisations, and machines that results from the Internet, mobile technology and the internet of things.
The rise of digital economy had given birth to a number of digital businesses such as Uber, Amazon, Ebay effectively replacing traditional businesses. This has undermined conventional notions about how businesses are structured; how firms interact; and how consumers obtain services, information, and goods.
Digital business are effective to operate and maximise profit with limited balance sheet assets and this has given them competitive advantage over traditional businesses. Examples of digital businesses which have effectively replaced traditional businesses include Uber replacing the metered taxi, AirBnb vs Guesthouse, Booking.com vs Hotel, Expedia vs Travel Agent, Amazon vs postal service, LinkedIn vs Labour broker, Alibaba vs marketplace among other examples.
The transformation of world’s economy has created loopholes for many companies to operate and denying nations of the much needed revenue through taxes as most of these businesses do not have physical presence and thus it is difficult to tax them. These multinational digital businesses are often accused of crowding out local companies without paying taxes in some African countries they operate in.
African countries continue to lose revenue from not taxing the digital economy and therefore there is need for them to come up with disruptive tax policies that respond to the disruptive technologies and businesses in order to stop the companies from tax evasion, tax avoidance and other forms of illicit financial flows.
Digital multinational businesses profit sans-frontier, they have no boundaries on where it reaps and reports say these tech companies operating in the continent are benefiting from the African economy but are not paying taxes, and have no offices on the continent.
Most of these businesses don’t have physical presence — they do not have to be in your country to supply the service and make profits.
These battles have seen services such as Uber being banned in Algeria and in some European countries. Another example is Netflix. It is a US-based company which offers streaming services for example in South Africa where one streams content on their phones or smart TV or download content to watch later. The question arises on where should that company be taxed? Is it in the USA or South Africa?
Closer home in Zimbabwe many people have bought cars online through platforms such as beforward.jp and paid directly to those companies without paying the necessary taxes. This resulted in serious outflows of the much needed money from the Zimbabwean economy. In the digital economy money flows out of the country both through legal and illegal means.
Speaking at the just ended 7th Pan-African Conference on Tax and Illicit Financial Flows held in Nairobi, Kenya, executive secretary of the African Tax Administration Forum Logan Wort stressed the need for African governments to come up with disruptive tax policies that will enable the African states to tap into the digital economy through taxation.
“Though the digital economy is disruptive and has many benefits, which Africa can’t hide from, the countries in the continent need to redefine their tax policies and practices in order to tax the multinational digital businesses,” he said.
Africa needs to understand taxation of the digital economy in the context of domestic resource mobilisation. In Zimbabwe the introduction the Intermediated Money Transfer Tax popularly known as the 2 percent transactional tax is an example or an effort to tax the digital economy and improve domestic resource mobilisation.
Uganda has also introduced a related tax mostly on social media usage.
Nigeria is the latest country to join the trend, with a new 5 percent tax on items bought online. It wants banks to deduct the tax from online transactions for the government. In Kenya, the government has been increasing taxes on mobile money transfers. And this month the Kenya Revenue Authority said it will start taxing many applications developed and downloaded in the country.
The issue of illicit financial flows is big in Africa more so when states emphasise on domestic resource mobilisation and tax evasion and avoidance is allowed to continue.
This gives rise to the notion that as African states are we ready to tax the digital economy? Is Africa speaking with one voice when it comes to taxation of the digital economy? Are our current fiscal regimes updated for the new form of economies? Africa needs to be proactive in advancing African issues.
Currently most of the global proposals on taxing the digital economy tend to sideline taxing rights for African countries and there is a serious need for African countries to secure taxation rights to the fast growing global digital economy. Political pressure can be used to achieve this.
The digitalisation of the economy and other technological advances has enabled business enterprises to be heavily involved in the economic life of a jurisdiction without a significant physical presence. These technological advances have rendered the existing tax laws and policies ineffective.
As the digital economy sector grows, countries increasingly demand reforms of the international rules under tax treaties and a fair allocation of taxing rights. Many conversations are going on in different fora including the pan-African conference on how best to tax the digital economy for the betterment of the African states. The recently launched Africa free trade area is an opportunity for African states to come up with a common position on taxing the digital businesses. Currently, there is no single authority of the African tax governance architecture and Africa needs to move with speed in coming up with such architecture in line with regional integration ethos.
The Fourth Industrial Revolution where data is the new oil is here to stay and African states need to embrace it and benefit from it. In most cases African countries are reactionary in their responses. There is therefore need to be proactive and disruptive in their response to the new normal and make sure the continent does not continue to lose the much needed revenue. Digital businesses should be taxed without impeding their growth.
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