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Who here doesn’t use a smart phone? Thulani from the African Tax Administration Forum ( ATAF ) asked the 90 participants of the 2019 International Tax Justice Academy in Senegal. Obviously, none! All of us had very smart phones, with many apps installed. This question reminded me of the reports that come out every year, from many African countries detailing the mobile phone usage and internet penetration rate onto the market. The numbers are impressive. However, if we are going digital, then why are our tax systems so analogue?
…IF YOU FIND THE CONSUMERS
A crowd of people. Photo by Keegan Checks from Pexels.
According to the Bill and Melinda Gates Foundation, more than 200,000 households in Kenya emerged from extreme poverty after the introduction of mobile money service M-Pesa. It is mentioned that currently mobile money customers move cash in and out their digital wallet quite often. This kind of innovations aims at connecting 400 million unbanked Africans so that they can do their transactions, purchases and sales in an easier manner. (Africa payments: Insight into African transaction flows 2018). The market is getting bigger and more virtual. Africa needs to put a strategy together and like other players take advantage of the market to finance its development. Otherwise, there is a risk for Africa being the market place for online activities with nothing to show for it.
Suppose that you are in Nairobi, the capital city of Kenya, and want to travel to Panama. You decide to go and buy a ticket from A ltd, an airline company that has an office in Nairobi city center. The ticket cost includes VAT that is meant to be remitted to the Kenyan government. The tax that you have contributed will build a school or probably boost the universal health coverage you have been waiting for. Well, hopefully, but what the money is used for is a whole different conversation.
Consider a scenario where you are one of the lucky individuals who have been exposed to online banking, digital transactions and online purchases; you want to save both time, money, fuel and keep your mind clear of the impatience caused by the traffic jam, you will simply go to A Ltd website or application, select your ticket, press pay, et voilà. You got it in your email. You may proceed to the airport. All this is amazing, technology has made our lives different and easy. The question in the second scenario though, is after paying for the ticket, will A ltd still pay the taxes that you contributed to after you have done the online payment? Who will get it? How will they know that A Ltd sold you anything?
…IF YOU CAN LOCATE THE BUSINESS
Black Farmed Eyeglasses in Front of Laptop, Photo by Kevin Ku from Pexels
A company with a permanent establishment (a physical presence – office, warehouse, agent- carrying out its business activities for a defined period) is tied, through agreements, to paying taxes in the country of establishment. When the same company decides to go digital, mainly with its sales department, it renders the permanent establishment principle obsolete since the very requirement of the company’s physical presence is dispensed with. In addition, the traceability of sales and revenue that are eligible to taxation becomes impossible.
The internet giants today do not need a physical presence in your country to do business. This is the case of all Social networks, Google or Netflix. Social networks make money purely though advertising. Few of them sell other services, but advertising is the cash cow. They advertise, simply because they have subscribers. For example, if a company wanted to launch/sell/ influence sells or behavior to people in Nairobi, Facebook will get paid to help that company target those people. In reality, their database is the most important asset that they cannot do without. Digital firms have figured out strategies to collect, store, monetise and generate revenues out of personal data. Their commercial activities have increased, various sectors are booming, they make money from African economies, but the tax base hasn’t equally changed.
...IF YOU CAN HOLD ONTO DATA
Data visualisation, Photo by Markus Spiske from Pexels
The discussion around the taxation of the digital economies has been a hot topic lately, questions are raised, conference are organized, steering committees are formed to talk about it, to review or brainstorm.
One thing that stands out every single time is Data! Data is one of the most valuable resources in the world, and the engine of the digital economy. A central goal of the world’s biggest corporations today is to have their government representatives use trade agreements to gain control of the world’s data and use it purely for private profit. Writes Deborah James in her paper Giant Tech Corporations Join Forces with the WTO to Try to Launch a WTO 2.0 to Cement Digital Colonialism through International Treaties.
Where does this leave African governments? How will they be able to tax these multi billion corporations if they have no access to data?
The economy will increasingly find its way to the ‘digital world’, that is a fact. The million dollar question now is , How will African governments collect money to finance the Sustainable Development Goals if cash will increasingly vanish with no ability to trace it?
The digital market is dominated by very few players who provide most of the services and are likely to diversify their service delivery for even a bigger share of the market. For example, only seven companies namely: Microsoft, Apple, Amazon, Google, Facebook, Tencent and Alibaba; account for two thirds of the total market value (UNCTAD, report on digital taxation, 2019).
Experts argue that with the proposed e-commerce rules in the World Trade Organisation, the big tech is advocating for the removal of custom duties on digital products while the tariff revenue losses on these will be a burden carried by developing countries. The same corporations would not wish their taxes and profits reviewed, and would rather not share copies of financial records for inspection by Revenue Authorities.
Africa for the longest period has been accused of copy pasting systems that are established by the West and not being proactive in designing taxation systems that work for Africans. African governments end up establishing regressive and oppressive taxation systems that over tax the end consumer, putting more burden on the people as it happened in Zambia and Uganda with the social media tax. Currently, there is no single body at the level of the continent that oversees harmonizing taxation systems. However, ATAF published a technical note made of proposals to address the tax challenges from the digitalisation of the economy.
There is need for African governments to understand the importance of data and its impact on the design of economy in the future. For the digital economy to work in our common interest, they must be able to access the data, have it stored in spaces that they can control. Finally, they need to voice the African concerns, get their house in order and investigate proposals that would work for their economies, have a continental agenda on the taxation on the digital economy and become a worthy player in the Global market.
Obviously, this is an ongoing conversation. This actually will be the focus for the 2019 Panafrican conference on illicit financial flows to be held in Nairobi. Hopefully, Africa will trace and find the digital world and by that time, Africans would have figured out how to make the most out of it.
Cynthia Umurungi, Communication and outreach officer, Tax Justice Network Africa.