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Taxing the Digitalised Economy, Is Africa on The Crossroads?
Robert Ssuuna- Policy Lead Tax and International Financial Architecture
Tax Justice Network Africa.
“Our New Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and Taxes”-Benjamin Franklin. Whereas this remains the case to-date, globalisation has necessitated reshaping global rules for trade, investment and taxation. Amidst these reforms, comes an agent that is more certain than both death and taxation, this agent is Technology. Indeed , it is no doubt, that this agent will continue to influence the global economy in the foreseeable future.
In the wake of such trends, African countries need to beware of the opportunities and complexities resulting from digitalisation of the economy. First, the ability to supply digital services without physical establishment in a particular jurisdiction. Secondly, the heavy dependency of digital businesses on intellectual property. Finally, the miss-match between the current value assessed by governments and actual value generated from user participation in the digital activities on some platforms.
Harnessing the benefits of digitalisation and technological advancements requires regulation of both actors and operations within the digital space. Among such regulatory reforms include; adjusting taxation rules to ensure that adequate revenue is generated without stifling innovation. Unfortunately, technology is always ahead of regulation!
In the recent Pan African Conference on Illicit Financial Flows and Taxation (PAC) hosted by the Tax Justice Network Africa and like minded institutions, 1st-3rd October 2019; Participants observed that , African countries need to fully understand and appreciate how the digitalised economy operates in-order to tax it better. The conference particularly highlighted the need to safe guard the sovereignty of African jurisdictions in designing regulations that protect their taxing rights of the digitalised economy. These suggestions come at the backdrop of the ongoing discussions in the global north lead by the OECD to provide a unified solution to taxation challenges in the digitalised economy based allocation of profits based on where value is created (economic presence) and the nexus rule which emphasises permanent establishment of an entity.
Participants at the conference noted that, majority of African countries still define these solutions as prescriptive and not fully cognisant of the challenges of African economies. Indeed, as the momentum for a global consensual solution grows, other countries including members of the OECD, have embarked on unilateral solutions to taxation of the digitalised economy[1]. This does not only cast the doubt about the practicality of the suggested solution, but also increases fragmentation of international taxation system. Amidst such challenges, African countries are left at the crossroads.They are particularly concerned with the swiftness of the discussions and the limited level of involvement of African nationals and individual Governments. Evidently, some African countries are already taking unilateral measures which include, review of domestic rules to expand the definition of Permanent Establishment, taxation of Over The Top Services, taxes on mobile money transactions
From the foregoing, the conference concluded that the need for an African based tax coordination platform dedicated to addressing emerging tax challenges and shaping African positions on tax reforms at the global level. According to participants, the suggested taxation regime for the digitalised economy in Africa, would include the use of Unitary taxation ( the parent company and subsidiaries are treated as one); Altenative Minimum Taxes based on turnover of Multinationals; use of withholding taxes and use of safe habours ( ring-fencing of certain companies or sectors).
The participants however argued that to achieve the above, the following have to be addressed; Increased investment in research and development, Increased automation of revenue administrations and the entire government to allow ease of exchange of information, continuous capacity building for Revenue Administrations in specialised functions including data analytics, audit and ICT, African Ministers of Finance to constantly engage their counterparts in Ministries of Trade and of Foreign Affairs/ International Co-operation to harmonise policies and messaging targeting taxation of the digitalised economy.
“It is okay to be on the table as opposed to being on the menu, however, It is useless to be on the table when the meal has already been shared amongst other diners” remarked one participant! The question remains, Where is Africa?
[1] India,introduced an equalization levy on online advertising revenue in 2016 and a revised permanent establishment concept in 2018. In July 2019; The French Government approved a 3% tax on large Tech Companies with global sales of over £674m (€750m), and which make more than £22.5m (€25m) a year in France; Italy, established a 3% web tax on digital transactions, effective January 1, 2019; Slovakia, amended its income tax in January 2018 to add a tax on providers of services on digital platforms; Hungary proposed an internet tax in October 2017; and the European Commission in March 2019 released two digital tax proposals, The first proposal is described as an “interim” 3% digital services tax (DST) on gross revenues (i.e., turnover) derived from activities in which users are deemed to play a major role in value creation, the second one is a broader long term proposal, with more than 50 different digital activities potentially subject to tax. A “significant digital presence” (SDP) concept which would result in a new digital permanent establishment (PE) definition, intended to establish taxable nexus, along with revised profit allocation rules to determine how the taxes on digitally-derived profits are distributed among countries.