Prosper Ndlovu, Business Editor
AFRICA is poised to quickly close the gap on taxing the digital economy through adoption of a collective legislative framework to harness more revenue from highly digitalised multinationals whose growing virtual footprint in the continent comes with negligible tax dividend.
As the global economy rapidly gets digitalised, many African revenue authorities have reported difficulties in taxing highly digitalised businesses operating in their countries.
This is because current international tax rules only allocate taxing rights to a country where a non-resident enterprise creates sufficient physical presence in that country, that is, 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.
African countries including Zimbabwe have in recent years reported significant growth in digital transactions through online platforms such as Amazon, Facebook, Google, Alibaba, Booking.com, Airbnb, Uber and Netflix, among others.
This is driven by emerging economies in the continent and increasing access to the internet and use of mobile phones. The 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.
Through the African Tax Administration Forum (ATAF), the continent’s sole tax advocacy organisation, African states have developed a Suggested Approach to Drafting Digital Sales Taxation, which was virtually launched officially on Wednesday as a guide. The ATAF Secretariat and its Cross-border Taxation Technical Committee, developed the Suggested Approach document, which is set to help African countries keen to implement digital service tax to tax transactions of highly digitalised businesses. Already some African countries such as Kenya, Zimbabwe and Nigeria have enacted digital service tax laws and are implementing them, as others are weighing options.
“This Suggested Approach is intended to provide African countries with a suggested structure and content for their legislation and possibly the regulations.
“It also provides a framework that draws from the various DST (digital service tax) legislation enacted in other jurisdictions but adapted to meet the specific challenges faced by African countries,” said ATAF in a statement after the launch.
“Besides enabling countries to charge tax on digital transactions, a DST may have the benefit of building public confidence in the fairness of the tax system as there has been public concern about under-taxation of multinationals especially the high-profile digital companies that do not have a physical presence in countries.
“This may enhance tax morale in African countries and boost the underlying voluntary tax compliance.”
Tax experts have noted that digitalisation often enables multinational enterprises (MNEs) to carry out business in African countries with no or very limited physical presence in those countries. This trend has increased due to the use of digitalised services necessitated by the Covid-19 lockdowns that have seen most MNEs with physical presence in a country close their premises and move to online trading. The trend makes it difficult for countries to establish taxing rights over the profits the MNEs are making from those business activities.
“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 physical presence in these countries,” says ATAF.
“Besides the issue 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.”
Whilst efforts continue to be made by the Organisation for Economic Co-operation and Development (OECD) Inclusive Framework to develop a consensus-based solution to address tax challenges arising from digitalisation, ATAF has said that the status to- date shows that a global solution is unlikely to be reached this year. The delay could cost African countries millions of dollars of tax who might wish to act now to address this potential risk.
The Suggested Approach, thus, speaks to this challenge but acknowledges the need of ensuring that the DST does not negatively impact on growth of the digital sector in African countries. As such, it proposes that countries set minimum thresholds, which will ensure that they only target large and profitable digital businesses. In the context of global politics and self interest, ATAF has also warned member states that taking these measures might attract repercussions such as trade wars and institution of tariffs by countries from which these MNEs hail. Africa, however, has to defend her stake all the same.