Taxing digital economy in Africa

Digital economy which covers a range of economic and social activities that are enabled by information and communications technologies is growing very fast in most parts of Africa according to the latest data available. In more than ten countries I analyzed their data in various sectors like banking, buying and selling, and accessing education or entertainment using the internet and connected devices, there is clear evidence the continent isn’t being left behind by the rest of world. Actually if you ask me, digital economy is not separate to the economy. Of cause it impacts all industries and business types, and influences the way we interact with each other every day.I do know very well that rapid developments in technology and science are changing the way Africans live, work and do business. These changes come with challenges for our industries, jobs and communities. They also present opportunities to increase wellbeing and secure African jobs and prosperity. Digital technologies can also deliver social benefits by supporting social inclusion and helping African countries to address big challenges like the changing nature of work, protecting our environment, and looking after ageing population.However, the spread of the digital economy poses challenges for taxation. This report sets out an analysis of these tax challenges.  The digital economy is increasingly becoming the economy itself, and experts have argued that it would not be feasible to ring-fence the digital economy from the rest of the economy for tax purposes. On the other hand, certain business models and key features of the digital economy may exacerbate risks. Few days ago, I had a chance to discuss deeply about taxing of digital economy in Africa and what the scenario could look like in coming years bearing in mind your blogger is an interested party in various parts of the continent.He started by explaining that by definition, value added taxes is a tax on consumption of goods and services within Africa’s customs jurisdiction which is applied at every stage along the production and distribution line. But so far, that hasn’t really been keenly implemented in most countries across the continent. His explanation carries important general principles which is the destination principle, in simpler terms, the place of taxation is the place of consumption. The other one is the neutrality principle, whereby value added tax is implemented through a staged collection process whatever the nature of the supply, or technical means used.Thanks to the extremely rapid advancement in digital technology, such principles are facing tough challenges with regards to value added taxes collection from supplies of services and intangibles goods from non-resident or cross border supplies. The use of reverse charging mechanism for this type of transaction is ineffective, compliance is predictably low since there is no incentive to the final private consumers to declare and pay the value added tax due. Thus the cost of chasing unpaid small amount of value added tax from millions of private consumers may outweigh the total revenue collected.

Some of the proposed guidelines set by countries like South Africa, Kenya, Mauritius and recently Morocco proposes to require non-local suppliers to register and account for the value added tax in the jurisdiction of taxation. What potentially works with this approach is that, first, big foreign suppliers, on the basis of good governance, trust, image, and expected ethical conduct, might follow through the registration process requirement and collect value added tax from their consumers on the behalf of the government unaffiliated with such consumers. Therefore, the stream of value added tax revenue is expected to significantly increase in comparison to the only reliance of reverse charging by the consumers.Taxes are the main sources of revenue for African governments to fund various public services and projects. The spread of the digital economy, however, creates challenges for general taxation as well as domestic tax revenue mobilization. Tax authorities in Africa need to keep pace with the fast changes occurring in the digital economy. Institutions need to be further strengthened to be able to perform required functions and be responsive to change.Another set of suggestion has been mooted by countries like Ghana, Nigeria and Egypt which offers more effective and efficient mechanism than custom-assisted for imported goods and reverse charging for business to consumers. It’s likely to be effective because value added tax will be collected in efficient manner because tax administrations will only deals with few registered foreign suppliers in contrast to having to enforce compliance to every single private consumer. The incremental impact to the tax revenue is expected to be positive according to Ghanian officials.Both approaches nurtures compliance in general because the tax administration could be seen imposing the similar level of taxation to similar transactions according to the intended regulation whether they are done conventionally or unconventionally or whether they are purchased within the countries or internationally. When compliance is nurtured, more consistent stream of tax revenue is expected to follow. One could argue that the past half decade or so has been something of a free pass for digital players in Africa, who have been able to take advantage of legal loopholes to pay very little tax on their extremely lucrative businesses.Although your blogger believe that when trust is given and businesses allowed to decide for themselves what is best on this matter, participatory compliance can be developed. But as the saying goes, there are only two certainties in life death and taxes and it is only a matter of time before the taxman catches up.