Is it time to tax the digital economy in Sub-Saharan Africa?
Digital transformation is bringing manyfold benefits to all sectors of the economy, from health, to trade, transport, to education, and financial services. The increased digitisation of businesses and transactions also provides an opportunity to improve government’s revenue collection and expand its tax base, which is particularly important for many governments in Sub- Saharan Africa that are faced with large informal economies.
However, the significant changes brought about by digital transformation have also sparked global debate on the tax implications of the modern digital economy. Existing international tax laws are based on physical presence attributable to a permanent establishment in a particular country, and fail to reflect many of the characteristics of digital companies, such as having scale without mass (no physical presence), reliance on intangible assets, and the centrality of data. [1]
What are the new OECD/G20 tax rules?
The Organisation for Economic Cooperation and Development (OECD) has been considering global solutions to this problem and a new two-pillar plan to reform international taxation rules and ensure that multinational enterprises pay a fair share of tax wherever they operate has been agreed upon by over 136 countries in principle during the just concluded G20 Summit in Rome[2].
These new rules are still to be fully developed and implemented into legislation in each country, and are expected to come to force in 2023 at the earliest. The agreed rules have two key components:
- Pillar 1- Re-allocation of taxing rights towards market jurisdictions where physical presence is not already established. Limited to multinational groups with global consolidated revenues exceeding €20bn.
- Pillar 2- Multinational groups that meet a certain threshold will be subject to a minimum tax rate of 15% business profits earned in a particular country.
Importantly, countries that adopt the new international tax rules would have to commit to the removal of all Digital Service Taxes on all companies.
As of November 2021, several countries in Sub-Saharan Africa including Angola, Mauritius, Namibia, Benin, Senegal, Kenya, Nigeria, Togo, South Africa and Sierra Leone are members of the OECD/G20 Inclusive Framework on BEPS that has contributed to developing the new rules. However, Kenya and Nigeria are yet to sign the agreement over concerns on the removal of DSTs (Kenya has introduced a DST in January 2021) and the dispute resolution mechanism [3].
How do we ensure that the current efforts of closing the usage gap in the region that is 53% as at 2020 representing 575M people, are not eroded by a tax that impacts affordability of service which is a key barrier of adoption of broadband services?
The GSMA and its members are advocates for fair taxation, including taxation that does not distort investment, is broad-based rather than discriminating towards specific sectors, encourages digital citizenship and welcome dialogue with policymakers to develop a fair and transparent framework for the taxation of the digital economy.
It is crucial that governments recognise the essential contribution of the telecoms sector as an industry that makes long-term investments into the critical infrastructure of a country that is the bed rock of the digital revolution, and the already high burden from unilateral Telecom Specific Taxes (TSTs) levied in many countries in SSA, in addition to general taxation and spectrum fees .
Any government adhering to the new OECD rules should therefore commit to removal of current and future TSTs from regulated telecommunication Multi National Enterprises. Moreover, as we prepare for these new rules to come to force in 2023, government, private sector and other stakeholders should prioritise policies that address the key barriers to broadband adoption and these are affordability of service and devices, relevant content, digital literacy, safety and security of service. This will ensure that have as many people as possible participate in the digital economy, this could increase the possible revenue governments can collect though this new international tax framework.
[1] https://www.oecd.org/tax/beps/beps-actions/action1/
[2] https://www.oecd.org/tax/beps/statement-on-a-two-pillar-solution-to-address-the-tax-challenges-arising-from-the-digitalisation-of-the-economy-october-2021.htm
[3] https://qz.com/africa/2082754/why-kenya-and-nigeria-havent-agreed-to-global-corporate-tax-deal/
[4] https://www.gsma.com/newsroom/blog/gsma-and-etno-call-for-a-more-equitable-and-balanced-approach-towards-taxation-of-the-telecommunications-sector-under-the-new-tax-rules-proposed-by-oecd-g20-august-2021/