Many ATAF members have reported difficulties in taxing highly digitalised businesses operating in their countries. Their economies are rapidly getting more digitalised and 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 pandemic that has seen most MNEs with physical presence in a country close their premises and move to online trading. This makes it difficult for countries to establish taxing rights over the profits the MNE is making from those business activities.
This is caused by the fact that the current international tax rules only allocate taxing rights to a country where a non-resident enterprise creates sufficient physical presence in that country i.e. 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 have reported significant growth in digital transactions through online platforms such as Amazon, Facebook, Google, Alibaba, Booking.com, Airbnb, Uber and Netflix. This is driven by emerging economies in the continent and increasing access to internet and use of mobile phones. 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 . 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.
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. For instance, new value streams such as user data and user participation have become critical. Additionally, digitalization has increased reliance on intangible assets such as Technology Intellectual Property and global Trademarks. These intangibles assets can now be exploited in mass markets where the owner has no or little physical presence. The current international rules on profit allocation do not address these new value streams. Thus, African countries will not have an opportunity to tax income associated with these value streams under the existing profit allocations rules (which are based on transfer pricing principles).
Whilst efforts continue to be made by the OECD Inclusive Framework to develop a consensus-based solution to address tax challenges arising from digitalisation, the status to- date shows that a global solution is unlikely to be reached this year. This delay could cost African countries millions of dollars of tax to the ATAF membership who might wish to act now to address this potential risk. At their request ATAF has thus developed a Suggested Approach to Drafting Digital Sales Taxation as a guide.
The Suggested Approach, which has been developed by the ATAF Secretariat and ATAF’s Cross-border Taxation Technical Committee, will help African countries that are considering implementing digital service tax to tax transactions of highly digitalised businesses. It should be noted that some African countries such as Kenya and Nigeria have already enacted Digital Service Tax laws and are in the process of implementing the laws. A number of other African countries are considering this option. Hence, 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 legislation enacted in other jurisdictions but adapted to meet the specific challenges faced by African countries.
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 .
Acknowledging the need of ensuring that the DST does not negatively impact on growth of the digital sector in African countries, the Suggested Approach proposes that countries set de minimis thresholds which will ensure that they only target large and profitable digital businesses. This approach, coupled with setting of modest rates of DST will be important for promotion of investment and growth in the digital economy in Africa.
As ATAF has previously noted, ATAF Members need to be aware that there could be repercussions to taking these measures, such as the institution of tariffs by countries from which these MNEs hail. The African countries however, like other global nations, find that given the consistent revenue loss, they are left with very limited options given the delay in the global solution.
