Digital economy presents new tax headache for revenue authorities
By Staff reporter | 18 Mar 2019 at 09:43hrs
The emergence of digital economy presents a major challenge for the majority of tax authorities in Africa, with some describing the situation as a worrying state of affairs.
Rapid digitilisation has changed Africa, with many people and businesses participating in the modern economy. But, the majority of countries in Africa have not developed a framework to regulate and be able to get a "fair share" of taxes from revenues generated from such businesses.
Tax experts from across the African continent-who last week met at the African Tax Administration Forum (ATAF) in Kigali, Rwanda-expressed concern that the digital economy has challenged traditional taxation rules. They highlighted that the majority of revenue authorities in Africa were struggling to capture the new phenomenon in their respective jurisdictions.
ATAF serves as an African network that aims at improving tax systems. Today, all sectors are impacted in a bigger way by the rapid spread of digital services largely e-commerce, Facebook, Cloud services, twitter, video streaming and google advertising.
It emerged that African tax authorities were not ready for the digital revolution, also known as fourth industrial revolution as they have old regulations or laws and have limited knowledge of the phenomenon, which is overhauling industries across the continent.
Anonymous cryptocurrencies such as bitcoin are posing challenges to efforts that seek to combat money laundering and other illicit activities.
ATAF director for tax programmes, Mary Baine, who spoke at the ATAF media engagement meeting in Kigali last week, said the digitilisation of the economies presents tax challenges and opportunities in Africa. "The new value chain structures are challenging the fundamental underlying principles of the tax rules. To put it into context, development assistance alone is not sufficient in terms of aiding Africa development," Baine said.
"This is so, because developed countries - since the financial crisis of 2008 - have been hit hardest, resulting in them pressing austerity measures, meaning that there is less development aid to go around. Consequently, developing countries are now encouraged to mobilise internal revenue as means of funding development."
Developed countries suffered from profit shifting by some of their big multinational companies from the jurisdictions in which these profits arise and that poor legislation and weak administrations was hampering tax collections. This, Baine said, resulted in rampant illicit financial flows where tax payers are not geared to pay all the tax due.
"These are activities under trade mispricing, which is falsification of price, quality, value of goods to avoid duties and levies. There is also rampant misinvoicing of services and intangibles such as intra-group loans and intellectual properties or management fees, tax avoidance by engaging in abusive transfer pricing and tax evasion by profit channeling via financial secrecy or tax haven jurisdictions facilitated by double taxation agreements, tax incentives and insufficiency of state reporting requirements," she said. Thulani Shongwe, ATAF manager for resource mobilisation said it was time for revenue authorities to act.
"The digital business has risen and effectively challenging traditional tax rules. Most of these don't have physical presence. The changes in physical presence are completely altered. This means they are changes in the game. The digital economy has opened up opportunities for tax avoidance, depriving government of the much needed cash because cross border transactions are virtually tax free. Transfer pricing is one challenge posed by digitilisation. It's very difficult to apply in Africa.
Some Bernadette, a Burkina Faso-based tax researcher told Business Times: "This is a new phenomenon in Africa and it's a real problem today. We have not come up with solutions to tax it or to improve our tax collections. We are supposed to see it as an opportunity, but people are taking advantage of this to commit crimes such as fraud and tax evasion. We are finding it difficult to capture VAT because of transactions happening on the internet. We have not put in place measures to deal with the emerging digital economy. We need to revise or update our laws on tax to help us in our countries."
Aimable Kayigi Habiyambere, the Rwanda Revenue Authority (RRA) commissioner of domestic taxes said authorities "need to find a way of taxing the digital economy. Authorities need to gear up for this emerging sector".
RRA deputy commissioner for taxpayer services department, Drocelle Mukashyaka agreed with the other tax experts adding that Rwanda has made some stride in dealing with the digital economy, in some way.
"In 2011, our revenue to gross domestic product (GDP) was 12 percent but now is about 15,2 percent," Mukashyaka said.
"We have invested a lot in automation and this has resulted in 20 percent increase in revenue collection using electronic system. We have also invested in the sharing of information. We have connected with other agencies electronically. We have also linked with National Identity Authority, Rwanda utility agencies, telecommunication and transport industries."
She said the authority signed memoranda of understanding with other agencies making it easy to see transactions by these agencies.
"We have also invested a lot in risk management system. This enables us to see even people who have transacted with government. We can trace it," Mukashyaka said.
She said RRA reviewed its Finance Act to deal with transfer pricing, double taxation and management fees, among others.
Laws in many African countries are not clear on these, according to Leila Kituyi, ATAF legal and corporate manager, who also spoke at the Kigali meeting.
"Double taxation laws in Africa are not clear. Parliament must be given an opportunity to look at double taxation agreements before signed by the two countries involved," Kituyi said.
"The other is the tax incentive issue. I personally don't believe that providing tax incentives are the reasons for investors to come into a country. They are many reasons like stability of the country, access of the market, the financial sector and how easy to transfer funds, which investors consider more. In fact, tax incentives are the least, they look for. If you create incentives, you are actually creating a burden for the citizens, because authorities to collect more by increasing say value added tax to fund government operations."
The Zimbabwe Revenue Authority (ZIMRA), like the majority of countries in the African continent, is using old tax laws which do not reflect economic realities of today, meaning its vulnerable and is not ready to deal with the challenges that comes with the new world order.
Zimbabwe considers digital economy a major growth enabler and has been seeking to capitalise on this avenue, but like other countries in the continent, is losing millions of dollars in potential revenue.
ZIMRA commissioner general Faith Mazani said her organisation was battling to deal with the emergence of digital economy adding it was important for the revenue collector to enter into agreements with all regulatory authorities in the country to gain access into their databases.
ZIMRA, she said, has heightened efforts to force companies to fiscalise which assists in curbing transit fraud and smuggling.
"The solution to capturing the digital economy is to have systems that help capture and analyse the data, identify risks and enforce where there is non-compliance. We have fiscalisation systems that are helping us gather real-time information to know the tax transactions," Mazani said.
"We are working on enhancing the systems to ensure we gather all information so we know all the transactions real-time. This requires full integration with third party data sources which include the Reserve Bank of Zimbabwe, Central Vehicle Registry, banks, Registrar of Companies."
While most countries on the African continent, including Zimbabwe, recognise digital integration as an opportunity to promote development and generate dividends by promoting innovation, reducing transaction costs, boosting efficiency and productivity and making services cheaper, they are not ready to tax the digital economy, which can drive up Gross Domestic Product.
Only a few countries in Africa such as Uganda, Egypt and Cameroon have since dealt with social media platforms. Benin, initially introduced the law to tax users last year, but reversed it after public outcry.