Digital Taxation: can it contribute to more just taxation?

Executive Summary

The acceleration of global digital services and e-commerce has exposed the outdated nature of many tax regimes around the world. The forgone potential revenues for states, particularly in the context of post-pandemic economic reconstruction has further necessitated the updating of the tax system to address what is an increasingly global and complex challenge. For Africa, the situation is arguably even more precarious with the dawn of the African Continental Free Trade Area, ACFTA, where there is an expected significant drop in conventional physical trade tariffs. As trade barriers begin to ease across the region and e-commerce gradually becomes more pervasive the success of the proposed single digital market will depend on some levels of harmonisation digital taxation policy. 

This makes the assessment of the tax regulatory regimes on the continent and the alignment of them with an international tax regime imperative. Such an assessment needs to consider two international processes that are particularly important in this context:  the OECD/G20 BEPS tax proposals and its potential and challenges, and, from a trade perspective, the plurilateral negotiations on e-commerce at the WTO. It also requires consideration of various domestic resource mobilisation strategies within the digital markets, especially in the context of post-COVID-19 reconstruction. In this regard, the paper also examines the effects of unilateral taxes on digital services and transnational global platforms, and how this impacts the development of the digital economy in Africa. It also considers the regressive taxation applied in many African countries on end users of social networking services and its negative impact on digital substitution during lockdowns and on social and economic inclusion more generally.

The paper highlights how digitalisation and datafication has posed challenges for traditional tax revenue systems. However, the accelerated growth in digital services and e-commerce also presents new opportunities for Africa’s economy. The paper seeks to inform effective governance of global public goods from a developing country and regional lens, exploring the challenges and opportunities created by the digitalisation and datafication of Africa’s economy and the policy options for justly expanding the tax base for optimal state formation.

Findings from the paper indicate that the stringent digital tax policies as currently applied on end-users within the continent – rather than the global platforms – as a means of appropriating location-specific rents within the digital economy, have the potential to lower affordability of online services as well as impede the fundamental human right of freedom of speech. While the paper is of the position that the emerging unilateral approaches to digital taxation in Africa can serve as a temporary gateway and a starting point to better grasp the value creation and capture dynamic of the digital economy, it has a significant disadvantage of risking a global impasse for global bilateral trade obligations.

This paper proposes the following key recommendations to optimising the global tax system:

  • Within the ambit of an equitable value distribution with reference to developing economies, a revenue threshold that is based on the size of customer payments within the country to a non-resident provider of services – whether they are digitalised or not – is the most effective and easiest to apply in determining the taxable nexus. This optimised approach can be achieved by expanding on the profits-split methodology within the transfer pricing framework that the OECD and G20 have put forward. While the current BEPS proposals have unfairly focused on the residual profit-split, there also needs to be an incorporation of the contribution profit split for a fairer assessment, which looks at the contribution of all the firm entities concerned.
  • African countries need to build out the required systems for implementing these digital tax proposals on the continent. These need to be cognisant of the institutional endowments of countries and adapted to meet local contexts. This will require both local research and the building of an adequate evidence-base to inform Africa-led alternatives.
  • In the same vein, capacity development efforts in Africa with respect to digital taxation should leverage more South-South rather than the current North-South cooperation model if the existing problems for the region, as espoused within the BEPS process, are to be effectively addressed.
  • In addition, the WTO negotiations on e-commerce have through its customs moratorium resulted in huge revenue losses to developing countries via the restriction of the flexibility to regulate the import of digital services. The issue of the moratorium needs to be revisited, as proposed by some African states to create an enabling international trade regime that will promote e-commerce on terms that are more equitable.  For this to happen the concerns of countries – the majority of which are currently African countries – that do not feel that that the interests of developing countries are safeguarded will need to be addressed.
  • At the regional level, the AfCFTA represents an opportunity for tax harmonisation on the continent, but this may not necessarily be for every form of tax. Here it will be important to assess how African countries are leveraging the new tax opportunities by way of introducing regulations and legislation that would at least capture some of those proceeds that were previously not being taken advantage of.
  • Digital service taxes as currently applied on users rather than providers across several African jurisdictions is not ideal from the perspective of good tax design principles, as it is quite likely that the cost of implementation will be passed on to consumers or users. For a continent where the average age is 19 years, and where most people are unemployed or in the informal sector, the regressive nature of indirect taxes are not a good starting place for taxing the digital economy. This is likely to distort markets and be less progressive in general than a direct tax on profits would. The focus should therefore rather be on taxing income generated within digital spaces, which should be the most important basis for taxation, even if this is not immediately achievable.

By more actively engaging in the BEPS reform of the global taxation regime, African countries may be able to get at least a bare minimum of 15% from global digital players with no physical presence in the country, and from whom they currently receive nothing. This will require relatively few enforcement mechanisms.

Suggested citation

Gillwad, A., & Onuoha, R. (2022). Digital Taxation: Can it contribute to more just resource mobilisation in  post-pandemic reconstruction? (Working Paper No. 2; RIA Digital New Deal for Africa). Research ICT Africa. https://researchictafrica.net/publication/digital-taxation-can-it-contribute-to-more-just-taxation/

One thought on “Digital Taxation: can it contribute to more just taxation?

  1. An important and timely paper. It would benefit from global historical context.
    That context would include the ways in which the most developed countries allowed the current technology multinationals to structure their affairs to avoid paying tax. For example an subsidiary of Apple in the 2010’s paid no tax anywhere in the world for five years despite billions in revenue. It is only more recently that developed countries have begun to impose taxes on technology companies. The impact of this on global competitiveness shouldn’t be underestimated.
    Similarly the preference in economics and tax literature for residence over source based taxation has tended to favour developed countries even prior to digital services.

    The e-commerce customs moratorium at the WTO would also repay greater attention. The purported rationale for this, that digital economies were not yet mature or well understood is no longer tenable. In this context the suggestion that “It is time to start considering the lifting of this moratorium, which the Africa cohort within the WTO are in favour of doing” is an invitation for delay since even a strong demand that it be lifted immediately would be met with strenuous resistance and lengthy delays.

    It would also be helpful to explain more clearly why revenue flow from an African country to a developed country is not itself a sufficient nexus for taxation.

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