Online companies have managed to have an edge over how business is done and Africa has been getting the short end of the stick. Is it now time to create an even playing field that gives traditional businesses a chance?
In November last year, South Africa broadened its value added tax (VAT) base by including all electronic services that are supplied to the South African market. France has also just passed digital services tax targeted at Silicon Valley.
Is it time that African governments consider revamping their tax systems to accommodate for the evolution in modern commerce?
In Nigeria, companies such as Jumia, Flutterwave, Andela, and Cowrywise have pretty much grown and shaped the digital landscape away from the taxman's radar. This is not for long though.
The Chairman of Nigeria's Federal Inland Revenue Service confirmed this in an interview with Premium Times Newspaper in which he revealed that the country is currently working on a solution for taxing the digital economy.
As it stands today, most large technology companies have to pay tax in countries in which they operate due to lack of any physical presence. Therefore, companies such as Netflix do not pay tax the same way a company that offers a similar service physically such Multichoice's DSTV does.
In his maiden budget presentation in November last year, Zimbabwe's Finance Minister brought up the issue.
In his statement, he proposed to extend the scope of revenues deemed to be from a source in Zimbabwe for tax purposes to include amounts received by or on behalf of a radio or television broadcaster domiciled outside Zimbabwe or an electronic commerce operator domiciled outside Zimbabwe."
Such a move was seen as a direct target to companies such as Netflix and Youtube which are becoming increasingly popular alternatives to traditional broadcasters.
Nigeria has tried in previous years to ask local partners to withhold tax on revenues that are paid to non-resident companies. However, they met resistance due to the lack of clarity within the legislation.
Considering that most of the payments are paid electronically, the cost and means of administering such a tax will be relatively efficient. The tax authority may lay the burden on banks to withhold the portion of the tax that is owed to the government. This will not need foreign companies to then remit payments made from Zimbabwe as it has already been deducted the moment the transaction is effected.
Whilst most European countries have seamlessly adjusted their tax systems to include VAT for sales made online, most if not all African countries are still lagging behind. Therefore, one can buy goods through a platform such as Ali-Express without having to pay the same VAT they would have been subjected to if it was from a local company.
Is it an unfair tax or levy?
Companies that also offer services such as advertising do also pay VAT which a local services company may have to pay in the country in which they are based.
This then puts them at a disadvantage compared to their foreign counterparts selling the same product or service. It favours expanding a foreign economy more than local companies.
Paul Martin, UK head of retail at KPMG, said: “The digital services tax . . . holds the greatest potential to rewrite how the retail game is played. Online marketplaces have often been able to rise above the problems faced by traditional legacy players or independents.”
Do African countries have the muscle to enforce the tax?
The Trump administration has responded to France's introduction of the tax levy with its usual song of tariffs and retaliation. They have promised to make an investigation on whether the tax is discriminatory and restricts American commerce.
Whilst it has every right to look at how the tax may harm American commerce, the Americans tend to look the other way about the effects on other economies. The small retailer in Harare is already at a disadvantage, the local company in Zimbabwe which is subject to taxes that the U.S. giants are not subject to is not able to compete at the same cost.
Dave Lee, BBC North America technology reporter commented on the issue and agrees that the overhaul on the global tax system is now overdue.
Whilst France has been left exposed, it is hoping that more countries can be rallied to its cause. EU-wide adoption failed as countries such as Ireland did not come on board as they have managed to lure tech companies to set up their European bases in the country. However, it is not every country that has had this advantage.
A move by a powerhouse such as France offers hope for African countries who are looking to move in the same direction. It can be the opportunity to bring the issue for discussion on a global scale and allow both sides of the aisle to find a consensus.
The chancellor of the UK has already made known their intention to introduce their own digital services tax in 2020. He stated the government remained committed to discussions with the OECD and the G20 on reforms to the international corporate tax framework. The UK tax would only apply until an alternative solution is reached internationally.
The US-China trade war has already shown that when world economies go to war, both sides of the coin suffers. Increased tariffs will only be transferred to consumers and business that are within the ecosystem suffer.
Therefore, a tough stance from the US at this stage is not exactly in their interest. The world is becoming increasingly irritated by its bully tactics and former allies such as France are slowly withdrawing from years of shared values and vision.
Other bloggers have argued that companies such as Netflix and Google will withdraw their services because most African countries do not have the leverage do reign them in.
Well, it could go two ways. Consumers within the economy will be denied of premium quality services.
Then on the more optimistic path, it could lead to the birth of local digital economies. We have already seen Econet Wireless launch its own host of applications targeted for the digital economy. Many African countries already have their own services to occupy whatever void that may be left by the Silicon Valley giants.
For all it is worth, African countries have been getting the raw end of the stick, and they have to evolve to protect their economies in the Fourth Industrial revolution.
Header Image Credits: Financial Times
Are you impressed, have any concerns, or think we can improve this article? Comment below or email us.