G7, African Ministers caucuses take aim at digital companies for levies
The recent Group of Seven (G7) advanced economies agreed the outline of a global deal on taxation that could hand governments greater rights to levy US tech giants and set a floor for corporate rates around the world.
Incidentally, African leaders seem to have mooted the similar initiatives on taxing the tech giants.
However, a joint G7 statement did not mention any commitment to tax digital companies, focusing only on big profitable multinationals. That is a victory for the US, which opposed France’s bid for explicitly targeting tech giant such as Amazon.com and Facebook.
Tech companies have long supported the efforts to replace a growing number of national levies on their revenues with clear rules to where they pay tax.
“Today’s agreement is a significant first step towards certainty for businesses and strengthening public confidence in the global tax system,” Facebook’s global affairs vice-president, Nick Clegg, said on Twitter. It is “a historic agreement on global tax reform that will require the largest multinational tech giants will pay their fair share of tax in the UK”, chancellor of the exchequer Rishi Sunak said.
France finance minister Bruno Le Maire said the deal was a triumph. “We’ve been fighting for four years in all European and international forums, here at the G7 and the G20 for a fair taxation of digital giants and for a minimum corporate tax,” Le Maire said, adding that the 15% rate is a starting point that could be pushed higher.
Similarly, the Italian finance minister Daniele Franco said he will aim to broaden the discussion when G20 finance ministers meet in July in Venice. Once the proposals are agreed, Italy will no longer need its digital tax.
During Donald Trump’s presidency, the transatlantic division on digital issues spiralled into a battle of unilateral measures and threats of trade sanctions, which, though suspended, are still in place, says a Bloomberg report familiar with the matter.
The G7 said that countries would “provide for appropriate co-ordination” to remove such digital services taxes. Resolving the exact sequencing of that could prove tricky with countries unwilling to give up revenues from their unilateral measures before they have certainty over what they will gain from new global rules.
However, a similar thinking is cropping up on the continent of Africa. For many years, international taxation and Africa Taxation regimes have been unable to tax digital Multinational Enterprise (MNEs) effectively over the past few decades. MNEs tend to carry out business in African countries with no, or very limited physical presence in those particular countries.
A report in Afromicslaw by Mbakiso Magwape states that the African Continent, like many parts of the world, has adjusted to utilising unconventional digital means to replace every-day physical activities through mediums such as digital education, online banking, virtual conferencing and meetings, and online sale of goods. African Leaders and policy makers have taken cognisance of this, placing this as the main theme at the upcoming fifty-third session of the Conference of African Ministers of Finance, Planning and Economic Development, titled; ‘Africa’s sustainable industrialization and diversification in the digital era in the context of Covid-19’.
According to Afromicslaw, there are two over-arching approaches to taxing the digital economy. The first is a global approach spearheaded by the OECD, through its Unified Approach to taxing the digital economy under the Base Erosion and Profit Shifting framework. This approach seeks to allocate income taxing rights to local markets, regardless of the presence of relevant jurisdictions and was due to be agreed in 2020.
The objective is to allocate taxing rights between jurisdictions, address permanent establishment and the applicability of the arm’s length principle, prevent aggressive unilateral measures and the intense political pressure to tax highly digitalised MNEs as proposed.
The above has been met with delays which have, in the interim, led to the second approach, specifically the unilateral approach of imposition of digital services tax by Countries. Individual States, such as Kenya, Nigeria, United Kingdom and France have imposed unilateral taxation legislation to taxing the digital economy.
Nigeria and Kenya have incorporated the tax into their respective Income Tax and VAT instruments, France captures DST in VAT returns, and the UK has prescribed for the tax separately in the Finance Act 2020. Digital taxation has been one of the areas at the forefront of global tax policy discussions, particularly under the Organisation for Economic Co-operation and Development’s (OECD) Inclusive Framework on Base Erosion and Profit Shifting (BEPS) initiative.
According to the same input by Botswana-based Magwape, digital services tax, presents an opportunity for African Countries to expand their tax base regarding digital sales and services, which has been eroded significantly over the years. There are, however significant challenges which cut across most countries, brought about by the unique nature of the digital economy and international taxation, such as permanent establishment rules, characterisation and allocation rules, and developing data and protection rules.
“The African Tax Administration Forum has led the charge in Africa, in the efforts to address taxation of the Digitalized economy. It has issued technical notes on key issues regarding digitalisation and taxation, particularly on establishing a consensus-based proposal that meets the needs of African countries.
The discussion dealt with three issues: i) new nexus rules, ii) new profit allocation rules and iii) a new global anti-base erosion rule. ATAF further published a Suggested Approach to drafting legislation on digital services Tax Services prepared by the Secretariat and ATAF’s Cross-border Taxation Technical Committee, to assist African countries implement digital service tax to tax transactions of highly digitalised businesses,” he notes.
Tentatively, digital services tax presents a unique challenge for the world, and Africa, in the need to develop relevant robust, enforceable tax strategies and legislation to empower tax administrations to effectively tax digital sales. Synthesising simple solutions for complex digital transactions in a tall feat, however, this presents an opportunity for increased revenue for a continent that has the potential to significantly increase tax base, and add to Africa’s development.
In order to prove that they mean business, African Countries have started implementing, or have indicated plans to start implementing forms of digital tax. The ten African Countries to date include Kenya, Nigeria, South Africa, Egypt, Tanzania, Mauritius, Uganda, Cameroon, Ghana and Zimbabwe as reported by ATAF. Zimbabwe’s Minister of Finance & Economic Development, Mthuli Ncube, proposed a Unilateral Digital Services Tax which encompasses both digital service and online retailers.
Overall, the potential gains from Digital Sales Tax are significant, as inclusion of digital services tax, may subsequently increase revenue that may be utilised for developing States, particularly at a time of high State expenditure to alleviate the economic and social impact of Covid-19. You could include some benefits from countries that have imposed unilateral taxation legislation highlighted above to showcase the potential gains.