THE PRICE OF INNOVATION

Taxing the Digital Economy

Regulation has constantly played catch-up, leading to unfortunate instances of regulation stifling innovation

In Summary

•The idea of taxation the digital age indirectly, however, may not be the ultimate end

•The Finance Act 2019 seeks to attempt to tax the digital economy, by specifically targeting digital market platforms

A kilimall shopping site
A kilimall shopping site
Image: COURTESY

Traditionally, regulation has more often than not trailed innovation. This is all the more true in the digital age. As technological innovations experienced exponential growth over the past two decades, regulation has constantly played catch-up, leading to unfortunate instances of regulation stifling innovation.

This unfortunate happenstance is likely to be replicated in the digital age, as regulation attempts to capture the digital age within its net.

However, the above notwithstanding, it is evident that the stifling of innovation is not an aim of regulation. This is particularly true in the ongoing debate on how to tax the digital economy. Calls for taxation of the digital economy, and policy proposals on how this should occur, should from the onset establish the potential negative consequences, if any, of these proposals and in tandem propose mitigating measures to prevent the crystallisation of the same.

In line with the ongoing debate on how to capture the digital economy, the Organisation for Economic Co-operation and Development (OECD) in an exercise aimed at reforming global tax codes, and to specifically address the challenge of base erosion and profit shifting (BEPS), released BEPS Action 1 – Digital Economy, that proposes policy measures aimed at capturing the expanding digital economy within the tax net.

 
 

BEPS Action 1 discussed the challenges policymakers are faced with when attempting to introduce policy measures targeted at the digital economy. It is noted that the digital economy’s peculiar characteristics, such as mobility, make it all the more difficult to isolate and tax. Simply put, the vast reach of the digital economy, as well as its integration with traditional industries/economies, makes it difficult to isolate and tax independently.

Consequently, rather than introduce measures that target the digital economy directly, BEPS Action 1 largely attempts to tax the digital economy indirectly through traditional industries/economies. This involves beefing up traditional tax measures, and sealing loopholes in tried and tested tax regimes, for instance in the case of cross-border transactions and permanent establishment considerations, with a view to ensuring that tax validly due and payable arising through the digital economy is accurately reported and paid.

The idea of taxing digital age indirectly, however, may not be the ultimate end. Other proposals include the imposition of tax specifically targeted at businesses operating the digital space, for instance as proposed in the EU which seeks to levy a three per cent digital tax on certain entities with digital operations in the region. Closer to home the Finance Act 2019 seeks to attempt to tax the digital economy, by specifically targeting digital market platforms, such as Amazon, and homegrown digital marketplaces such as Jumia and Masoko. The impact of this amendment to Kenyan tax legislation, however, is yet to be evidenced.

The above considered, it is evident that whether directly or indirectly, policymakers are yet to reach consensus on the most efficient manner through which the digital economy may be taxed.

Karen Kandie – MD IDB Capital