• The challenge is especially witnessed where multinational companies are involved and take advantage of the gaps to reduce taxable income.
• The other obstacle is the fact that companies are not obliged to keep physical presence with the destination state to operate.
Business has evolved tremendously over the last few decades.
Incorporation of technology has brought about increased efficiency, greater convenience, economic development and improved problem-solving. The value-added results have positively impacted operations.
The entrance of new and tech-oriented players has not only resulted in inclusion and disruption but also created an interesting ‘digital economy’ ecosystem. This unprecedented transformation should be good news for governments as they have the potential to grow their domestic resource mobilisation.
However, the revenue authorities have been caught flat-footed in regulation and have not been able to assess, collect and account for revenues from the modern global economy. The current international tax rules are not up-to-date with the technological advancement in the business industry and therefore, need to be re-assessed.
Some of the successful technology-driven businesses include popular mobile money transfer services, yet they are not banks. For instance, Safaricom posted 14.7 per cent increase in net profit to $634 million in March and Facebook, an American social media and networking service company that brands target for advertising, yet does not create content recorded $16.9 billion in revenue in July.
Another entrant into the economy, whose growth and proliferation has been facilitated by digitalisation, is the multi-sided online platforms. This happens outside of the traditional business structures to enable transactions between individual sellers of goods and services to individual consumers.
Familiar examples include Uber, an online taxi service company with operations in almost 800 metropolitan areas yet does not own the cars. Airbnb Inc, an online marketplace for arranging primarily homestays yet does not own any of the real estate listings is another successful business. Currently valued at $31 billion, it acts as a broker, receiving commissions of 9-15 per cent on average from each booking. Based on the first-quarter results this year, and projections by www.alltherooms.com for the remainder of the year, Airbnb is set to make $1.26 billion.
There exist opportunities in the multi-sided online platforms for taxation if governments integrate them into the formal economy in that there will be greater reporting of income which will drive growth in revenue.
Tax Justice Network Africa recently hosted a three-day Pan African Conference on Illicit Financial Flows themed Taxing intangibles, Financial Technology and Digitalised economy. It sought to address the trends, challenges and opportunities for domestic resource mobilisation in Africa. Stakeholders sought to establish how technology can aid in combating outflows from the continent.
Speaking at the conference, Uzuma Erume from United Nations Economic Commission for Africa encouraged taxation of the new and evolving tax models. “However, priority should be given to understanding the sector, its dimensions and subsector flows and the kind of activities taking place without impeding its growth. Further, invest in research, data collection and data analysis to help capitalize on the new development” she said.
There is a lot that needs to be done for revenue authorities to efficiently carry out this mandate. According to Lyla Latif, a lecture at the University of Nairobi, there are grey areas that need to be cleared. “Who should be taxed? Is it the producer, consumer or user?” she posed.
The challenge is especially witnessed where multinational companies are involved and take advantage of the gaps to reduce taxable income. In reacting to this, the African Tax Administration Forum executive secretary Logan Wort admittedly stated said the emergence of digital-based businesses has thrown into the fray whether the current tax systems are updated to deal with new forms of ventures.
This is because the current framework of international taxation is pinned on duality in the attribution of taxing rights. The enterprise’s residence state is entitled to effect tax on the basis of the presence in its territory or the fact that it is incorporated under its law. Then, there is the source state that can levy taxes on the income generated in its territory.
The other obstacle is the fact that companies are not obliged to keep physical presence with the destination state to operate. A case in point is Uber, which operates on different continents but does not have functions, assets or risks geolocated therein.
This means policy development and implementation must take into consideration the rapidly changing ecosystem yet objectively provide certainty and clarity that promotes sustainable economic growth.
While acknowledging these gaps, governments should focus on the modification of existing rules that divide the right to tax of multinational companies among jurisdictions. They should also endeavour to improve coherence in domestic rules that affect cross-border economic activities as well as enhance transparency and certainty for businesses and governments.
Bwari works at Tax Justice Network Africa