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By Barry Silah
Government tax bases are shrinking as digital services and global businesses continue to expand, but there’s little global consensus on how to protect public revenues.
That challenge, according to experts could continue into the foreseeable future due to the absence of a unified approach geared towards aggressive tax plans.
Thulani Shongwe the head of African Tax Administration Forum (ATAF) and a member of the Illicit Financial Flows Working Group believes more needs to be done with regard to the effective enforcement of such tax rules against companies that do not have a physical presence within the country.
“This is an important debate that has been going on for a very long time now, and the United Nations needs to play a leadership role on this front” he said.
Many African countries continue to express concerns over the tax challenges they face as their economies become increasingly digitalized while tax agencies designed for brick-and-mortar activities still oblivious to new disruptive business models.
That digitalization enables multinational enterprises (MNEs) to carry out business in African countries with no or very limited physical presence in those countries. This makes it difficult for African countries to establish taxing rights over the profits the MNE is making from the business activities it carried out in the specific African country.
The challenge has become increasingly pressing, as economic changes have eaten away at governments’ tax bases, with more and larger multinational corporations and many are tech businesses – making it hard to identify where their profits are generated.
Digitalization according to Mr. Shongwe, further raises the question of how taxing rights on income generated from cross border transactions should be allocated between jurisdictions.
The allocation of taxing rights between residence and source jurisdictions, for instance, he says, has been an issue of considerable concern for African countries for many years with most of them having their tax bases eroded by Illicit Financial Flows due to MNEs artificially shifting profits to jurisdictions where the profit are subject it little or no tax.
To address this, he advises a re-look into double taxation rules among different economies.
“There have been significant losses made by African countries through payments made by MNEs to their related parties or no tax jurisdictions. As a result, MNEs have managed to manipulate and take advantage of aggressive tax planning, aggressive transfer planning practices and loopholes with outdated double taxation agreements,” he said.
In December last year for instance, Kenya announced that it would start levying new tax on digital markets under a new law signed by the president early in November 2019. Through the Finance Act, the new law would broaden the Income Tax Act net to include income accruing through a digital market place.
The law defines the digital marketplace as a platform that enables direct interactions between buyers and sellers of goods and services through electronic means.
In addition, a similar change was made to the VAT Act making digital market services subject to value-added tax.
Like France and India before it, the move by Kenyan authorities was seen as a well calculated step in trying to get its cut of every digital transaction within its territory.
The argument is that it is only fair to tap into the revenue accrued from the digital economy taking place within their territory. Companies registered elsewhere and operating in their territory earn income from the same but do not pay taxes, the argument goes.
Political goodwill, according to Mr. Shongwe, would go along way in solving some of the challenges at play.
“Political backing and high level ministerial meetings among African leaders would play a critical role,” he concluded.