The taxing problem of e-commerce: Experts weigh in

By Steve Umidha

Digital commerce environment is evolving at such a rate that current global tax systems are not only struggling to keep up, but also unaware of the huge amounts being lost owing to the absence of up-to-the-minute innovations and skills to keep track of such levy proceeds.

VAT and its application to e-commerce for instance, has given rise to a variety of compliance challenges for governments because digital commerce transcends traditional jurisdictional boundaries – with relevant tax agencies oblivious of how to navigate through such developments.

This distressing headache has now brought together Pan-African nations together to deliberate on best practices to address swelling challenges affecting the sub-sector in the region.

“As digitization continues to influence African economies, most countries continue to lose a significant amount of revenue as a result of tax avoidance by digital platforms but also through limitation of taxing rights due to emerging global consensus that favour Western countries,” commented  Alvin Mosioma – Executive Director of Tax Justice Network Africa (TJNA) while addressing journalists in Nairobi.

He was speaking during the seventh Pan African Conference on Illicit financial Flows organized by TJNA that is ongoing in Nairobi.

The escalating problems of deteriorating tax revenue collection and further downward revisions to economic growth projections have significantly eroded Kenya’s fiscal position for instance. Tax revenue, as described by the country’s taxman – Kenya Revenue Authority (KRA) could fall short of the fiscal budget estimate as a result of such challenges.

It is now believed that the evolution of the global economy and specifically digitization, the role played by intangible assets transactions in profit shifting and developments in FinTech require a paradigm shift in the discourse about the current international tax rules, trade, investment and Illicit Financial Flows.

The current taxation systems as presently constituted began with the promise of ensuring payment of taxes where value is created but left most of the old rules and principles unchanged, something experts now believe should be overhauled and replaced with ‘working strategies.’

“As it is presently constituted, we lack capacity, and we need to change our laws and regulations of digital taxation to accommodate ‘new’ businesses,” said Mosioma, adding that these markets also are in need of new frameworks.

Experts have also called on multinationals to set up local addresses for ease of tracking their operations.

“The functioning of the digitized economy causes changes in value chains and consequently value creation making old taxation rules unworkable, while at the same time the increasing use of virtual means to operationalize transactions across the globe reduces the need and importance for physical presence,” they said.

Such changes in tax experts believe, trade investment are being rendered more complex by technological changes in the financial sector. These pose new challenges of regulation and exacerbate tax evasion and avoidance risks as well as threats to national security through risks associated with money laundering and terrorist financing.

There is also growing concern within the global tax justice movement and beyond that Jurisdictions that have traditionally been characterized as “tax havens” are gradually becoming hubs for Blockchain-based ventures.

These jurisdictions attract Blockchain entrepreneurs by offering refuge from regulation and tax imposed by nation states. These new “Blockchain Havens” create a regulatory “race to the bottom” that is traditionally associated with international tax evasion and avoidance.