21st
CENTURY APPROACH TO TAXATION IN DIGITAL ECONOMIES
First and foremost, digitalisation in the wave
of the digital economy is good and all nations should embrace it. Due to
traditional preoccupations that tainted the continental scape, Africa didn’t transform
thoroughly through the first to the third industrial revolutions. However, the
rise of modernization and its tenet of a single equal pace to globalization has
facilitated the continent’s aspirations to catch up with the opportunities and
challenges of this fourth industrial revolution that include taxation.
The main features of digitalized economies include:
multinational companies whose activities are not easy to localize or track and
tag taxes levied on them to a specific economy or distribute the total fiscal
contribution amongst countries of operation. The second feature is that firms
dominating the digital economy are quite often platforms that direct
interaction between the buyer and seller which reduces transaction costs and
dodges many stages of value addition and avenues of taxation.
The third feature is that size matters and that
the increasing returns to scale tend to facilitate growth of very large firms
with cross border transactions that are not easy to track and tax especially in
Least Developed Countries which are treated as tax havens through base erosion
and profit shifting. Finally, the fourth feature is reliance on information and
data which facilitates operation without physical presence in countries where
they operate subsidiaries. This information and data are an essential input to
the economy and yet this input isn’t taxed. The use of this data sometimes
isn’t licensed which causes a threat to the benefits from intellectual
property.
The intangibility of goods and services and the
untaxed and/ or undertaxed increasing returns to scale in the digital economy
poses a huge fiscal crisis. It is not only difficult to tax digital goods, but
it is also hard to define the boundaries of what should be taxed since the
point at which value is created is hard to determine.
The basis of my opinions, methodology and
proposed solutions to existing problems is based on secondary data and facts
such as different case studies and publications on the digital economy and
taxation.
On average, digital penetration in
Africa stands at 21.8% and this is predicted to hit 50% by 2024. Nonetheless,
the digital economy accounts for a bigger share in the African economies. According
to the Digital 2019 report, there are 5.11 billion unique
internet users in the world today. There are 4.39 billion internet users in
2019 with an annual increase of 9%. There are 3.48 billion social media users
in 2019 and this number grows at 9% annually. These figures show how the world
economies will be more digital than traditional and that taxation approaches
must also adapt to the same trend.[1]
In the last century, taxation was traditionally
structured and hedged on production side and/ or consumption side. These
traditional structures have grown and are rigid to change and with the rise of
the fourth industrial revolution, their deep rootedness is posing a challenge
in addressing the digital fiscal needs. The challenge with doing away with the
traditional structures is that there can’t be a purely digital economy and yet
having a conservative approach would result into an eternally growing challenge
in the digital tax regimes. My recommendation is that tax regimes should do
away with the conventional one-way fiscal disorientations and adopt ways that
cater for an efficient digital tax system and an efficient traditional tax
system.
Further, I propose a multilateral approach
rather than the unilateral approach in averting the risks of double taxation on
the digital services; however, this tends to be a benefit to first class
economies rather than to the emerging economies because of the few
multinational companies that have an origin in third world economies.
Nonetheless, from the perspective of worst case scenario, multilateral approach
mitigates the risk of double taxation compared to unilateral approach.
In addition, African nations should take a
confident step in innovation to create software that can easily track the
activities in the digital economy and levy a relevant tax with predetermined
tax rates plus creating incentives for digital companies to pay taxes in
addition to strengthrening the penal codes to safe guard the country’s revenue
that is shrinking due to tax avoidance and exploitation of tax havens.
Globally, to benefit Africa, all nations should have a share on the revenue
collected multilaterally on digital companies whose operations are borderless
and benefits accrue to such companies not definitive of national or continental
frontiers.
Uncontestably, the transcontinental and
extra-continental crisis in most economies reveals an iota of fundamental
weakness in pre and ante architecture of managing financial systems especially
those that are rotational such as tax regimes. State Revenue Authorities remain
overwhelmed in their digital capacity to compute every company’s digital
returns, compute their liability and make a follow up on payments.
These hypotheses and models on taxation amidst
digitalisation should be vested in various factors: economic factors such as tax
rates and tax audits. The institutional factors which include the tax payers’
perceptions on the efficiency of the role of the tax authority, the simplicity
of the tax returns as well as the probability of being detected. Social factors
such as ethics and attitude towards tax compliance, perceptions of equity and
fairness, tax knowledge and changes to current governments’ policies. These
should be surveyed internally and externally to remedy their negative effect on
tax compliance amidst digitalisation.
Kansiime Onesmus
kansmus@gmail.com
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