Tanzania in International Tax Law: Towards a fair, effective and efficient digital tax policy (1)
Debates are currently ensuing over whether Tanzanian tax rules are appropriate in the 21st century’s globalized and digitalizing economy.
Especially amongst policymakers, the debates are exacerbated by the apprehension over aggressive tax avoidance and base erosion and profit shifting (BEPS). The taxation of the digital economy in Tanzania is gaining prominence on the country’s public policy agenda.
Put simply, a digital economy (also sometimes referred to as the Internet Economy) is an economy that leverages digitized information and knowledge as key factors of production. According to the United Nations Conference on Trade and Development (UNCTAD)’s “Digital Economy Report 2019: Value Creation and Capture: Implications for Developing Countries”, services in the digital economy can be classified as digitally ordered goods that reflect e-commerce, platform enabled services (such as, Uber and Airbnb), and digitally delivered products (such as, software, e-books, and database services).
The Organization for Economic Co-operation and Development (OECD) is doing a lot of work aimed at arriving at a consensus on a unified approach to this important issue. Indeed, the tax challenges arising from digitalization is the focus of Action 1 of the OECD/G20 BEPS Project.
And although Tanzania has not yet become a member of the OECD, it has recognized the OECD “Model Tax Convention on Income and on Capital 2017” and the OECD “Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations” by incorporating these instruments under Regulation 9 of the Tax Administration (Transfer Pricing) Regulations, 2018.
In this two-part article, I examine, albeit briefly, the major points of view in the debates and I also consider the experiences of other countries and recommend options for fair, effective, and efficient taxation of the digital economy in Tanzania.
Suffice it to say that fair, effective and efficient tax policy is key for building a sustainable and vibrant Tanzanian economy.
From a global perspective, technology firms such as Amazon, Facebook, Tencent, and Alibaba are among the world’s top 10 largest companies by market capitalization, according to Global Finance.
This signifies that the digital economy is getting larger and more virtual, even here in Tanzania where mobile money services are connecting and enabling millions of Tanzanians to easily do sales and purchase transactions, thanks to the ubiquity of smartphones and the Internet.
Edwin Bruno, founder and CEO of Smart Codes, a pan-African digital innovation and advertising agency, tells me that entrepreneurs in the Tanzanian digital and technology space are turning problems into business opportunities, creating jobs, and improving lives.
However, for Tanzanian tax policymakers, the growth of digital businesses has led to many challenges relating primarily to profit allocation and nexus rules (i.e. allocation of taxing rights) between Tanzania and other jurisdictions.
By way of illustration, American streaming services giant Netflix does not need to establish a physical presence in Tanzania in order for its Tanzanian online members to buy and watch their favourite TV shows, movies, and documentaries.
In addition, how could the Tanzania Revenue Authority trace tax eligible sales and revenue of a Tanzania tax resident company that fully digitalizes its sales function?
These challenges bring to the fore the question of the effectiveness of the extant Tanzanian tax laws, regulations, and guidelines in addressing the broader tax challenges raised by the digital economy.
Granted, Tanzania has a double taxation agreement with the UK, but is the Tanzanian Income Tax Act applicable to a UK merchant selling Christmas products through Amazon with the help of a local independent agent based in Tanzania?
In the July 2017 Oxford University Centre for Business Taxation working paper No. 17/07 titled “Implications of Digitalization for International Corporate Tax Reform”, Michael Devereux and John Vella state that the growth of the digital economy together with existing tax planning strategies aggravate tax avoidance.
It is therefore not surprising that India, Kenya, France and other countries have unveiled taxes on their digital economies.
Specifically, the Indian Finance Act 2018 expanded the definition of a taxable significant economic presence to include a digital permanent establishment (PE).
This Act also introduced a six percent equalization levy to the gross amount of online advertising payments exceeding INR 100,000 annually from an Indian resident or nonresident with a PE to nonresidents that lack a PE in India.
In neighbouring Kenya, the Finance Act 2019 amended the Income Tax Act by listing “income accruing through a digital market place” as income chargeable to tax and defining a digital marketplace as “a platform that enables the direct interaction between buyers and sellers of goods and services through electronic means”.
Subject to specific thresholds, the French Digital Services Tax (DST) law introduced a three percent tax on gross revenues deriving from the provision of a digital interface and targeted advertising and transmission of data collected about users for advertising purposes.
These experiences indicate that taxation of the digital economy has become increasingly pressing. This article continues next week.
Paul Kibuuka ([email protected]) is a tax and corporate lawyer, tax policy analyst, and the chief executive of Isidora & Company.
