Should Tanzania introduce Google tax?

By Ansel Missango

A sizeable number of Tanzanians follow world trends in consumption of digital content using their various gadgets (mobile phones, tablets, computers as well as TV sets).

One of the main topics connected with this trend is the question how is VAT administered and collected on imported digital services (taxation of digital content is often internationally called “Google tax”)

For all cross-border transactions, destination principle is the international norm for applying the value-added tax (VAT). This principle is designed to achieve neutrality in international trade by ensuring that the VAT on all cross-border supplies is ultimately levied only in the jurisdiction where the final consumption occurs. This is achieved by taxing imports on the same basis as domestic supplies and allowing exports to be supplied VAT-free (i.e., taxed at a 0-rate with a refund of any VAT paid on inputs used to produce the exports).

While the destination principle has been widely accepted as the basis for applying VAT to international transactions, its application to cross-border services is complicated by the intangible nature of those services, which prevents the tax from being collected through physical customs control at the border. In addition, non-resident suppliers of services often have no physical presence in the importing country that could be made liable to VAT. At the same time, efforts at requiring final consumers to self-assess and pay VAT on their purchases of imported services have proven unworkable in most jurisdictions.

For many years, these challenges were not a major concern because few services could be performed across borders. With little revenue at risk, many countries either did not include imported services in their VAT base or did not find it necessary to establish effective methods for collecting VAT on these supplies. In the past decade, surge in imported digital services has led tax agencies around the world to give greater attention to administering the VAT on imported digital services. As a consequence, countries have become increasingly concerned that no or inappropriately low amount of VAT is collected from these suppliers and that domestic businesses (who must charge VAT) are placed at a competitive disadvantage relative to non-resident businesses (who do not charge VAT or even if they charge, it is not remitted to local authorities).

Based on the data provided by United Nations Conference on Trade and Development (UNCTAD), Tanzania imports $317 million worth of digital services per year (2019 data). Based on this amount of revenue, not collected VAT (18 percent rate) amounts to $57 million. At the moment there is no process for control of collection of digitally provided services in place and whole amount goes untaxed.

Since many countries around the world have already implemented laws and processes to collect this VAT, it is arguably the most reasonable next step for Tanzania as a nation to start doing the same.

Like many of my friends, my iPhone is filled with various applications that I use. From some basic business applications to concert ticketing app to food delivery applications, all the way to my favourite music online store. In recent discussion with one of my friends I was faced with a weird question. How are all these (usually American) companies paying taxes on content that I purchase from them?

This question started long research that ended up in conclusion that currently, unlike any physical good I would purchase from abroad, companies providing digital content and services are almost invisible to our tax department and do not pay taxes in Tanzania. Why is this so? Mostly because they are foreigners with no legal establishment (address and business) in Tanzania.

Certain tax authorities around the world have introduced measures to ensure that nonresident suppliers of electronically supplied services are not at a competitive advantage over domestic suppliers, and that tax is charged, collected, and remitted at the point of consumption.

This also ensures that the revenue base of the country is not eroded by suppliers establishing businesses overseas to avoid having to remit tax on those transactions. Obviously, there are examples of legal framework that we can follow to ensure similar results in Tanzania.

But: how big is the problem? Is it worth it? Recent survey gave insight on behaviour of more than 52 million mobile telecoms subscribers in Tanzania. On a monthly basis, 1 out of 10 mobile users are spending $7 on average on some form of digital content (over 90 percent provided from international marketplaces Google play and Apple store). This amounts to $436 million of purchased digital content per year that is bought in cyberspace through credit cards and other digital forms of payment.

When I was reading these statistics, it was obvious that there is no reason why, in Tanzania, we are taxing somebody who is trying to sell me some milk - but we are inefficient in taxing somebody who is selling me subscription to my favourite movie channel?

The author is a resident of Dar es Salaam with extensive experience in the areas of Technology, banking and Fintech; [email protected]