US-France Digital tax row- African perspective

  • France warns the US of EU retaliation on US’s French digital tax response
  • UNCTAD discourages digital tax in Kenya
  • Digital tax hampers Uganda’s economic growth
  • 2% digital tax has affected growth of Zim economy

France has warned the US that it will face retaliation from the EU if it tries to impose “highly disproportionate” trade tariffs in response to its digital tax on the likes of Facebook, Google, and Amazon.

The French tax imposes a three percent levy on the revenues — often from online advertising and other services — earned by technology firms within the country’s borders.

In December of 2018, The US government threatened to impose taxes of up to US$2.4 billion on French imports into the United States in response to the French digital tax regimes that hit giant tech firms from the US. In the most recent development, The French finance minister Bruno Le Maire says the US will face retaliation from the EU if it imposes trade tariffs on French goods.

What is digital tax?
For governments, it’s easy to tax traditional multinational companies as their products such as cosmetics, food items, or machines move across borders and have to go through customs.

Not so with a tech firm that can sell digital advertisement, fintech services or ride-hailing services without having any physical presence in the country where the sale is made. Tech firms such as Apple, which rely on sophisticated computer programs to drive their global businesses, have found ways to reduce the tax burden.

By shifting intellectual property to a tax haven like Ireland and making subsidiaries make royalty payments for its use, it can transfer profits from countries where actual sales of ads or other products are made. The actual profits of such companies are frequently not disclosed on a country-by-country basis, frustrating local governments.

Up until now, large firms have been taxed in jurisdictions where they have an office or operations.

In Africa

Kenya, the home of mobile money platform “P-Pesa” and ride-hailing app “Little” will start levying a new tax on digital markets under a new law signed by the president early in November. The Finance Act seeks to broaden the Income Tax Act net to include the income accruing through a digital market place.

However, the United Nations Congress on Trade and Development -UNCTAD, notes that the introduction of digital taxes in Kenya would derail the gains made on a digital scale thus so far. Kenyan government’s move to tax mobile application and internet usage would be counterproductive as it may reduce active internet users. In addition, taxation may suppress growing start-ups and online businesses leading to a decline in digital economic activity.

As a testament to UNCTAD’s argument, Mozilla and The African Union Commission (AUC) released a 2019 study examining the misconceptions, challenges and real-life impact of additional taxes on Over the Top Services (OTTs) imposed by governments across the African continent.

Among other things, the study assessed the 2018 Ugandan government excise duties which included a mobile money tax of 1% on the transaction value of payments, transfers and withdrawals increasing mobile money fees from 10% to 15% and a new levy on more than 60 online platforms, including Facebook, WhatsApp, and Twitter that amounted to 200 Ugandan Shillings ($0.05) per day.

The impact of these new taxes was immediate. The impact was immediate: the estimated number of internet users in Uganda dropped by nearly 30% between March and September 2018. But the impact is far wider than just the number of lost internet users. An initial estimate in August 2018 was that Uganda had forgone 2.8% in economic growth and over US$100 million in taxes.

Zimbabwean Context
In October of 2018, the government introduced the 2% intermediated money transfer tax (IMTT) on all mobile money transactions in a bid to tax the highly informalized Zimbabwean economy. On the receiving end of this tax regime are mobile money platforms Ecocash, One Money and Telecash who form the backbone of trade in the cash-strapped Zimbabwe. This has since yielded positives from a revenue generation point of view, as the 2% tax is now the second-highest tax revenue head.

In response, captains of industry have been stern in their calls to have the 2% tax scrapped off, as they claim it is increasing the cost of doing business. Industrial lobby groups among them; the Confederation of the Zimbabwe Industries and the Zimbabwe National Chamber of Commerce, have also expressed their concern on the subject.

While the impact of the 2% tax may not be fully quantifiable, it can be said that it has contributed, (along with other factors) to the high inflation the nation is grappling with which came in at 440% in the month of November and the contracting economy whose GDP estimate for 2019, government set at -6.5%.

Conclusion
While for the developed world, taxing the digital economy makes sense, in Africa the taxing model may need serious consideration. On the continent of Africa, digital infrastructure development, internet connectivity, and increased digital participation are imperative.

Indeed, the digital economy in Africa is expected to grow to over $300 billion by 2025 at an annual rate of 40% (McKinsey, 2013), on the back of massive mobile penetration, among other technologies. In order for this to happen, participation-friendly digital taxation models would need to be developed.

As it stands, digital taxation could deprive several African countries of the growth potential as well as future economic benefits the digital economy presents.

EQUITY AXIS NEWS

Eben Mabunda

An Investment Analyst and Business Anchor for Equity Axis. Eben is passionate about the innovative digital space on the continent,  tourism trends, and real estate developments in Zimbabwe. He also has a comprehensive understanding of the operations of listed companies on the Zimbabwe Stock Exchange- across all sectors. Eben is an award winner of "The Vice-chancellor's Inno-preneur Award," an accolade in innovation and business entrepreneurship from the Vice-chancellor of the University of Johannesburg.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.