The solution to challenges of digital taxation

By Edson Ashabahebwa

The New Vision of 16^th September 2019 reported about the challenges to taxation of the digital economy and the author concluded by advising that Uganda needs a tax code to address the challenges of digital economy.

It's however not the tax code that Uganda needs now to address challenges of digital economy but a consensus led solution and overhaul of tax laws. Taxation of digital economy is a monster that is here to consume any country that is not ready to change. Unfortunately, many developing countries like Uganda have not given this issue a priority. Tax avoidance and evasion have become a monster with digital economy.

We have to accept that business models have changed and the current international and domestic tax laws are inadequate.  The laws and rules that were developed in the "brick and mortar" are no longer tenable in a digital economy. The major challenge is the shift on the basis (nexus) of taxation because of a shift in value creation. The likes google, Facebook, Twitter, do not create value from where they are physically based thus raising the issue of taxing rights. This kind of economic environment has led to the exploitation of gaps by multinationals who pay almost nothing in terms of taxes yet they generate a lot of profits to their headquarters. According to OECD countries lose between USD 100 to 400 million dollars in base erosion practices. 

This kind of environment is very complex and challenging and some countries have quickly acted unilaterally as a stop gap to the challenge of digital economy while still searching for a consensus. In July this year France, for example, introduced a 3% digital tax levied on multinationals like Google for the revenues they source from France and this did not go well with the USA. Some other countries have introduced some taxes to bridge the gap for example equalization levy; and Social media tax in Uganda. In Uganda social media tax was envisaged to bridge the gap. However, for the case of social media in Uganda it failed to tax the source (nexus) instead taxed the users and multinationals remained with their profits untouched.  Worse still evasion of social media tax has been facilitated by technology via VPN. Effects of social media tax of economic activities are yet to be reported.

The above attempts by nations to counter the challenge of taxation of digital economy shows the extent of the problem. The Unilateral moves above will only serve to harm the interests of any country and are unsustainable. The solution lies in consensus agreements. This calls for speed in action and engagement in global discussions especially developing countries.

To resolve this challenge the G20 under their Organisation of Economic Community for Development (OECD) came up with a project that is still ongoing called "Base Erosion and Profit Shifting" programme. In 2015 the OECD issued 15 Action Measures to address "Base erosion and Profit Shifting". Since then, a number of African countries have become members of the OECD Inclusive Framework to ensure implementation of the BEPS minimum standards. Even in cases where countries are not members of the Inclusive Framework, implementing the BEPS measures cannot be avoided given the international nature of BEPS schemes that take advantage of the wide network of double tax treaties that countries have signed. Action 1 specifically addresses the challenges of digitization of the economy.

The implication is that BEPS was not meant for developing countries but was a project of G20. However because of the nature of international taxation systems it's unavoidable and beneficial to developing countries to participate in BEPS project. Some Africa countries are sceptical and have not signed up. However whether they are members or not they are already affected. Many African countries have adopted OECD transfer pricing rules in their domestic laws. OECD transfer pricing rules are changing according to Actions 8-10 and countries are still using old rules. This is so vulnerable and leads to significant tax evasion and avoidance by multinational. We must put emphasis of this issue because it's like we are drawing water using a tin with holes. Someone in ministry of Finance, parliament must take lead on base erosion because we are serious affected. BEPS project is addressing so many issues like transfer pricing, digitization, Intangibles, Permanent establishment, value creation, Interest deduction, abusive treaties etc. all compressively tackled in 15 action plans that cannot be compressively discussed here.

When you check the updated country by country reporting Action 13 of BEPS as of September 2019 Uganda is classified as a country with the intention to implement BEPS inclusive framework. The more we wait for the more revenues we are losing. The super economies of Africa like Nigeria and South Africa but some other Africa countries are still sceptical. We have no option but to engage in the wide discussion and deliver our people from poverty.  Tax avoidance and evasion is enemy number one to developing countries.

In BEPS Action 13, all large multinational enterprises (MNEs) are required to prepare a country-by-country report with aggregate data on the global allocation of income, profit, taxes paid and economic activity among tax jurisdictions in which it operates. This report is shared with tax administrations in these jurisdictions, for use in high-level transfer pricing and BEPS risk assessments. These are some of the benefits of BEPS project. Let's engage and not be left out.  We can't engage without this vital information. Instead of taxing end user to access social media in addition to taxing airtime and data, let working towards engaging the cow by the horn i.e. tax the maker of profit before shifting it. 

In conclusion therefore it's not the tax code that we need now to act unilaterally but to facilitate ministry of Finance, URA to engage in global debate aimed at a consensus led solution. It's high time we started changing our laws and rules in line with the current developments if we want to be a middle income country in ten years to come.

The writer works with Africa Tax Institute, University of Pretoria