In 1995, when Don Tapscott first spoke about Digital Economy from his book, The Digital Economy: Promise and Peril in the Age of Networked Intelligence, he was merely forecasting a possible future global economic trend; not knowing that he was setting a tone for a global economic discourse. Twenty-six years down the line, Tapscott has been vindicated. Global economy, including production, buying and selling, has gone online. The final straw was the COVID-19 pandemic which Amani Abou-Zeid described as the “single biggest catalyst for digital transformation which has moved digitalisation from a niche market into mass adoption”.
If the economy has gone online, then, fiscal logics would recommend that taxation should also go online. This is the only way to avoid economic disruption.
It is on the above premise that tax administrators in West Africa under the aegis of West Africa Administration Forum (WATAF) have re-iterated their resolve to implement measures to tax digital businesses in their respective jurisdictions. Digital enthusiasts say that digitization has made life easier and simpler. However, on its flipside is economic sabotage such as tax evasion and avoidance involving multinationals. Currently, African countries, who are at the receiving end of the global digital divide are the prime losers because the big techs keep exploring the African economies without paying the right taxes.
In its recent conference in Abuja, which was the 10th Anniversary of the tax body, tax experts drawn from 15-member countries charted a course for taxing the hydra-headed economic activities happening on the internet.
For Nigeria, taxation of the digital economy is a way to go; and the government has always given greenlight to it. Going by its population and the volume of economic activities going on in the country online, Nigeria stands to generate trillions of Naira when digital taxation is well harnessed.
Declaring the WATAF meeting open, the Secretary to the Government of the Federation of Nigeria, Boss Mustapha, who represented President Muhammadu Buhari, noted that “Digital transactions must be taxed digitally and the goal of our efforts must be to achieve seamless digital collection and remittance of tax revenue that accrues from the digital economy”. He said that current realities have made it imperative to digitally tax all digital transactions and that President Buhari has given the needed support to the tax authorities.
The reality which Mr. Mustapha was talking about is what Mr. Taiwo Oyedele, the Fiscal Policy Partner and Africa Tax Leader at PwC referred to as digital disruption of businesses and the economy. Oyedele said that the growing e-commerce transactions if left untaxed would certainly disrupt the economy. He gave instances with virtual transactions on goods and services such as traditional goods (books, food, shoes, bags etc), conventional services (training, surgery, legal, accounting etc) and digital goods (card reader, ATM card, downloaded movies, Netflix, crypto) which are all initiated and completed online. Other e-transactions, according to him are digital services (online advertising, online news, webinars, online dating), platforms (U-Tube, online stores/ordering, AirBnB, sharing economy e.g. Uber), SaaS (fintech, profiling, etc), intangibles (films – Netflix, app stores, etc).
In a presentation to the WATAF event, Oyedele noted: “Examples of e-commerce businesses in Africa: Jumia reported a 50% increase in transactions in the first 6 months of 2020; Paystack report a five-fold increase in transactions relative to pre-pandemic levels, Kenya’s Getboda an e-commerce delivery business reported a 150% increase in orders in the first weeks of the pandemic”.
He emphasized that political leaders, media outlets, and civil society around the world have expressed growing concern about tax planning by multinational enterprises (MNEs) that make use of gaps in the interaction of different tax systems to artificially reduce taxable income or shift profits to low-tax jurisdictions in which little or no economic activity is performed.
The lofty aspiration to tax the digital economy notwithstanding, the concept raises broader tax challenges for policymakers. Some of these challenges, according to Oyedele relate in particular to nexus, data, and characterization for direct tax purposes, which often overlap with each other. “These challenges extend well beyond domestic and international tax policy and touch upon areas such as international privacy law and data protection, as well as regulation and accounting”, said Oyedele.
Towards the determination to tax the digital economy, Oyedele noted that the key questions to ponder on include: PE (Permanent Establishment) Rule and Digital Presence; Remote working and residency rules; How to deal with intangible properties and other non-traditional transactions such as Software as a Service (SaaS); Oct 2015: BEPS Report Addressing the Tax Challenges of the Digital Economy; Mar 2018: Interim report on Tax Challenges Arising from Digitalisation; Mar 2018: Digital package Containing two proposals; Jan & Feb 2019: Policy Note and Public Consultation Document on Digitalisation of the Economy; May 2019: Work program; Oct & Nov 2019: Unified approach & Public Consultation (the “two-pillar” approach); Jan 2020: Inclusive Framework statement on the “two-pillar” approach; Oct 2021: Finalisation of the blueprint; 2022: Pillar 1 should be open for signature and Pillar 2 should be brought into law and 2023: Pillar 1 & 2 will become effective.
It is also important to note that right taxation of the digital front requires equitable policies. This was highlighted by the Minister of Finance, Budget and national Planning, Mrs. Zainab Ahmed in her address to the WATAF meeting.
Her words: “As the Competent authority in Tax matters for Nigeria, I am pleased to say that we have actively participated in the global discourse around the issue of taxation of the digital economy, particularly as it affects the allocation of taxing rights.
“In this regard, we have continued to contribute our quota in different fora, most importantly at the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting, otherwise known as the Inclusive Framework (IF).
“Let me highlight that the basis of our involvement in that process was the understanding that a coordinated, universal solution to the tax challenges of the digitalised economy was necessary and that the solution would be fair and acceptable for all members.
“We had hoped that all jurisdictions would be participating in the project on equal footing and that the agreed solution would benefit all while preserving jurisdictions’ existing taxing rights which are not aimed at digital businesses, and that the project would provide universally acceptable rules, by consensus”, she said.
To get digital taxation right in West Africa, Nigeria’s apex revenue authority, the Federal Inland Revenue Service (FIRS) noted that key players must work together. The FIRS Executive Chairman, Muhammad Nami said that tax regulators and other industry stakeholders must tap into the stream of opportunity that advancements in science and technology offers.
“Science & Technology is not only about rockets going to space; it is also about effective tax collection and we must maximize it in every possible way we can”, he said.
In her presentation, the Group Lead, Digital and Innovation Support Group of the FIRS, Mrs. Chiaka Ben-Obi said FIRS was ready for digital taxation having deployed FIRS’ Tax Administration Solution, TaxPro MAX, which was developed by FIRS Staff. She highlighted that emerging tax technologies could be useful in taxing the digital economy because of inherent features.
Mrs. Ben-Obi listed the following as emerging technology capabilities: “Digital Identity: supporting secure and unique identification of taxpayers in a synchronized way, helping to reduce burdens; move processing into the background and connecting the taxpayers’ ecosystem; Sensitive to Taxpayer Touchpoints: enabling the engagement of taxpayers with tax administration processes as and when necessary (such as through access to real-time support), progressively looking for opportunities to put such touchpoints into taxpayers’ ecosystem, including in more automated ways; Data Reconciliation Engine: reconcile data from different sources and to enhance the accuracy and reliability of the data being submitted to the authorities; Tax rule management and application: creating and distributing tax laws in administrable and verifiable formats to allow stakeholders to integrate tax rules within their own preferred systems, including as they evolve, while providing robust and increasingly remote reassurance to the administration; Workflow & Team Collaboration Application: to increase the efficiency of the tax team, along with making it easy to store and retrieve tax data when required even after several years”.
Others, she said are: Tax Controversy Management Application: for companies operating in multiple jurisdictions, a tax notice and tax controversy management application to ensure timely response to authorities; and Entity Management System: with built-in global tax and regulatory compliances that provides alerts, reminders and escalations can go a long way in addressing compliance monitoring”, she said.
Kelechi Okoronkwo, Staff of Federal Inland Revenue Service sent this piece from Abuja.