Digitalization of Africa’s Tax System, Panacea for Revenue Loss

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The global economy is gradually becoming digitalized in this age of sporadic development in the field of Information Technology. The African economy and especially the Nigerian business environment have witnessed tremendous growth in the level of internet activities in the last decade considering the large population and access to affordable smartphones and cheap internet facilities. Almost all transactions have become digitalized.

It has been the tradition of tax authorities to charge tax on companies and businesses based on the residence rule. The Organization for Economic Cooperation and Development (OECD) and the European Union (EU) have offered certain recommendations to address incidences of non-taxation of income arising from digital transactions. These include the introduction of Digital Service Tax and the concept of Virtual Permanent Establishment to help determine the incidence of permanent establishment for tax purposes.

African countries appear not to have made reasonable progress although myriads of digitalized transactions are carried on within Africa daily.

The general rule for taxing the incomes of foreign enterprises in a given jurisdiction is by establishing that the entity is physically present or has a permanent establishment in such a country.

Taxing digital transactions have become a cumbersome venture for tax
authorities all over the world since digital transactions require little or no physical presence of the parties to which income accrues, in the jurisdictions of the consumer.

While OECD and G20 states are engaged with the digital tax debate at the highest political levels, Africa’s involvement is still largely at the revenue administration level. Most African countries are represented at the OECD by revenue authority officials; whereas it is finance ministries that determine tax policy.

The applicable rules for corporate taxation have failed to effectively capture the realities of a modern economy in our world of fast paced digital transactions. There are also various profitable business models in digital
services that derive income from countries without creating palpable physical presence.

Thus, strategies must be put in place to ensure that potential future tax revenues are not lost due to changes in economic activities.

Experts in the field of tax are already writing reports and doing researches to come up with solutions to this emerging issue.

In 2015, Organization for Economic Cooperation and Development (OECD) created a framework to tackle international tax avoidance arising from Base Erosion and Profit Shifting (BEPS). In March 2018, the OECD, in its interim report with the topic “Tax Challenges Arising from Digitalization,” described the typical characteristics of digitalized business models to comprise of a wide digital footprint with limited or no physical

Given that non-resident companies are taxed in Nigeria based on profits derived from Nigeria, the question as to whether a foreign company is liable to pay income tax for instance in Nigeria is usually controversial. Section 13 of the Companies Income Tax Act (CITA) – (the Nigerian Tax Laws governing companies) implies that a no resident company must have physically performed activities in Nigeria before it can be concluded
that such a company has income tax liability in Nigeria. To ensure that companies, particularly digital companies, do not escape tax in Nigeria, the FIRS has often required Nigerian companies to withhold tax on all payments made to non-resident persons
regardless of the non-establishment of the tax presence specified under section 13 of CITA.

It is obvious that if actions are not taken to harness the enormous tax revenues provided through digitalized transactions, Nigeria and many other African countries that rely on tax revenue as part of the fiscal instrument to generate revenue to fund budgets may suffer.

The Nigerian digital economy is estimated to generate $88 billion and create three million new jobs over the next 10 years.3 Thus, it has become necessary for tax experts to explore a more creative approach to ensure taxation of the digital economy.

From the foregoing, and in order not to lose a larger portion of tax revenues in the future due to radically changing business processes from traditional physical presence to a digitalized economy, the following recommendations should be considered by the Nigerian Tax authorities:

  • There should be a review of the scope of ‘fixed base’ as regards physical presence of a business and for example, Nigeria’s Section 13 of CITA should be reviewed. New sections should be considered to specifically address the issue of Digital Service Tax as recommended by OECD.
  • There should be an automation of tax administration in Africa; this will ensure taxes are automatically remitted as digital activities occur.
  • Proper data handling should be ensured. This can be done through strict adherence to digital documentation of digitalized transactions.
  • Effective collaboration between Tax Authorities and Digital Service Providers.
  • Those who formulate tax policies in Africa especially those in Finance Ministries should send representative to OECD to foster effective collaboration between ministries and revenue authorities.

– Okeji David Ozovehe
Finance Professional, Lagos Nigeria.

This article was written to be presented in a conference in one of the African countries.

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