Tanzania in International Tax law: Towards a fair, effective and efficient digital tax policy (2)
For those who, like me, celebrate Christmas I hope that you had a merry one, and that all our readers have a wonderful and happy new year 2020. Today, I continue last week’s article on taxation of the digital economy—a top-of-mind issue for policymakers in Tanzania and for officials of the country’s revenue authority.
In its 2015 report “Addressing the Tax Challenges of the Digital Economy, Action 1 – 2015 Final Report, the OECD notes that the digital economy is progressively becoming the economy itself, posing new challenges for policymakers.
Consequently, in March 2018, the OECD/G20 Inclusive Framework on BEPS put forward the “Tax Challenges Arising from Digitalization – Interim Report 2018”. One of the key conclusions from report is reviewing the influence of digitalization on profit allocation rules for corporate taxation.
Under Pillar 1 of the Inclusive Framework on BEPS, the OECD published in October 2019 a proposal for a “unified approach” to address international taxation in the digitized world and it acknowledged receiving public comments in mid-November 2019. The aim of the OECD is to find global consensus among more than 130 countries on a consensus-based solution to the challenges of taxing the digital economy by June 2020. It is difficult to prognosticate if (and when) the OECD will arrive at the solution.
Nevertheless, there is a general concern among companies and States that new rules will precipitate double taxation as more revenue agencies seek to tax the same revenue. Furthermore, Anis Chowdhury, adjunct professor at Western Sydney University and the University of New South Wales (Australia), argues that “the OECD is not the right place to reform international tax rules”. Although Tanzania is not yet a member of the OECD, rules, norms and standards produced by the membership of the OECD have an effect on Tanzania and other non-members. Therefore, Tanzania can but hope that the OECD incorporates effective dispute resolution devices into the consensus-based solution.
If the OECD’s work does not lead to the envisaged consensus-based solution by June 2020, there will be a propagation of unilateral approaches to taxation of the digital economy. Tanzania should therefore review and revise its extant tax laws and regulations with a view to introducing provisions for the fair, effective and efficient taxation of all digitally-enabled economic activity, including innovations in the fintech space. After all, some countries (such as, France, India, Kenya, and South Africa) have already focused on this issue, in consonance with the OECD’s rationale of avoiding double taxation and other distortions.
Undoubtedly, taxing the digital economy is a global issue; so, adopting international best practices, including the OECD’s proposals issued under the BEPS Project concerning tax administrations and the digital economy, is a good choice for Tanzania. The Tanzania Revenue Authority (TRA) should also learn about foreign about foreign tax authorities’ practices by actively participating in multi-national tax organizations. Through creating contacts and networking with foreign tax authorities, TRA officials will learn of more practices, which the TRA can consider for possible adoption in Tanzania.
In relation to tax registration of entities in the digital-based economy, Tanzania could enhance the understanding of its tax system and lessen the compliance costs for these entities by simplifying and streamlining document and information requirements. Simplicity means that digital players can avoid a labyrinth of forms and filing requirements. Moreover, a simpler tax system will increase compliance with, and enforceability of, tax laws and regulations.
Tax policymakers in Tanzania should also consider introducing transitionary periods when new tax laws and regulations come into effect. This should go in tandem with tax awareness and education initiatives to inform the public about the new laws and regulations and pave the way for implementation of the same. In 2018, Uganda’s efforts to impose a social media tax in a bid to raise revenue caused outcry, with some people saying it could force them to quit the internet.
Furthermore, any new tax should take into account the effective tax rate that digitalized businesses have suffered on a global scale. This will help Tanzania to avoid discouraging innovation, investment, and digital transformation that could address some of the country’s challenges exemplified in the enormous differences in the provision of services and infrastructure between urban and rural areas.
In their paper “Defining, Conceptualising and Measuring the Digital Economy” (August 3, 2017. Development Informatics Working Paper no. 68), Rumana Bukht and Richard Heeks note that the digital economy is growing fast, especially in developing countries. Tanzania is no exception. But digital start-ups in Tanzania are prone to financial fragility and to operating at a loss in the early years. It is logical, therefore, for policymakers to ensure that the taxation of the Tanzanian digital economy is done in a fair, effective and efficient manner that will not asphyxiate entrepreneurship.
Paul Kibuuka is the tax director and chief executive of Isidora & Co. The views expressed here do not necessarily reflect those of Isidora & Co.
