The pandemic-fuelled growth of the digital economy and unabated demand for online retail products across Africa have led to extensive disruption in the Consumer Goods and Retail Sector (CG&R) sector.
Due to a growth in demand for
online retail, CG&R companies in Africa have been rapidly adapting their
digital operating models, and multinational e-commerce platforms operating in
the region have attracted a record number of new customers. This digital
transition, and resultant growth in the e-commerce sector, has tax implications
for digital CG&R businesses operating in Africa.
The OECD’s Pillar One and Two
Multilateral international tax
changes currently being implemented by the Organization for Economic
Co-operation and Development (OECD) in terms of Pillar One and Pillar Two, as
well as unilateral developments with regard to the taxing of digital services
in specific countries, have consequences, particularly for multinational
CG&R businesses operating in Africa.
The OECD has been looking closely
at the taxing of digital companies through their Base Erosion and Profit
Shifting (BEPS) project. The OECD is currently finalizing its Blueprint for
Pillar One, which will enable market countries to collect income tax on a
portion of the profits of certain digital enterprises and consumer-facing
companies, and Pillar Two, which aims to establish a global minimum tax. This
multilateral approach is expected to eventually replace the unilateral digital
services tax (DST) currently being imposed in different levels in countries
around the world.
The OECD’s Pillar One changes, once finalized, will enable market countries to charge income tax on a portion of the profits of large multinational companies operating within their borders.
Taxpayers are currently waiting for clarity on what activities will be included in the final blueprint, how the taxable profit will be determined, what allocation of the profit will be attributed to the market countries, how countries of production will surrender their taxation rights and what global and local revenue thresholds will be applicable.
Pillar two proposes a new network
of rules that will reallocate taxing rights according to a new global minimum
tax regime – aimed at ensuring a minimum effective net tax rate across all
jurisdictions.
Implications for Africa
According to African policymakers, a multilateral approach to tax collection has benefits for the continent. Smaller economies like those in Africa are more reliant on business income tax than larger economies.
The African Tax Administration Forum (ATAF) has noted that 16% of total tax revenue in African countries is from corporate tax, compared to 9% in OECD countries. African countries have increased their revenue collection methods and have implemented punitive measures to clamp down on tax avoidance measures because the revenue collected is of the utmost importance to the stability of their economies.
Current tax rules mean that
African economies cannot collect tax revenue from multinationals even if they
are operating profitably in African countries. ATAF has made it clear that the
development of global tax rules is essential for Africa’s post-pandemic tax
policy considerations.
While African economies have been severely challenged by the impact of COVID-19, and governments have had to assess all sources of potential revenue to aid post-pandemic recovery, the pandemic is not the only reason for possible changes to digital tax on the continent.
Many African jurisdictions were
seeking both direct and indirect taxing rights in respect of digital services
and products ordered via multinational e-commerce platforms since before the
pandemic struck.
VAT
The application of VAT to e-commerce transactions has proved challenging around the world, including in Africa. Digital services tax on an e-commerce platform does not replace customs duties on physical goods that arrive in a country after being ordered online from other jurisdictions.
While currently the customer pays import duties on goods they order from other countries via digital e-commerce platforms, this is set to change. Due to the rapid expansion of online retailing, African countries are looking at ways to simplify the payment of customs duties on the increasing volume of cross-border, business-to-consumer transactions, in the form of low value consignments. They are doing so by seeking to impose VAT on the goods on the supplier side.
Consequently, non-resident e-commerce companies that provide goods via online retailing platforms to African countries may have an obligation to be VAT registered in the countries to which they ship goods.
In addition to the possible
increase in tax due to the OECD’s Pillar One changes, this indirect tax change
has further cost implications for multinational e-commerce organizations
operating in Africa.
Recent African Tax Developments
Examples of recent developments in digital tax in Africa include Kenya’s amended Income Tax Act, which introduced DST on income accruing through a digital marketplace at the rate of 1.5 percent of the gross transaction value via the Finance Bill, 2020.
Further, last year the Kenya Revenue Authority published the draft Value Added Tax (Digital Marketplace Supply) Regulations, 2020, providing a simplified VAT registration framework for non-resident entities who provide digital services in Kenya on a Business-to-Consumer (B2C) basis.
Failure to collect and remit VAT
could result in the denial of access to the digital marketplace.
In Nigeria, the Finance Act, 2020 was enacted into law, amending the Companies Income Tax (CIT) Act and Value Added Tax act by bringing digital services within the purview of the Nigerian CIT imposition, as well as for the applicability of VAT to digital transactions.
Zambia introduced VAT on electronic services, which includes the supply of services via the internet, mobile telecommunication networks and any other electronic commerce infrastructure, effective 1 January 2020.
While implementation of these
provisions is still under consideration by the Zambian Revenue Authorities
(ZRA), and regulations in this regard are yet to be published, the ZRA expects
multinationals to comply with the current legislation.
In South Africa, there were early
developments with regard to indirect tax on digital services when an amended
regulation that expanded the VAT base for electronic services was first
announced in 2018. In 2020, it was announced that the definition of
telecommunication services per the regulations prescribing electronic services
for the purposes of the South African VAT Act would be revised.
In South Africa’s 2021 budget
speech the-then Finance Minister Tito Mboweni noted that the country would wait
for the OECD to finalize Pillar One and Two, before any developments were
announced regarding a direct tax on digital services in the country. He also
said that should the OECD’s efforts fail; South Africa would consider the
appropriateness of a unilateral approach.
CG&R businesses with digital offerings in Africa should ensure they are compliant with the requirements laid out in the potential new global tax regime for digital services, while simultaneously keeping up to date with rapidly developing, country-specific direct tax and VAT regulations, as revenue authorities in post-pandemic Africa seek to clarify and broaden their tax bases.
AUTHOR: Jana Botha, Tax Consultant, and Prenisha Govender, Associate, Tax Practice, Baker McKenzie Johannesburg.
