- African presidents and presidential hopefuls are discussing taxing the digital economy as a campaign strategy.
- Taxing digital products is a complex issue that depends on various factors, including each African government’s specific context and objectives.
- Companies and individuals can leverage digital platforms, online marketplaces, and e-commerce to reach a global audience and conduct transactions more efficiently.
The digital economy is growing, especially in Africa. The Internet, e-commerce, digital products, digital services, social media, streaming, and cryptocurrency are all elements of the digital economy. However, with the rise of the digital economy, tax authorities in Africa have been working to clarify the e-tax implications.
Various attempts have been launched at taxing the digital economy. This is seen as a way to boost tax revenue for African countries. African presidents and presidential hopefuls are discussing taxing the digital economy as a campaign strategy.
The digital economy
The digital economy refers to the economic system based on digital technologies, primarily the Internet and digital communications. It encompasses all economic activities that rely on or are facilitated by digital technologies, including the production, distribution, and consumption of goods and services.
Information and data are crucial in the digital economy as valuable assets. Digital technologies enable the collection, storage, processing, and analysis of vast data, creating new business models and opportunities. Companies and individuals can leverage digital platforms, online marketplaces, and e-commerce to reach a global audience and conduct transactions more efficiently.
Some key characteristics of the digital economy include:
Digital Goods and Services
The production and delivery of digital goods and services drives the digital economy. This includes software, digital media (e.g., music, movies, e-books), online subscriptions, digital advertising, and various online services (e.g., cloud computing, digital marketing).
Online retail and e-commerce have transformed the way people buy and sell products. Consumers can shop online from anywhere, and businesses can reach customers globally without needing physical stores. E-commerce platforms facilitate transactions and enable businesses of all sizes to participate in the global marketplace.
Digital platforms act as intermediaries connecting buyers and sellers or facilitating various interactions. Examples include online marketplaces (e.g., Amazon, Alibaba), ride-sharing platforms (e.g., Uber, Bolt), and social media platforms (e.g., Facebook, Twitter), among others. These platforms often rely on data-driven algorithms to match supply and demand, personalize experiences, and provide value-added services.
Data-driven Decision Making
The digital economy generates vast amounts of data, which can be analyzed to gain insights and drive decision-making. Data analytics, machine learning, and artificial intelligence (AI) techniques extract meaningful patterns, improve operational efficiency, personalize experiences, and make predictions for businesses across various sectors.
Remote Work and Digital Labor
Digital technologies have facilitated remote work and the rise of the gig economy. Freelancers, independent contractors, and remote workers can leverage digital platforms to offer their skills and services globally, while businesses can access a more flexible workforce and reduce overhead costs.
Digital Payments and Financial Technologies
The digital economy relies on secure and efficient electronic payment systems. Digital payments have become commonplace, with various methods such as mobile wallets, online banking, and cryptocurrencies providing convenience and enabling global transactions.
The digital economy has significant implications for businesses, governments, and society. It offers opportunities for innovation, economic growth, and improved efficiency but also raises challenges related to privacy, cybersecurity, digital inclusion, and the disruption of traditional industries.
The digital economy is huge, and thus far, Africa has not tapped it much. There’s a valid argument that not taxing the digital economy is losing African governments millions in revenue. According to Chainalysis, Africans received US$105.6 billion worth of cryptocurrency between July 2020 and June 2021. Depending on the type of tax applied, there is significant revenue there. If you applied a 10% tax, that is US$10.56 billion in revenue. Contrast that with US$5.9 billion in Foreign Direct Investment into Africa in 2022 . And that is just cryptocurrency.
Should African countries tax the digital economy
Taxing digital products is a complex issue that depends on various factors, including each African government’s specific context and objectives. Here are a few points to consider:
Taxing digital products can be a potential source of revenue for governments. Taxing digital products and services could help governments generate funds to invest in infrastructure, education, healthcare, and other public services as the digital economy grows.
Fairness and Equity
Some argue that digital products and services should be subject to taxation to ensure fairness and equity. Traditional businesses often have to comply with tax regulations, and taxing digital products can prevent an unfair advantage for digital businesses that operate across borders or have unique taxation challenges.
Encouraging Local Industry
Taxing digital products can promote the growth of local industries and encourage domestic innovation. By imposing taxes, governments can create a level playing field for local businesses, which may face challenges competing with global digital platforms.
Digital Economy Growth
On the other hand, some argue that taxing digital products could hinder the growth of the digital economy. Digital products and services are often characterized by their ease of scalability and global reach. Imposing taxes may increase the cost of access and limit the potential for innovation and economic growth.
International Taxation Challenges
Taxing digital products can also present challenges due to the global nature of the digital economy. Determining the appropriate tax jurisdiction and ensuring compliance can be complex, particularly when digital transactions occur across borders.
Ultimately, the decision to tax digital products lies with individual African governments, and they need to consider their respective countries’ specific circumstances, economic goals, and challenges. It may be beneficial for governments to engage in international discussions and cooperation to develop common frameworks and guidelines for digital taxation to avoid potential conflicts and ensure a fair and balanced approach.
How to tax the digital economy
Taxation is not a simple landscape. There are many different taxes and ways to tax the digital economy. Let’s look at the different taxes and how they can be used in the digital economy.
Capital gains tax
In many countries, cryptocurrency is treated as property for tax purposes. Therefore, if you sell or trade your cryptocurrency for a profit, you may be subject to capital gains tax on the difference between the purchase and sale prices.
If you receive digital goods or services payment, you may be subject to income tax on the value received. Similarly, if you mine cryptocurrency as a business or as part of a mining pool, the value of the cryptocurrency received may be subject to income tax. Individual income tax is applied as a percentage of revenue though some deductions are allowed. For businesses, income tax is applied as a percentage of the profit.
Sales tax or Value Added Tax
In some jurisdictions, sales tax may apply to selling goods or services. This is usually applied as a percentage between 10 and 15% of the items sold. This is a very effective tax for the digital economy because it is simple yet versatile.
Depending on the jurisdiction, cryptocurrency and digital assets may be subject to property tax, similar to other assets. This is an unpopular tax because it is levied on ownership rather than income.
In some jurisdictions, an excise tax may be levied. Excise tax is also sometimes referred to as ‘sin tax’. It is applied directly to consumers over and above the cost of their goods and services. The US recently proposed an excise tax on electricity used in cryptocurrency mining. This tax is typically imposed to account for the additional strain mining operations place on the electrical grid and offset any associated environmental costs. The exact rate of the excise tax and the criteria for its application may vary depending on the specific jurisdiction.
It’s important to note that the tax laws and regulations surrounding the digital economy are still evolving and can vary widely between jurisdictions. The taxation of the digital economy in Africa is still a developing area, and the specific tax laws and regulations may vary from country to country. However, here are some examples of African countries that have implemented taxes or are in the process of implementing taxes on the digital economy:
South Africa has been one of the leaders in Africa when it comes to taxing the digital economy. In 2014, the country introduced a law that requires foreign companies that provide digital services to South African customers to register for value-added tax (VAT) and to charge VAT on those services. The law applies to various digital services, including software, e-books, and streaming services.
In 2020, Kenya introduced a digital services tax (DST) of 1.5% on the gross transaction value of digital services provided in the country. The tax applies to non-resident companies that provide digital services to Kenyan residents and generate at least KES 5 million in annual revenues from those services.
In 2020, Nigeria introduced a finance act that includes provisions for the taxation of the digital economy. Under the act, non-resident companies providing digital services to Nigerian customers must register for VAT and charge VAT.
In 2018, Egypt introduced a law that requires foreign companies that provide digital services to Egyptian customers to register for VAT and to charge VAT on those services. The law applies to various digital services, including software, e-books, and streaming services.
As the digital economy takes greater hold in Africa, authorities are being pressed harder to respond. Presidential candidates in various elections across the continent have commonly made statements about taxing the digital economy. The digital activity suggests a great opportunity to increase government tax revenue. If used well, this could transform the lives of millions.