Finding African Solutions for the Taxation of Digital Trade
The development of the digital economy has brought many public policy and administrative challenges to governments worldwide. Among these is how an international taxation system that was designed for goods trade and physically present companies can work in a world where value crosses borders at lightning speed and co-location is completely unnecessary for a business-to-consumer relationship.
There are several initiatives are underway, most notably the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting, which comprises 155 countries working to reduce tax base erosion and multinational organisation profit shifting, especially in the digital economy. Alongside this, one solution has been simply to not tax digital trade. In 1998, WTO members adopted a Declaration on Global Electronic Commerce which committed members to continuing the existing practice of not imposing customs duties on ‘electronic transmissions’. This moratorium has been periodically renewed since 1998 and was due to expire on 31 December 2019. On 10 December WTO members agreed to retain the status quo, until the 12th Ministerial Conference (MC12) which will be held in Kazakhstan 8-11 June 2020. The 1998 work programme will also continue into 2020 to prepare for a decision at MC12.
The moratorium has in the interim been made permanent by many countries in regional trade agreements, but some countries, notably South Africa and India, have called for a reconsideration of the moratorium given the:
revenue implications, particularly for developing countries;
uncertain scope and definition of the term ‘electronic transmissions’;
technical feasibility of imposing duties; and
broader impact of the moratorium on trade and industrialisation.
Since it has become technically more feasible to tax digital trade – at least at flat or uniform rates – the question is about the desirability of such taxes. E-commerce holds many benefits for countries – improved price competitiveness, range of goods and customer service from the demand side perspective; and from the supply side – the ability to integrate into the digital economy and develop entrepreneurship in any number of sectors.
tralac research currently focuses on estimating tax forgone and potential gains and losses of imposing taxes on digital trade in three of Africa’s leading economies (Kenya, Nigeria and South Africa).
First the value of digital trade of electronic transmission (ET) goods is estimated, which permits an estimation of the tariff and indirect tax revenue forgone. Kenya and Nigeria forgo a greater proportion of their total customs revenue, having more limited customs revenue bases, but South Africa forgoes a greater proportion of total tax revenue, having a greater assumed proportion of ET trade digitalised.
tralac’s research also includes a set of SMART simulations, assuming a 10% uniform tariff applied across the board on ET products. It is assumed initially that each country applies their existing tariffs on the entire quantum of imports – both physical and digital trade. Since each country tariffs these ET goods differently, the results are diverse. South Africa barely tariffs ET products, but the same does not apply to Kenya and Nigeria. Projected revenue gains and welfare losses are therefore greatest for South Africa, and least for Kenya, although the results for Kenya and Nigeria differ significantly only in that the latter experiences a small welfare gain due to a net tariff decrease.
Tariffing will always lead to welfare losses, so care needs to be taken in making recommendations for developing countries to apply tariffs to ET products – whether this means extending existing tariffs on physical trade to digital trade – or raising tariffs on all ET imports.
Since few African countries are yet significant producers of ET products, protection of digital industry is not currently feasible in the African context and given the nature of ET products, in any case, may not be effective in the same way as protection of more localised industry can be. For revenue raising, tariffs can be effective, but policymakers must take into account the relative value of the type of import that the tariff is disincentivising. Given this, and the practical impediments to tariffing digital trade, we suggest countries:
Extend or continue to apply indirect tax to digitally traded goods, including by using new internationally recognised methods to ensure a level playing field among local and foreign suppliers and to bolster revenue.
Continue to leave digitally traded goods untariffed, or if they must be tariffed (for revenue or protection reasons), implement a low, flat rate tariff that could effectively be added as an increment to indirect tax.
Implement multilateral measures to redistribute taxing rights in the digital economy to improve the fairness of taxation over digital-heavy business and to bolster revenue.
For Africa to reap the benefits of the digital economy, it is important that governments do not discourage digital trade through excessive taxation. Digital goods have the potential to add value to economies as many are ‘positive’ goods in that they are support technology transfer, add to knowledge, reduce unit costs and enable existing resources to be better utilised. The revenue needs of Africa’s developing economies needs to be carefully balanced against the potential losses of discouraging these imports.
 A tralac book on digital trade and e-commerce will be published in early 2020.
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