In recent times, the issue of digital services taxation has been stirring up international trade tensions. In June the US walked away from talks with the European Union aimed at agreeing a global consensus solution, claiming that such a tax unfairly targets giant US technology companies such as Google, Amazon, Facebook and Netflix.
In the absence of a global agreement, many countries have been looking at unilaterally remodelling their tax structures to bring in revenue from foreign-owned digital platforms and other online services that accrue sales in their jurisdictions. In Africa, several countries have extended indirect taxes to cover digital services, but to date only a handful have introduced a form of direct tax: Zimbabwe, Kenya and Tunisia have announced or implemented levies of between 1.5% and 5%, while Nigeria is considering a 30% rate.
However, since the US threatened to impose a 25% tariff on some French imports after France enacted its own 3% digital services tax, many governments have started to get cold feet. The fear of similar retaliatory action outweighs their keenness to plug growing budget deficits even in the midst of the pandemic.
Underlying all the contention is the unresolved issue of who should have the right to tax the activities of transnational digital companies that are based in one country but make millions via the internet in others. Governments are free to levy value-added and sales taxes on digital transactions in their territory, but the question of who should charge corporate income tax pegged to gross revenue is as yet unresolved.
Current international tax treaties allow governments to tax the business profits of a non-resident corporation only if it has a physical presence. As a result, with the rapid digital transformation of economies, many countries are missing out on big tax revenues.
Current international tax treaties allow governments to tax the business profits of a non-resident corporation only if it has a physical presence
The sums that could be raised are far from insubstantial. France, for example, expected its digital services tax to raise €400m in 2019 (US$475m), rising to €650m (US$770m) in 2022. Meanwhile the UK expects to raise £500m (US$670m) a year from its 2% tax.
The situation is particularly challenging for low-income countries in Africa and elsewhere. Even before the pandemic, the cost of servicing public debt was absorbing a large proportion of tax revenues that were already insufficient to meet the demand for investment in social-economic projects and infrastructure that is so important for their development agendas. They badly need these tax revenues but cannot afford to risk a trade war with the US.
As the digital transformation goes ever onwards, an equitable global decision must be made about who has the right to tax these services so that low-income countries can receive their fair share along with everyone else.