Technology disrupted tax income, but nobody escapes taxes
The good news for digital companies is that it appears there is lots of debate and current proposals may not be ready before 2020.
Having said that, 2020 will mark the end of a three-decade tax holiday for those that have been creating the e-commerce universe.
Taxes are charges levied by governments to pay for their programmes.
Typically they come from commercial activity and trade, the income of residents and the profits of companies.
Typically those companies had a physical presence in the country they operated in and were subject to all the taxes that applied to another physical business.
However, after the introduction of the World Wide Web, services could be provided by companies with no physical presence in the country. When you search for something on Google you will also see ads. Should you click one of those ads, Google earns revenue, but they will not pay a part of that income to the South African Revenue Service as that click is regarded as a transaction outside of South Africa. The South African company that bought the ad and made a sale from it would be liable for the tax. However, if that company were also based outside South Africa, they too would be exempt from tax. The South African purchaser, though, would need to pay VAT and if it was a physical product sent to South Africa the costs for import duties if they apply.
South African companies that operate digitally also have to declare the income and profits they make in SA and elsewhere and pay tax, but they would also be spared paying taxes in the countries outside of South Africa.
Since 2014 consumers buying anything online need to pay VAT, even for products purchased outside South Africa. However, that is effectively a tax paid by the person buying the product rather than the company selling it.
So there is lots of room for companies that operate outside of their main base of operations. For many of the top digital companies, they base themselves in the countries with the best tax legislation.
I have been told the newly-introduced social media and mobile money taxes have caused debate. To clarify, the tax on sending and receiving mobile money is 0.5% not 1%. For the rationale behind these taxes, read my statement here: https://t.co/SLe1UFb7P2— Yoweri K Museveni (@KagutaMuseveni) July 4, 2018
On 1 July Uganda introduced a tax on digital services. Mobile Money deposits and payments will be taxed at 1% of the value of the deposit or transaction and Over the Top services (OTTs) that can supply voice and video messaging were set as a fixed daily tax for any users that access services like WhatsApp. The mobile networks are tasked with collecting the tax which is set at UGX200 (about 70c).
According to the Daily Monitor, which reported on the impact on 3 July, Mobile Money transactions had fallen by 60%.
President Yoweri Museveni took to social media to explain that there had been a “miscommunication” in charging 1% and that it would be scrapped for deposits and reduced to 0.5%.
The Excise Duty (Amendment) 2018 as it is officially known is being called the OTT Tax and opposition to it have been using #ThisTaxMustGo on social media. A protest in Kampala on 11 July sought to end the tax the government hoped would raise half a billion in additional revenue. But, as many already point out, there are already taxes for buying airtime and making deposits to use mobile money, effectively making this a double tax.
For emerging economies, the growth in mobile has been an incredible opportunity allowing for a more inclusive economy, but it has also reduced the traditional tax income.
For Uganda, the reason may have a different motivation. Museveni has been President since 1986. Most Ugandans were not even born them. The median age in Uganda is 15 years. The digital economy and social media belong to those that grew up with it. For Museveni it is a space to gossip and waste money; paying foreign mobile companies for data.
MTN operates in Uganda and, like all mobile operators, it has to pay for its license and it's required to pay these taxes. The tax is unlikely to survive in the current form, but other tax collection agencies will be keen to investigate how to tax digital transactions more effectively.
The US has the bulk of the world’s dominant digital players. Besides being quite tax-averse, it will be careful how it taxes its big players as it sets the terms that other countries may follow and charge them too.
Despite the Trump Administration being against corporate taxation, President Trump often singles out Amazon for not paying enough. It may be more personal than policy in that case, and indeed, the US position in world bodies like the G7 and G20 is to resist adding taxes to US digital companies in the regions they operate.
A supreme court ruling recently did set aside the rule that prevented a state from charging taxes on products sold by a company based in another state. That ruling is the basis for the international call to say foreign-based companies have an unfair advantage over local suppliers.
The EU may be the ones to first introduce taxes for companies selling to EU members from outside the EU. However, they are being cautioned that it would be best to establish a global approach to the principles before introducing tax legislation that is already very complex.
The rest of the world
Most of China's internet sales occur inside the country, so it is less of an issue for now. China and India are looking to expand their services outside their borders, and it will both be a benefit to other emerging economies as well as a challenge for how to balance the upside of access to improved services and products while protecting local suppliers and obtaining a share of the activity in taxes.
The slow but inescapable shift to global commerce is not just a digital challenge, it will disrupt the economics and politics of every country.
It will not be soon, but the end of sovereignty as we know is likely, and those who wish to view trade, immigration and innovation as something that can be contained and controlled within the borders of their countries will find it increasingly difficult to maintain.
A surprising potential solution
The world is being converted into data. Managing that data in a controlled way could prove very difficult, but an experimental open source program published in the depths of the global economic meltdown in 2008 and drawing from research starting in the 1980s to create a way to track and verify transactions publicly may be the long-term answer.
Blockchain may be the taxman’s friend, not for a new form of currency, but for a global ledger of transactions that will log buyer and seller and be able to automatically apportion any payments that are required to those entitled to them.
It would not only make tax collections easier and rendered in real time, but it would also provide citizens with a way to transparently see how funds were allocated and spent.
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