Inside Politics

Why attempts to tax tech giants could fail

Thursday, July 16th, 2020 00:00 |
Mobile transaction.

Steve Umidha @UmidhaSteve

Kenya could be forced to review plans to tax the digital economy due to lack of a structured approach to the aggressive tax policies, experts warned yesterday.

The growth of the digital economy in recent decades has been paired with policy debates about the taxes that digital companies pay and where they pay them. 

Many digital business models do not require physical presence in countries where they have sales, reaching customers through remote sales and service platforms. 

Treasury Cabinet Secretary Ukur Yatani in the Finance Bill read in June announced that the government would push forward digital tax plans after it faced pressure over perceived low levels of tax paid by technology companies operating in the country.

The bill targets technology firms using the internet to market and sell products with a tax rate of 1.5 per cent of the value of transactions in a proposed change to the Income Tax law to cut down on revenue leakages.

Tax experts have questioned the government’s level of preparedness with the ambitious move that not only threatens the survival of those companies but one that is also expected to attract resistance.

“This is an important debate that has been going on for a long time and is being compounded by the absence of a unified approach geared towards aggressive tax plans,” says Thulani Shongwe,  head of African Tax Administration Forum.

 He believes more needs to be done with regard to the effective enforcement of such tax rules against companies that do not have a physical presence in countries of operations.

Many African countries including Kenya continue to express concerns over tax challenges they face as their economies become increasingly digitised while tax agencies like Kenya Revenue Authority designed for brick-and-mortar activities are still oblivious to new disruptive business models.

The challenge has become increasingly pressing, as economic changes have eaten away at governments’ tax bases, with more and larger multinational corporations and many are tech businesses – making it hard to identify where their profits are generated.

Tax policies

According to international lobby Tax Foundation, the digital tax debate is far from over, and policymakers should seek to follow sound principles in developing, refining, and (in some cases) removing digital tax policies.

“Countries are relying on novel, but distortive and discriminatory, approaches to taxing digital businesses.

These policies have the potential to lead to an economically harmful tax and trade war and should be avoided,” says the lobby in a paper published on its website.

Shongwe says digitisation further raises the question of how taxing rights on income generated from cross border transactions should be allocated between jurisdictions.

The allocation of taxing rights between residence and source jurisdictions, for instance, he says, has been an issue of considerable concern for African countries for many years.

Most of these countries, Shongwe adds, have had their tax bases eroded by Illicit Financial Flows due to multinational enterprises artificially shifting profits to jurisdictions where the profit are subject it little or no tax.

He is now recommending, among other factors, a re-look into double taxation rules among different economies if Kenya and other economies are to succeed in their quest to tax the target tech firms.

Taxation of the digital marketplace in the country has proven to be a a tough nut to crack, owing to the fact that online businesses do not necessarily have physical addresses or legal structures in the jurisdictions they operate.

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