US tech giants — such as Amazon, Google and Facebook — pay minimal taxes abroad, despite making billions in profits. African user countries no longer want to miss out on the revenue and are discussing digital taxes.
Despite the global economic crisis caused by COVID-19, US tech companies, such as Amazon and Microsoft, are making big sales — including in developing countries. Therein lies a problem. Most of these companies based abroad pay hardly any taxes in the countries that use their digital services.
African countries could benefit from increased tax revenues to strengthen their ailing economies and improve their health care systems, especially during the pandemic.
Africa is losing massive revenue, according to a tax report by British nongovernmental organization ActionAid International. It states that 20 countries in the global south — including 12 countries in sub-Saharan Africa — could be missing out on up to $2.8 billion (€2.3 billion) in tax revenue from some of the three big tech companies alone: Facebook, Microsoft, and Google’s parent company, Alphabet.
Africa’s archaic tax regulations
David Archer, the spokesman for ActionAid, cites outdated global tax regulations that allow big companies to shift their profits to tax havens and a lack of a worldwide agreement that obliges every country to be transparent regarding taxes.
The Organization for Economic Cooperation and Development (OECD) has been working on an international tax plan, but negotiations have stalled. Archer thinks the OECD is the biggest hurdle. “It’s a club of rich nations that don’t care that much about the needs of developing countries,” Archer said, adding, “proposals and processes are often delayed.”
Mustapha Ndajiwo, founder of the African Centre for Tax and Governance (ACTG) in Nigeria, doesn’t necessarily find certain OECD approaches wrong. “African countries have taken their steps to reduce tax leakage.” For example, they tax transactions and electronic transfers.
Nigeria’s digital tax
Nigeria is trying to counter tax avoidance by tech companies on two fronts, according to Ndajiwo. First, an indirect value-added tax (VAT) on digital services has been enshrined in the Finance Act since 2019.
When a Nigerian pays for their order on Amazon, the VAT goes into the government’s pockets, Ndajiwo said. A second approach would require foreign companies not based in Nigeria to pay taxes on profits they make from digital services. Ndajiwo called this taxation of profits “the main problem.” According to him, this rather complex regulation, which Abuja introduced a year ago, is not easy to implement.
That still doesn’t fix the profit shifting to tax havens, he said. Even with the simple, indirect tax payment for digital services, there’s a problem. “Companies can immediately pass the taxes on to the consumer,” Ndajiwo said. That happened in the UK in 2020 when they introduced a digital tax. And it could happen in Kenya, too, said the tax expert.
Kenya: digital tax at the wrong time?
Kenya enacted a 1.5% tax on all digital services in 2021, regardless of where a company is based. This was intended to cover global players, such as cab competitor Uber and streaming service Netflix. According to local media reports, Kenya hopes to collect the equivalent of about €38 million as early as the first half of 2021.
“This taxation comes at the wrong time,” Nimmo Elmi told DW. Like her colleague Ndajiwo, she works at ACTG — but with a focus on Kenya. “Many businesses are already suffering badly from the economic downturn caused by COVID-19, and they are now expected to pay additional taxes.” Elmi called for making a distinction in taxing foreign and Kenyan businesses.
Africa fears retaliatory tariffs from the US
The South African-based African Tax Administration Forum (ATAF) is offering help with the introduction of a digital tax. It already has 38 members from all African regions, to whom it provides technical assistance on tax issues. ATAF also works with the African Union in this effort.
“From discussions with our members, we know that some other African countries are considering introducing a digital service tax,” said ATAF’s executive director Logan Wort. In addition to Kenya, Zimbabwe has already introduced such a tax. “However, some members have concerns about possible US retaliation against them,” Logan told DW. “That could lead to the imposition of tariffs on exports from those countries to the US.”
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Such concerns are well-founded. In 2019, the US announced punitive tariffs against France after it wanted to introduce a digital tax. However, the new US administration under Joe Biden recently agreed that tech companies should pay a more significant share of their revenues in the countries where they operate. A minimum corporate tax is also under discussion, according to a signal from the US.
France received this positively. Paris hopes for an international agreement before the end of the first half of 2021, according to Finance Minister Bruno Le Maire.
In Africa, skepticism still prevails — Logan Wort said: “As long as our countries are waiting for a global, consensus-based solution, they should act as a bloc and resist possible US retaliatory tariffs.” Nigeria expert Mustapha Ndajiwo also argues for countries to work better together.
This article was adapted from German by Chrispin Mwakideu.