Why digital tax laws will soon be the new normal

Internet is arguably the most popular channel of communication in today’s modern world. This has led to evolution of the ecommerce industry where most businesses have embraced digital platforms to market and sell their products.

With such a lucrative multi-billion dollar industry, discussions around introducing digital taxes have been rife. Policy experts have been lobbying for introduction of a ‘virtual permanent establishment (PE)’ concept in the current tax laws since most of ecommerce entities lack physical or legal structures in the jurisdictions they operate in.

According to the Organisation for Economic Co-operation and Development (OECD), over 100 counties have agreed to reach a consensus of taxing digital economy by year 2020.

The European Union (EU) is also seeking to introduce an interim three per cent digital tax on certain entities with digital operations in the region.

Although these proposals might be delayed by the Brexit events, entities with significant digital interactions with customers in the region will pay taxes if these proposals are implemented.

In the neighbourhood, Uganda is seeking to introduce a controversial digital tax law disguised as ‘gossip tax on the “over the top (OTP)” social media platforms such as Facebook and Twitter’.

Ugandans may be charged approximately a dollar per month for using OTP media platforms, if this law is implemented. This is an attempt to bring more income to the taxable brackets for the East African country.

READ: How Kenya can tax an emerging digital economy

In Kenya, the revenue authority has in the past expressed its frustrations in imposing taxes on some of the multinational e-commerce companies with significant operations in the country.

Currently, certain digital services attract 16 per cent VAT in Kenya if a foreign supplier provides electronic services to a VAT non-registered customer in Kenya.

However, the existing VAT and Income Tax Act provisions have been insufficient in setting out a strict tax framework for ecommerce companies operating in Kenya.

Nevertheless, if the proposed Kenya Income Tax Bill is enacted into law, the Cabinet Secretary will be able introduce specific guidelines for transactions carried out on digital platforms.

The new law will also set rigorous checks on cross-border transactions. This will be a major milestone for Kenya, the East Africa’s economic powerhouse.

That being said, digital companies operate across multiple countries and digital tax proposals are likely to trigger double taxation disputes and apportionment of PE tax revenues.

Obviously, most countries may not ready to be involved in sharing out such revenues.

While plans to introduce digital taxes have been impressive so far, a feasible solution can only be attained through a collective responsibility of all countries.