African countries that have seen economic activity shift online during the COVID-19 pandemic have trepidations about enacting digital services taxes or similar measures because they fear retribution from the United States, according to observers.
Lockdown orders led South African middle-income earners to shift their buying power online, but it has been difficult for tax administrations to collect additional revenue from digital activities, Thulani Shongwe, an international tax officer at the African Tax Administration Forum, told participants at an August 17 webinar hosted by Afronomics Law.
“When we look at digital services taxes, many countries are afraid of putting such a levy or withholding type tax on digital services in fear of possible retaliation from the U.S. government, as we’ve seen in the ongoing discussion . . . at the OECD level and between the U.S. and France,” Shongwe said.
The United States sought to pause unilateral actions in June when it told several EU countries, including France, that it would retaliate if they implemented unilateral DSTs. Earlier this year, the French government said it would postpone its implementation of a DST until the end of 2020, after the Office of the U.S. Trade Representative opened a probe into the tax in July 2019 and threatened retaliatory tariffs.
Shongwe noted that despite political fears, Kenya has introduced a DST through an expanded VAT regime, and Nigeria introduced a “significant economic presence” provision into its regulations to handle taxation of digital commerce activity.
Fred Mugambi Mwirigi, commissioner at the Kenya Revenue Authority, urged African nations to restructure their tax collections to “move into the digital space,” both for internal tax administration operations and taxation of digital services. African economies should also focus on diversifying trade to countries within Africa and taxing industries that contribute more to GDP, he said.
Panelists agreed that much of Africa’s tax base is too narrow, with outsized reliance on pay-as-you-earn contributions and indirect taxes like VAT. They urged countries to rethink their tax structures while taking aim at corruption and lack of transparency in government agencies.
The informal economy also poses a challenge to African tax collection, said Oby Ezekwesili, a chartered accountant and co-chair of the World Economic Forum’s Africa Regional Strategy Board. Though many workers are outside the formal net of tax collection, she said, they still pay contributions “that cannot be accounted for.” Some economists believe registering informal workers will not make much of a difference in tax revenues, and that governments should focus on taxing high earners and multinational corporations.
Possible short-term solutions to free up liquidity and sustain economies during the COVID-19 pandemic — some of which have been enacted — are allowing late tax filing, imposing tax moratoriums, introducing tax waivers, and reducing penalties for late filing, Ezekwesili said.
But Irma Mosquera Valderrama, an associate professor of tax law at Leiden University in the Netherlands, cautioned that short-term tax incentives should be coupled with long-term solutions that allow governments to continue collecting tax revenue that will propel them through the pandemic and its recovery. Corporations also need to adhere to the “social contract,” she said, and become tax compliant or agree to higher tax rates, especially if business is doing well during the pandemic.
While many corporations feel some sort of social responsibility, some do not agree with the existing corporate tax structure. Many corporations spend time and resources fighting double taxation and reducing their tax burden, said corporate representatives.
Steven Dean, faculty director of the Graduate Tax Program at New York University School of Law, said the structure of international tax must fundamentally change because the era in which it was designed favored the ease of cross-border transactions, allowing revenue to elude collection from tax authorities. “We have to shift the entire framework away from the limiting, neoliberal framework to a system that helps us collect revenues,” he said.