Can Tanzania tackle the tax challenges of a digitalised global economy?

In today’s world, technology continues to have an increasingly pervasive influence on the success of economic sectors. Digital platforms have become mainstream business infrastructure that enables transactions to be concluded online without the need for physical contact with customers or presence in the country where a product or service is supplied. 

From a business perspective, a digital platform simply means an online business that facilitates commercial interactions between at least two different groups with one typically being suppliers and the other consumers. It is, nevertheless, not a product in itself. The services, applications, and solutions on the platform are the products that  a customer will interact with and pay for (inform of subscription fees).

Tanzania, like many other countries, is witnessing a digital transformation reflected by the rapid rise in the number of people connected to mobile services. A Datareportal publication titled “Digital 2021: Tanzania” highlights that “the number of social media users in Tanzania increased by 900,000 between 2020 and 2021”.  Many of the services consumed by these users are provided by non-resident companies (namely those companies that have no tax presence here as they have no physical presence on the ground and are not incorporated in Tanzania). As such, the challenge is as to how to restructure tax legislation and mechanisms of tax collection to adapt to such changes in technology and business models.  In particular, to what extent is it possible to apply a consumption tax to the customer and a separate tax on the provider.

Interestingly, there already is legislation in place to apply VAT on electronic communication services provided by non-resident companies to Tanzanian customers that are not VAT registered (therefore including private consumers).  Where such companies make taxable supplies in excess of the VAT registration threshold (TZS100m), then they should appoint a tax agent (VAT representative) to account for the VAT (on behalf of the non-resident).  However, although this legislation has been in place for a number of years, it has not been applied due to administrative challenges - in particular, because prior to VAT registration, an entity must first obtain a Tax Identification Number (TIN) which automatically triggers income tax registration, which is a registration these companies can not accept as they do not have a taxable presence for income tax purposes.  Unlocking this administrative hiccup could deliver immediate revenue results.

As for taxation on the provider, if the relevant online business is a non-resident company then income tax can only apply if either (i) it has a permanent establishment (PE) in Tanzania, or (ii) is subject to withholding tax (deducted by customers from payments). However, in practice unless the business has a place of business in Tanzania, it will not have a PE.  That leaves the withholding tax as the only practical basis to generate tax - however the withholding tax obligation only applies to payments made by a corporate entity or unincorporated business, but not to payments by individuals.

We all agree that the taxation of a digital economy is not only a challenge to developing countries like Tanzania but also it has been an international tax challenge.  How are countries addressing the challenge?  Well, either by participation in multilateral initiatives (in particular, the “inclusive framework” proposed by the OECD/G20 Base Erosion and Profit Shifting (BEPS) project) or unilateral initiatives (typically by legislation for a digital services tax (“DST”)).

On the multilateral front, recently the OECD have developed the BEPS “pillar 1” proposal that aims to address this challenge by creating a mechanism to require certain multinational enterprise (MNE) groups to pay taxes in the countries where they have users, even if they have no physical presence there. Pillar 1 applies to multinational entities (MNE) with revenue of 20 billion euros or above and profitability of above 10% which would capture some of the well known names (such as Apple, Google etc).  The allocation mechanism is to identify the MNE’s residual profit (being profit in excess of the 10% base profit amount) and reallocate 25% of this to countries other than the home country using a revenue-based allocation key.  However, to qualify for such allocation the relevant MNE must have recorded in-country revenue of at least 1 million euros (or 250,000 euros for countries with a GDP lower than 40 billion euros).  It is unclear in practice what adoption of this approach might mean for revenues of developing countries such as Tanzania.

On the unilateral front, a handful of countries including some in Africa (namely,  Kenya, Nigeria and Zimbabwe) have implemented mechanisms to impose a DST. Kenya’s DST, introduced in 2020, is charged at 1.5% of the gross transaction value of income accrued in or derived from Kenya from provision of services through a digital marketplace. Originally covering supplies by both residents and non-residents, its scope since July 2021 has been limited to non-residents (as is normal practice with DST).  Challenges that have been highlighted with this DST include undue administrative burdens given the lack of an annual revenue threshold, as well as a monthly instead of annual accounting basis.  More generally the imposition of DST, which runs counter to established international tax norms, does run the risk of retaliatory action (for example, through tariffs) by the home jurisdictions of these entities (in particular, the US which is the home base for many).

Ideally, Tanzania should try to take a well built yet flexible approach in dealing with digital marketplace especially in relation to non resident taxpayers. The first priority should be to remove the administrative impediments that stand in the way of implementation of VAT on electronic communication services provided by non-resident companies.  More of a challenge is the debate as to taxation of these non-resident companies themselves; in particular, whether to take a unilateral approach (taking Kenya’s DST as a reference point) or follow the multilateral (“inclusive framework”) approach.  As can people of Ghana say: “wood touched by fire is not hard to set alight” which implies that with the right preparatory work and conditions, a difficult task can become much easier.   One thing that is clear is that dealing with the challenges brought by the digitalisation of the economy will become an increasing area of focus of tax policy.

By Agape Ishengoma is an Associate, Tax Services with PwC Tanzania.