Let’s get digital

Thomas Friedman refers to our time as an ‘age of accelerations’ particularly: technology, globalisation and climate change. With these three forces in motion, there is disruption of all sorts which impact every sphere of our society and lives - including tax systems. 

Astro Teller’s graph depicts a phenomenon where technology is changing at a faster pace than human adaptability and one of the suggested ways of bridging this gap is learning faster and governing smarter. With the evolution of business models and the rise of the digital economy underpinned and driven by technology, and accelerated by the pandemic, will the budget see changes to make our tax system ‘govern smarter’ in terms of adaptability, practicability and fit for purpose? In particular, does the tax system (i) facilitate digital access (or create a digital divide), (ii) effectively tax digital activity and (iii) leverage technology to ease tax compliance?

Electronic communication services promote interconnectedness by saving time and money hence playing a vital role in reducing the burden of interactions at a personal and business level. Indirect taxes on electronic communication services (excise duty, VAT) are amongst the major contributors to tax collections. However, the concern remains that the excise rate at 17% (as compared to 5% when introduced in 2002) is much too high - being the highest in East Africa, and second highest in Sub-Saharan Africa. Importantly, excise duty is just one component of turnover taxes on electronic communication services; if cumulated together these taxes (excise, VAT, service levy,TCRA, UCAF) come to a staggering 40.2% of pre-tax turnover. Alternatively, if taken as a proportion of the tax inclusive price, it represents 28.7% (i.e. 40.2 divided by 140.2).

Historically, excise duty primarily targeted the consumption of luxury or discretionary purchases (such as alcohol, cigarettes, etc.) - and perhaps at the time of extension to electronic communication services, such services (which had started life purely in a post paid format) were seen more as a luxury item rather than mainstream. However, electronic communication services are certainly now a mainstream consumption item - and in many cases used for business, financial services or education rather than leisure use.  As such there is a question as to the appropriateness of the level of taxation on electronic communication services. On the other hand, given that so much of the consumer wallet is spent on these services it is not surprising that the Government seeks to maximise its take.  But at what expense in terms of accessibility?

So what to do?  Well, consideration could be given to an immediate reduction in the excise duty rate to 14.5% - being the rate applicable prior to the change in July 2014 to 17%. At the time the increase to 17% was stated to be a temporary measure (to compensate the Government for the loss of revenue resulting from removal of sim card tax of TZS 1,000 in the FY 2013/14), with the intention that the rate revert to 14.5% in subsequent years. However, no amendment has been made since then and so seven years later the 17% rate remains! 

Another facet of electronic communications services is ‘access’ to these services. Considering there is potential for increase in both direct and indirect tax revenue the more consumption occurs, it would be important to look at the bigger picture. According to The Tanzania Mobile Network Operators Association (TAMNOA), mobile broadband is one of the fastest growing areas of the telecoms industry today with great advancement in technology as most Mobile Network Operators are looking into 3G/4G upgrades. However, in order to benefit from the upgrades, smartphones are required. According to the telecoms regulator, Tanzania Communications Regulatory Authority (TCRA), up until June 2020, only 25% of the total population in Tanzania had access to a smartphone which is a very low level of smartphone penetration meaning that if the upgrades are implemented a majority of Tanzanians will not have access to data. Given this rationale, the government may consider relief from consumption taxes on mobile phones (for a fixed period to allow for penetration in line with the upgrades).

For those who have access, the question is as to whether appropriate tax is applied to services that they consume digitally - think iTunes, Netflix etc. Certainly, the digital economy presents various challenges for both direct and indirect taxes. 

On the direct tax side (income tax) there is an international buzz as the international community seeks to come up with appropriate rules to allocate and tax profits of digital businesses creating value in jurisdictions where such businesses do not have the traditional ‘physical presence’. Substantial progress has been made including recent agreement by the “G7” group of countries but global agreement has not yet been achieved. In parallel, some countries have moved forward with unilateral implementation of country specific legislation introducing digital services tax, including our neighbor, Kenya who in 2020 introduced a Digital Service Tax (DST).

At the same time Kenya also introduced Value Added Tax on Digital Marketplace Supply (VAT-DMPS). Tanzania’s VAT Act 2014 (effective from July 2015) introduced a requirement for the appointment of VAT representative to account for supplies to unregistered persons by non resident e-commerce suppliers. However, in practice such appointments have not been possible as the Tanzania Revenue Authority VAT registration process will not permit registration in the absence of a taxpayer identification number (TIN). The challenge with acquisition of the TIN is that it requires income tax registration, and yet the businesses concerned do not have a presence in-country. As a result businesses though willing to comply are facing challenges to do so. This is a classic case where the tax infrastructure does not support the tax laws rendering such laws impractical. Consequently, in order to not lose out on this revenue, one suggestion is to update the tax infrastructure to allow for issuance of ‘special TINs’ in cases where a non-resident business has a VAT obligation but not an income tax presence. 

The final piece of the potential “digital dividend” relates to tax administration.  August 2020 saw the introduction of an online filing system (e-filing) for various tax returns so as to improve user experience and incorporate additional checks to ensure completeness and accuracy of the submitted information. Much as this was a welcomed move in enabling real-time and remote processing of data, ideally more time would have been given for testing using a pilot before roll out so as to ensure minimum glitches. 

Overall, though this embracing of technology in tax administration is a welcomed move and the challenge is to consider how TRA can further accelerate ongoing initiatives to digitize filing and payment processes, as well as other processes - for example, mechanisms to automate required reconciliations (turnover, staff costs etc) and input tax validation. 

Considering the three issues covered, our tax system is adaptable to a certain extent but more can be done; there are some practical challenges that if addressed should boost compliance hence boost revenue collections. Interestingly, in 2017 Hon. President Samia Suluhu Hassan, then Vice President of the United Republic of Tanzania, during a GSMA meeting stated: “We can no longer overlook the critical role the mobile industry plays in our economy. Such a direct and affordable channel before has never existed, and mobile phones are now held as critical enablers to eradicating poverty in all its forms and achieving the sustainable development agenda”. It is clear that there is appreciation of the ‘digital’ potential therefore let's mold our tax system in such a way that it is digitally apt and bridges the digital divide especially in the context of a developing nation.

By Fadhila Tiisekwa, is an indirect tax consultant at PwC Tanzania.