ATAF Proposes a Digital Services Tax Rate Between 1% and 3% for Member Countries
On 30 September 2020, the African Tax Administration Forum (ATAF) released its Suggested Approach to Drafting Digital Services Tax Legislation (suggested DST Legislation) that proposes a rate between 1% and 3% on gross annual digital services revenue earned by a company or multinational enterprise (MNE) in a country.
The suggested DST Legislation proposes standard text that can be adopted by ATAF member countries in their domestic laws in order to tax highly digitalized businesses operating in those countries.
The activities within the scope of DST are digital services derived, directly or indirectly, by a company or an MNE group in a given country. These include, among other services:
- online advertising services;
- data services;
- online marketplace or intermediation platform services;
- facilitation of rental or use of real property located in a country;
- vehicle hire services;
- digital content services, online gaming services and cloud computing; and
- any other digital services.
The suggested DST Legislation proposes formulas for allocating income from the services above to a particular country. Broadly, DST will be levied on the portion of revenue that relates to the participation of users in a given country, and it will apply to the gross revenues.
The suggested DST Legislation also details how countries can determine the users of the services above since the number of users is the basis upon which a company or MNE's global revenues arising from digital services will be apportioned to a given country.
Countries have an option to make provisions regarding the offset of the DST for corporation tax purposes in the case of a permanent establishment if certain conditions are met.
Being careful not to affect growth of online businesses in Africa, the suggested DST Legislation proposes that countries set a "de minimis" or safe harbour rule that will remove smaller companies from the ambit of DST. This is mainly because DST is charged on gross annual revenues which, if not addressed, may have adverse effects on businesses with very low profit margins, or on loss-making businesses.
The DST returns will be filed annually by a responsible member or an appointed local representative of the company or MNE. A responsible member may be a member of the MNE group that is tax resident or operates in a country through a permanent establishment; or a member of the MNE group that is registered for VAT in the country. The suggested DST Legislation also suggests other ways of determining a responsible member should no member of the MNE meet the conditions above.
In a statement by the ATAF, it was highlighted that no consensus has been reached globally by the OECD Inclusive Framework on how to deal with the tax challenges arising from the digitalization of the economy. In the interim, African countries need a solution so that revenue is not lost especially during this time of the COVID-19 pandemic where businesses have opted to transact more through online platforms.
To date, a few African countries have enacted laws aimed at taxing the digital economy. Kenya, through its Finance Act 2020, implemented a DST at a rate of 1.5% and is expected to take effect on 1 January 2021. Nigeria will also tax non-resident companies that have significant economic presence (this is created mainly through digital transactions) in Nigeria and earn revenue above NGN 25 million in aggregate in a given year of income.
In conclusion, African countries really need to look into taxing income arising from digital services in order to curb revenue that is being lost annually due to the traditional taxing rules that are based on physical presence of non-residents in a given jurisdiction in order to be liable to tax.