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Last updated on May 30th, 2021 at 07:42 am
In November this year, the Ugandan government through the Ministry of Finance announced that it is set to introduce a digital service tax on subscription-based video and audio content providers operating within its jurisdiction such as Netflix, HBO, Disney+, iTunes and Spotify.
This tax was first proposed in Zambia last year. Uganda just borrowed the idea. However, it’s safe to conclude that the Pandora’s Box that sparked these series of events was the introduction of the digital tax in France. It is alleged that these digital services take advantage of some of Uganda’s 11 double taxation treaties to operate in jurisdictions where they’re not incorporated, without paying a taxes.
Contrary to France’s digital tax, Uganda, Zambia and other African counties are taxing digital revenues through the route of usage and not tax on tech companies. I am against this approach. This is short termism. Not sustainable.
This proposal to tax Netflix also comes at a time when Netflix is to (finally) start declaring the £1bn-plus revenues it makes from millions of British subscribers each year to the UK tax authorities, a move likely to ramp up pressure on tech firms such as Google and Amazon to stop funneling revenues through overseas tax jurisdictions.
Netflix, which has funneled UK-generated revenue through separate accounts at its European headquarters in the Netherlands – a tax haven, since launching in Britain in 2012, is to notify its almost 13 million UK subscribers on Tuesday about the change, which starts from January.
Part of the criticisms that will be levied against me after reading this article, is that I should have focused more on internal digital taxes in Uganda, than veering off course to discuss taxation law developments overseas in France or the European Union.
However, what should be noted is that in this 3rd industrial revolution, especially in this digital age, ideas don’t have borders. A financial technology regulatory or legal framework developed in France can very quickly be adopted in Uganda in no time.
For starters, Google, Apple, Facebook, and Amazon, world over have not been paying their fair share of taxes in jurisdictions where profits or particular gains are generated. This is what particularly makes digital taxation relevant.
The international taxation system hasn’t particularly kept up with technology. Corporate taxes were designed for an era where most businesses sold physical goods in brick and mortar shops. It was easy to track how many products were sold, and the tax generated from the sales.
Fast forward to the present day, sales and services have shifted to online. The most valuable companies such as Apple, Microsoft, Amazon, Alphabet and Facebook are all tech companies. All this is happening while corporate tax rates have steadily decreased in the span of 20 years.
Amazon, for example, paid zero federal income taxes in the United States in the year 2018, despite generating a profit of more than $10 billion. This has incensed many politicians across the aisle in the United States. But on a more multi-lateral level, the international monetary fund, the European commission and the OECD have called for better taxation laws to reflect the modern realities due to the fact that many companies do most of their businesses online.
For some reason, our regional economic bodies such as ECOWAS and SADAC in Africa, aren’t playing a pro-active role in this area, yet in the next 50 years, the digital economy will have more users in Africa and governments will be deprived of revenues. That’s how the nascent idea of the digital tax comes in, like what France introduced last year and is implementing this year.
This is how the French digital tax will work. It will apply to any company that makes at least $850 million in global annual revenue from digital activities. This, by default, automatically singles out a select group of tech giants. These companies also have to make about $28 million of their revenues in France.
Contrary to what Uganda has done with the over the top taxes (OTT) in the form of an excise duty tax on social media, a digital tax is different from value added tax, in that, it shouldn’t target consumers. Excise duty isn’t supposed to target consumers too, only that when OTT taxes were introduced, the whole logic behind the excise duty tax lost meaning, now that 200 shillings a day is levied on consumers instead of the social media companies. This, for sustainability’s sake, must be harmonized.
France’s digital tax targets two sectors. The first, is the digital market place that acts as a middle man, connecting customers and businesses such as Amazon. The second is online advertising revenues, particularly platforms that use personal data for targeted Ads such as Google and Facebook.
The French government states that the aim of this tax is to make these tech giants take on the same tax burden as a non-tech brick and mortal business. With this tax, they hope to raise $570 million in tax revenues, a year. Facebook earns this amount in just 4 days. Several countries like the UK, Italy and Spain are also proposing their own version of the French tax.
Most tech companies create a holding company structure in tax havens like Ireland and Luxemburg where they domicile their residence for tax purposes, and are taxed at very low rates. These tech companies operating in a country like France, then sell the advertisement rights from their holding company structures in these tax havens to French consumers and businesses inside France, yet France sees no taxation slice from that advertisement revenue because according to the double taxation agreement France signed with a tax haven like Ireland, that revenue has already been taxed in Ireland. Yet Ireland hasn’t even taxed them at all.
Recently, the French government took Google to court but lost the case because of what I have just explained. The main reason why it’s been difficult to tax these tech giants is that they are like slippery snakes that keep slipping out of the regulator’s hands.
Not only do these companies move tax jurisdiction or domicile whenever they want, but the tax man also has to work out the particular type of Ads and Ad spending that they do. For these tech companies, what regulators world over are starting to tax is source based revenues in their jurisdiction as compared to profits where corporation taxes have traditionally been levied.
I have read the United Kingdom’s consultation document on their proposed digital tax for these big tech companies and they have stated that they won’t tax small companies but the very biggest, where they look at a minimum revenue threshold. The document then goes into a series of definitions of various revenues generated in the digital economy. But the document’s biggest shortfall is that it fails to appropriately distinguish between a social media platform and a digital market place. In the near future this will be a big area of litigation if these grey areas find their way into legislation of a particular jurisdiction.
This French digital tax also has short comings. This is a tax on advertising. But not on all types of digital advertising. The advertising that Google and Facebook do is quite hard to tax. Ad tech is surveillance space advertising. The way google and Facebook make money, is they track everyone and profile them and then manipulate their behavior and rent out the information they have on their users to other companies. This is a toxic business model like we saw with Cambridge Analytica. Such type of advertising should be taxed in line with excise duty taxes charged on products like alcohol.
The United States and companies like Amazon stated that they prefer a global tax arrangement over paying different taxes in every country. If there is no global taxation mechanism of taxing the global economy, it’s possible that these piece meal digital taxes like those in France would end up hurting the businesses and people they are trying to protect.
A major study found that big tech companies would only end up paying 5% of France’s digital tax, 40% would pass on to smaller businesses and the rest of the 55% would pass onto the consumers who use their platforms. This study estimated that Amazon, could for example, increase the commission it charges merchants, which could in turn result in higher prices for shoppers in France.
In May 2019, nearly 130 countries agreed on a plan to overhaul international tax rules. One goal is to establish a minimum tax rate for multinational companies. The plan was to have a deal in place by this year (2020). It was on this premise that France introduced this digital tax in 2020, agreed to suspend its implementation until the OECD and possibly the European Union came up with a more multi-lateral solution. But given the trade wars going on and the raging pandemic, France just couldn’t wait any longer. Therefore starting this year, the tech giants will be taxed on their revenues.
These big tech companies are becoming too big to control. Not just one country should tax these tech giants. There is need for a multi-lateral approach if taxation in the digital economy is to be sustainably done. In this power relation, who should have more power? These unelected CEOs of big tech companies or our democratically elected leaders, however flawed they are? Google and Facebook have become surveillance capitalists.
Once the taxation makes it expensive for Google and Facebook to operate, then it’s possible we might see the rise of peer to peer systems that don’t have an intermediary listening or collecting our data. However, very little venture capital at the moment is getting to peer to peer decentralized tech systems akin to blockchain.
Most money is going to these surveillance based systems. We should build ethical social media platforms that are decentralized and peer to peer. There is one such platform called Mastodon in France that is an alternative to Twitter. However, it’s not getting funding. Instead, Facebook has 60 people working on a project that enhances more surveillance.
Are African countries ready to tax this digital economy? I don’t think so. The complexities that come with taxing this digital economy are enormous. Not at infrastructure level or even human resource. In a bid to tax the digital economy, it’s possible that the average African will just have to endure double taxation like we have seen with the OTT excise duty.
Ugandans are paying a percentage of excise duty on airtime but again go on to pay 200 shillings for OTT. These are 2 different taxes on the same thing. Of course, it’s a no brainer that over the top taxes failed to raise the revenue targets set due to virtual private networks that will make it easy to give rise to the dark web.
Technology from an economics and financial view point, has the advantage of being able to achieve the affirmation of economies of scale, far more efficiently than other types of businesses like retail, oil and gas, health care, pharmaceuticals and manufacturing.
Businesses with economies of scales take advantage of mitigation of fixed costs, efficiencies in scale and negotiating power. That’s why out of the 10 most valuable companies in the world, 7 are tech companies. Therefore, finding betters ways of taxing them, as we enter into the 4th industrial revolution so that they contribute to society, is crucial. This cannot be done by individual states but some kind of guidelines to be followed by individual states must be made on a multi-lateral level. I need not say more.
Louis is a lawyer in general Commercial law with expertise in Capital Markets, Securities law, structured financing, Fintech, venture capital and data protection
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