Taxation of digital services like Facebook, e-Commerce, cloud services, video streaming, Twitter and Google advertising is a complex global problem.
Countries like Zimbabwe, which are beneficiaries but not owners of global digital platforms, need due consideration to determine the tax policy. Recently Uganda imposed a US5c daily access tax, while Benin introduced a US0,8c per megabyte tax for social media platforms like Facebook, WhatsApp and Instagram.
Global digital firms leverage the nature of services and technology to minimise/remove payable tax.
They register huge revenue in subsidiaries located in tax havens or low tax jurisdictions rather than countries where the actual sales happen. Profit is taken out in the form of royalties payable to a tax jurisdiction with lower tax rates, therefore reducing withholding tax at source.
These tax reduction strategies are not new. Multinational companies have been doing this for decades.
The intangible digital services distributed on global digital platforms have a more pervasive, rapid and profound tax impact than businesses with physical goods and distribution systems.
A WhatsApp call is a typical over-the-top (OTT) service because it is made without the mobile operator’s control or billing, as long as the subscriber has data.
OTT refers to distribution of digital goods and services over the Internet without involvement of telecoms or broadcasting operators. Digital advertising involves three parties: the advertiser, a publisher such as Google and a consumer.
Advertising revenue is realised when the consumer acts to generate a sale as a result of seeing the advert. A digital advert scenario can occur where the advertiser, the server where the advert is published, and the customer clicking the advert all reside in three different countries.
Naturally the advert tax should be allocated to the location of the digital servers, services employees and residence of consumer that initiated the revenue transaction.
The challenge is how to obtain location-user location information and to assign taxable revenue contributions across the three tax jurisdictions in this scenario.
Some people advocate that e-commerce should be tax exempt. But that disadvantages traditional retailers.
E-commerce growth projections show potential source of tax revenue in future. Unfortunately, for a country like Zimbabwe, setting up the enforcement and operations to collect e-commerce tax is difficult and the costs can outweigh the revenues.
Facebook is headquartered in the US and provides social network functionality and messaging to consumers free of charge. It has offices in other countries that provide sales and training.
It uses digital platforms located in its headquarters or selected subsidiaries to process sales contracts and to receive local advertisers’ payments.
There is generally no taxable income declared in the sales offices. The local office only pays taxes related to local staff and any services offered to headquarters.
For instance, in 2012 Facebook earned £223 million in the UK but paid no income tax.
As such, countries like Chile withhold a 35 percent tax on digital advertisers at the time an invoice is paid to an operator like Facebook.
Google uses selected subsidiaries such as Google Ireland to register sales contracts instead of the actual country where the digital advert sale took place.
Google Ireland does not pay the local 12,5 percent tax rate, because the revenues are translated to royalty fees for intellectual property and transferred to a Dutch subsidiary. The Netherlands transfers the money to Bermuda, which has no corporate tax.
Argentina’s capital Buenos Aires imposed a three percent income tax law on all foreign online subscription services from companies like Netflix, Amazon Instant Video, Spotify and iTunes.
The law didn’t allow passing of the tax to consumers.
The idea was to avoid taxing consumers but rather collect taxes from digital content distributors that do not pay corporate taxes in Argentina.
In addition the tax offered protection to locally based streaming services firms that pay income taxes in Argentina.
The government had to ask credit card issuers to collect subscriber information and to withhold the tax since none of the digital content companies had no operation and presence in Argentina.
The digital operator collects the tax from credit card transactions and then delivers to the city. However, in the collection, storing and delivering of digital sales information, the citizens’ privacy rights are infringed.
The French government introduced a two percent tax on foreign video on demand operators.
In Chile a 35 percent tax on gross amounts invoiced by the operator to advertisers is subtracted and remitted to government.
A digital taxation policy can maximise tax revenue from the exponentially growing digital economy which is poised to be the de-facto future business model.
On the other hand, the policy can minimise digital taxation to corporates and consumers leading to improved economic growth.
Minimal taxation on the digital sector triggers has macro- economic growth spill-overs that are larger than the taxes.
To arrive at an optimal digital tax policy, a few distortions should be considered.
Firstly a digital tax policy should accommodate distortions between telecommunications and internet firms in the digital business.
Telecommunications companies are generally heavily taxed for reasons including easy of taxation and collection, and double taxation cases.
For instance, mobile user traveling outside the country of residence pays the home operator including local VAT.
When the international roaming partner invoices the subscriber’s home network, the cost includes a visited country VAT.
The double taxation in international mobile roaming results in up to 40 percent increase in the final retail price.
In Europe and China, Internet firms have a five-point lower effective tax rate than telecommunications companies.
In emerging economies, the effective tax rate is between seven and 14 points lower. This distortion is important to note given that telecoms companies compete with internet firms in the market.
Secondly, taxation policy should address asymmetry between telecommunications firms and global players in the digital ecosystem.
Telecommunication deploy in-country infrastructure which creates a permanent establishment making them liable to a tax burden.
Global digital firms like Facebook, Twitter and Google use the telecommunications firms’ infrastructure to service customers thereby avoiding presence in countries outside the headquarters.
They use distributed skeleton sales offices which register sales outside the country to reduce the tax liability.
OTT operators do not even have a physical presence outside their headquarters.
For instance, reports show that Facebook, Google, Twitter, Skype, LinkedIn and Netflix paid an effective tax rate of 11,78 percent in Latin America while telecommunication firms paid 33 percent.
Thirdly, locally based digital companies pay tax but have to compete with global digital players offering service with economies of scale and a tax advantage.
The national digital industries should be protected while enabling the benefits of global digital platforms.
The EU utilises the IP address of the consumer’s computer, or the credit card address, to determine the tax jurisdiction.
Japan has a tax law that requires foreign digital products companies to register with tax authorities and pay taxes as a condition to distribute products in the country.
The fourth dimension of taxation asymmetry refers to in-country comparison of tax burden of the telecommunications and digital sector, compared to the other sectors.
While the telecommunication sector is a social-economic growth foundation, its taxation burden is larger than other industries.
In fact, the telecommunication effective tax rate should one of the lowest in the country to maximise technology adoption.
In Europe, the effective tax rate for the telecommunication and digital sector companies is 7 percentage points higher than the media sector.
In emerging economies, the tourism sector effective tax rate is five percent lower than telecommunication and digital services.
Digital global platforms have a profound impact on both Internet adoption and the digital economy growth.
They are engines that spur economic growth and enable access to the global markets for economies of scale.
Taxation policy should maximise these overall benefits while ensuring fair tax has been paid Zimbabwe should carefully craft digital tax policies that address potential tax distortions while
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