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60 years of independence, contribution of digital economy in FISCUSS

60 years of independence, contribution of digital economy in FISCUSS

The development of e-commerce globally has transformed the way of doing business globally and how the revenue authorities now need to approach and look at how to administer taxation.

Tanzania has not been left behind and is equally impacted by the fast-developing e-commerce and digital economy.

60 years ago, history will confirm that our approach to business was driven by physical presence of buyers and sellers meeting in a market.

Traditional commerce began at the time of the barter trade system which dates back to 6000 B.C by the Mesopotamia tribes.

The barter trade system involved the exchange of goods with other goods instead of money because money was not available during those days.

This is where traditional commerce began and has been continuing till today in the form of exchanging money rather than with only goods.

Traditional Commerce required face to face and in person dealing with all the parties to perform the exchange of goods and services with predefined prices. Nowadays traditional commerce has lost its popularity and got reduced due to the E-commerce introduction in the early 20th century.

On the other hand, E-commerce is the process of exchanging goods and services in the form of digital mode where the payment to the goods and services happens in electronic form.

E-Commerce is mainly done in an online virtual shopping market where customers can buy goods and services easily from their comfort seat at home and still be able to secure a few discounts and the goods will be delivered at their doorstep.

In E-commerce most of the time and money can be saved in spending on traveling and selecting the goods online.

The payments can be made in any form of digital modes such as Credit Card, Debit Card, Digital Wallets or Net Banking.

In E-Commerce, the goods can be bought round the clock without any hassles. e-commerce has provided greater benefits and convenience in buying goods and services easily.

Traditionally before the development of e-commerce, the revenue authorities had to manually follow up transactions and struggled to escape tax evasion and avoidance by under declarations of revenues by unscrupulous business people.

But with the development of digital economy, the challenge to the revenue authorities is even more complicated and it is important for the revenue authorities to change their traditional approach.

Current international and local tax rules were not designed to cater for the digital economy where business may be global but have little or no physical presence in the countries where their customers are based.

Technology is being harnessed to redefine traditional business models and provide new ways for buyers and sellers to interact both locally and globally.

The result has been the emergence of a handful of firms—the so-called technology giants—that are capitalizing on first mover advantages and network externalities to boost profitability, capture market share, and turn themselves into the world’s most highly valued companies.

They have inevitably captured the attention of policymakers, and in the realm of international taxation, the debate has coalesced around a number of issues that are driving the debate over whether and how countries should be able to tax the returns to highly digitalized multinational businesses.

More generally, an increasing number of firms are digitalizing, leading to several issues that raise or intensify challenges for the international tax system.

Over the recent decade in Tanzania, we have witnessed an increasing use of sophisticated information and communications technology systems including the use of internet that have facilitated a surge in remote cross-jurisdictional sales, decoupling economic and physical presence.

Moreover, with this ability to market, sell and buy goods and services remotely, online retailers are also challenging and displacing traditional physical stores (of all sizes). For example, in Tanzania, the share of e-commerce in retail sales has increased compared to a decade ago.

Customers can book affordable rooms on B&B applications online as opposed to the traditional ways where a customer would be required to make a call or make a physical visit and make a booking.

Another example is on the access of NETFLIX channels, Tanzanians users only have to pay online and enjoy all current movies online either on their TV sets or communication gadgets.

With these e-commerce developments, who has the taxing rights? In Tanzania, under the Income Tax Act, 2004 (CAP 332 R.E 2019), section 70, the Act, states that the income tax liability of a person with a domestic or foreign permanent establishment shall be calculated as if the person and the permanent establishment were independent but associated persons and the permanent establishment were resident in the country in which it is situated.

Under this clause it is evident that with the development of the digital economy, E-Commerce, has strained this traditional concept of permanent establishments, which relies on a fixed physical presence as a precondition for governments to exercise their right to tax.

It is now a high time that Tanzania Revenue Authority, redefines and change her approach on taxing the digital economy in increasing Government Revenues.

The challenge of transfer pricing has been increased by the development of e-commerce and digital economy. 60 years down independence, Tanzania has embraced foreign direct investments in her economic development.

Tanzania has been a beneficiary of some of the biggest multi-national companies who are a step ahead in technology development.

With the presence of the foreign investors, the need for intangible assets has a greater role than ever before, with modern multinational enterprises deriving a larger share of their value from intellectual property that is both easy to shift across borders and hard to value for transfer pricing purposes due to lack of comparables, calls for a change in taxation system.

This has posed a significant challenge to the arm’s length principle and exacerbated opportunities for profit shifting which can negatively impact tax revenue collections by the Tanzania Revenue Authority.

Tanzanians who transact online are a critical driving force behind the value of digital services.

Digitalization has allowed businesses to harvest data and information about their users at an unprecedented scale.

It is common to be asked by various applications during installation, permission to be tracked.

Users provide data on their preferences, be it through their online search, purchase of goods and services, or through their interactions with others over social media platforms.

However, user participation is not recognized under the existing international tax framework as a source of taxable value.

As a result, the blurred line between their role in both supply (production) and demand (sales) has—for better or for worse—opened the door to an important conversation about the concepts of source, destination, taxable presence, and profit attribution.

All these parameters are critical in establishing the right tax base for purposes of ascertaining the right payable taxes.

This is an important area of focus by our revenue authority while we celebrate our 60th birthday as a nation.

Globally, the experience is not different in Tanzania, seeing the largest digitalized businesses paying minimal tax in the jurisdictions where they provide services, our policymakers should raise questions about the adequacy of the current tax system in both generating a sufficient level of taxation from such highly digitalized businesses in country.

Under the sixth phase Government, where Her Excellency President Mama Samia Suluhu Hassan is moving fast in building a robust economy at both the micro and macro level to improve the livelihoods of all Tanzanians across board, our policy makers need to move even faster to be able benefit the country from the investment inflows across different sectors of the economy.

Focusing on fiscal policy changes is key in increasing tax contribution from the digital economy which is now becoming increasingly important as almost all businesses are steadily moving toward what might be termed a digital asymptote.

60 years down independence, as a country, there needs to be policies which seek to limit the scope of tax avoidance and tax competition, by attempting to pre-determine a distribution of taxable profits across borders.

A proper designation of source needs to establish to justify taxing rights.

The need to work with business allies cannot be forbidden, the need for profit allocation may be necessary in getting a share of taxes.

A number of countries have begun to implement user-based turnover taxes, targeting specific digitalized industries and activities.

Tanzania should be in the fore front in embracing similar developments to optimize government revenue collections from digital economy.

  • The writer, Godvictor Lyimo is the President of Tanzania Association of Accountants (TAA), reachable via godvictorl@yahoo.co.uk, Phone: 078751401.
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Mwandishi: Godvictor Lyimo

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