*3.2. Consumption or Indirect Taxes and Taxation of the Digital Economy in Africa*

Resources mobilization from the digital economy is essential for post COVID-19 pandemic national reconstruction (Onuoha and Gillwald 2022), as economic activity was adversely affected. Revenue mobilization declined, and public expenditure immensely widened as countries committed substantial resources to fighting the pandemic. The situation is more precarious in Africa where revenue mobilization is generally weak, and countries are often faced with budget deficits (Mpofu 2021a; Sebele-Mpofu 2020a). Intangible assets have gained a significant role in the digital economy, with MNEs gaining a greater share of their value creation from intangible assets. These assets include intellectual property, trademarks and copyrights that are easily and invisibly shifted across borders and that are difficult to value for TP due to lack of comparables. TP abuse becomes easy in this case, siphoning Africa of millions needed to fund health, security, education, infrastructural development, and economic growth (Sebele-Mpofu et al. 2021b; United Nations Conference Trade and Development (UNCTAD) (2020)). The debate in relation to VAT and the digital economy revolve around the opportunities, constraints, and implications. There is on-going discussion globally and in Africa specifically on whether or not to tax the digital economy and if so, using what method or tax head and at what rates. Table 1 provides an insight into the VAT provisions, collection mechanisms and tax rates used by some selected African countries. Table 1 foregrounds the overview of indirect taxes towards taxing the digital economy in Africa. The table gives a synopsis of selected countries' VAT provisions and the effective dates of legislation implementation.


**Table 1.** Summary of VAT regulations in selected African Countries.


Author's Compilation from Various Sources.

From Table 1, it is evident that many African countries must formulate legislation to tax the digital economy through VAT/ GST. The VAT regulations presented in Table 1 require non–resident digital firms to register for VAT or to appoint a domestic representative to do so on their behalf. Despite the enactment of the new VAT on digital taxation laws or the widening of existing regulations to encompass the digital services, non-compliance by digital MNEs operating in Africa such as Facebook, Amazon, Netflix, and Google among others is still high and problematic (Simbarashe 2020; TaxWatch 2021).

African countries are losing a lot of revenue from the non-taxation of digital transactions. Initially, the South Africa VAT regulation on digital transactions was introduced in 2014 to cover a smaller section of electronic services; the definition was widened on 1 April 2019 to encompass electronic services provided by electronic communication or electronic agents or through the internet (Beebeejaun 2020; Bowmans 2020). Between 2014 and 2019, South African Revenue Authority Services (SARs) revenue authorities collected more than ZAR 600 million/year and an estimated ZAR 3 billion (USD 215 million) within the 5 years, (TaxWatch 2021). With the broadening of the VAT legislation in 2019 to include all electronic sectors, the SARs might improve revenue generation significantly. Discussions on the most effective way to mobilize tax from the digital economy have revolved around the superiority of VAT over Digital Services Taxes (DSTs) and the appropriateness of using VAT/GST to collect tax from the digital economy.

#### *3.3. Benefits for Taxing the Digital Economy in Africa Using VAT*

Ndajiwo (2020), while focusing on Ghana, Kenya, Rwanda, Senegal, and Uganda, expostulates that these African countries have an opportunity to mobilize taxes through VAT due to its comparative administrative ease. The researcher adds that the fact that VAT legal frameworks are already in existence, in contrast to the recently enacted DSTs, is an opportunity to exploit VAT in taxing the digital economy. Russo (2019) describes VAT as a low hanging fruit and that VAT ensures neutrality in taxation of foreign and local companies. For example, in South Africa, the VAT threshold of ZAR 1 million is applicable to both domestic and foreign companies, thus ensuring equity and neutrality in the treatment of companies. Ahmad et al. (2021) asserts that those who advocate in favor of consumption taxes submit that they promote investment and savings, thus promoting efficiency in the economy. On the other hand, critics claim that consumption taxes negatively affect the poor as they commit the greater portion of their income to financing necessities, therefore regressively affecting them, as VAT does not consider the ability to pay. VAT is also criticized for shifting the incidence of the tax burden to consumers (Ahmad et al. 2021; Kim 2020; Russo 2019). This section explores the possibilities and advantages of employing VAT in taxing the digital economy.

#### 3.3.1. Superiority of VAT to Turnovers

Russo (2019) argues that VAT is more appropriate for taxing digital services than DSTs and posits that VAT is superior to corporate taxes on efficiency grounds. (Russo 2019) points to three important positive effects of VAT: (1) VAT does not lead to a distortion in business decision for example production, supply, and usage; (2) uniformity—VAT does not differ based on the total companies in the supply chain, not cascading; (3) effectiveness. Turina (2018) argues that modifying the VAT legislation to cover digital services is a more appropriate option and economically superior option to mobilize tax revenue from the digital economy compared to DSTs and withholding taxes. It is easy for businesses (digital services consumers) to account for VAT from the supplier through the reverse charge mechanism for Business-to-Business (B2B) interactions. It is quite challenging and not viable for Business to Customer (B2C) interactions. Difficulties in enforcing compliance are alluded to in some African countries (Nigeria, Kenya and Rwanda) (TaxWatch 2021). Despite acknowledging the possible superiority of consumption taxes, efficiency advantages and the fact that they circumvent tax cascading, it is important to note that there is ongoing argumentation regarding the conception of value creation in the digital taxes discussion (Kennedy 2019; Kim 2020; Lowry 2019). Stakeholders disagree on what constitutes value creation and how the value is created or added and by who (corporates or users).

#### 3.3.2. Efficiency

Adhikari (2016) alludes to significant support for VAT-driven efficiency gains. While consumption taxes such as VAT are efficient and administrable, income taxes promote equity. Consumption taxes have the ability to avoid the dead weight loss of taxation, and to enable significant savings by individuals as well as investment and capital formation, and consequently higher economic productivity enhances efficiency (Kim 2020). In terms of administrability, those in favor of consumption taxes point to reduced complexity as a strength of these taxes. Researchers point out that despite the ease of administration, VAT passes the tax burden to consumers, thus making them regressive and violating the fairness and equity canons of taxation (Kim 2020; Lowry 2019). Researchers disagree on the regressive effects of VAT, with the OECD (2014) concluding from a study of 38 countries, that in 20 of these OECD countries, consumption taxes that encompassed excise and VAT, were nearly proportional or moderately progressive when evaluated for expenditure as opposed to income.

#### 3.3.3. Creation of a Competitive E-Commerce Environment

Where African countries apply uniform registration thresholds for VAT registration for both domestic and foreign companies, equity, fairness, and neutrality are ensured, as discriminatory policies are avoided. The principles of an ideal tax policy emphasize the need for equity in tax policy and accordingly as outlined in tax morale literature (Luttmer and Singhal 2014; Sebele-Mpofu 2021), tax morale increases if taxpayers perceive that they are treated fairly, thus increasing voluntary tax compliance. Owing to the infant nature of the VAT legislation on the digital economy and the difficulties in enforcement due to lack of power by the revenue authorities and their commissioner generals to do so across territorial borders (Kabwe and van Zyl 2021), voluntary tax compliance is key. The fair digital taxation environment can indirectly encourage investment in the digital services sector, novel technological advancements, economic growth, digital financial inclusion, and fruition of the SDGs, such as gender equality (SDG5), decent work and economic growth (SDG8) and responsible consumption and production, (SDG12) among others.

#### 3.3.4. Increased Tax Revenue Mobilization

Tax revenue mobilization is described as a stable, reliable, and predictable way of generating revenue for developing countries (Mpofu 2021c; Sebele-Mpofu 2021). African countries rely considerably on taxation for domestic revenue mobilization, the tax prominent heads being VAT and corporate tax. VAT is said to contribute around 30% or more towards African countries' overall tax revenue (TaxWatch 2021). Therefore, employing VAT to tax digital services could increase domestic revenue. Taxation is both a financing and development matter, therefore improved revenue prospects would lead to improved government funding as well as expenditure on education, health, security, infrastructure, and general economic development. Ultimately, increased government funding would lead to the realization of SDGs such as reduced poverty (SDG1), zero hunger (SDG2), good health and wellbeing (SDG3) and reduced inequalities (SDG10) among others.

#### *3.4. Constraints to Effectively Taxing the Digital Economy in Africa Using Consumption Taxes*

Non-tax compliance by digital or tech giants as they fail to collect VAT leading to large sums of revenue going uncollected negatively affects economic growth in African countries. Digital MNEs are failing to collect the VAT from their African customers and remit it to African companies (TaxWatch 2021). Therefore, they are contravening the African countries' VAT or GST in some jurisdictions. Different challenges are affecting the applicability and effectiveness of VAT legislation in taxing the digital economy globally and these might apply to the African countries, but they also vary considerably due the developed and developing country context differences. These variations could lie on administration and enforcement capacities, the state of development of VAT legislation, political power differences and clarity in legislation. Convergences on these challenges could be on the intangibility or borderless nature of digital services, as well as the ambiguities in key definitions. Janse van Vuuren (2019) and Rukundo (2020) allude to administrative challenges and increases in compliance and administrative burdens including costs. While assessing VAT legislation on the digital economy in Nigeria, Etim et al. (2020) point to the following challenges: outdated VAT legislation, poor legislation implementation, infrastructural gaps, technology, intricacies of digital transactions and the possibility of double taxation. Hadzhieva (2019) and Simbarashe (2020) posit that foreign companies raise concerns about the inconsistency in VAT legislation, the absence of double taxation agreements which compounds uncertainty and administrative responsibility, as well as advancing the probability of double taxation. This section discusses the challenges faced by African countries in the administration of VAT regulations on digital services despite the existence of legislation as set out in Table 1.

#### 3.4.1. Invisible or Borderless Nature of Digital Transactions

VAT is exigent to apply to digital transactions. Contrary to the situation with the importation of tangible goods, where it is easy to levy tax, the intangibility and invisibility of digital services makes it challenging for tax authorities to enforce VAT on their importation, as they cannot be subjected to border checks (Kennedy 2019; Lowry 2019; Ngeno 2020; Kapkai et al. 2021). It might be challenging to collect VAT from companies with insignificant or minimal presence in market jurisdictions (Kennedy 2019).

#### 3.4.2. Ambiguities in VAT Legislation Provisions

The TaxWatch (2021) points out that some digital MNEs such as Google, Microsoft and Facebook stated that they were complying with VAT legislation in some African countries where the legislation was clear and, in some countries, they failed to comply because the legislation was unclear. According to Kabwe and van Zyl (2021) ambiguities crystallize themselves around key definitions of important terms such as digital services, electronic services, 'supply' of digital services as well as the 'place' of supply. To levy VAT on a transaction, it must be initially demonstrated that the goods or services supplied fall within the purview of the VAT Act or legislation. The articulation of fundamental definitions becomes crucial in this regard.

• Definitions of Digital Services and Electronic Services

In some African countries, the definition of what constitutes digital services or electronic services is lean and fraught with vagueness. Kabwe and van Zyl (2021) assert that most of the VAT legislation and even that targeting the digital economy has not been regularly amended or updated in line with technological advancements, digital transformation, and the continuously evolving and emerging novel as well as complex business models. Most of the regulation has remained static and lagging technological developments in the digital economy. For example, in South Africa, the regulation remained static from promulgation in 2014 until 18 March 2019 when they were revised, and the revision became effective on 1 April 2019 (5 years after initial formulation and implementation). The revision was aimed to make the definition of electronic services expansive to give leeway for amendment in response to changes in business digital environment and advances in technological activities (Kabwe and van Zyl 2021). In Table 1, it is evident that countries such as Ghana and Malawi have not updated their VAT regulations despite the dynamism of the digital economy.

• Supply of Digital Services

For example, while focusing on South Africa, Kabwe and van Zyl (2021) allude to the fact that the VAT Act does not spell out distinct place of supply guidelines or what constitutes a supply. The place of supply must be derived from interpreting Section 7(1) of the South African VAT Act (the charging section) and Section 14 of the same Act (the section provides for the reverse charge framework). In the South African VAT Act, the definition of digital services is broad, and the Act defines these services as those outlined by the Minister of Finance in the legislation. Different international jurisdictions as well as African jurisdictions adopt different definitions for digital services and there are variations on the list of those that levied VAT. According to Kabwe and van Zyl (2021, p. 505) "the lack of international coordination and cooperation regarding a uniform definition of digital goods has resulted in a lot of confusion and uncertainty for foreign businesses". The complex and cumbersome rules will discourage digital MNEs from supplying customers in some tax jurisdictions. The variations in VAT regulations also make it difficult for foreign digital companies to comply, as they must familiarize themselves with VAT legislation in all countries they supply with digital services. The uncertainty in VAT regulations can have potentially pervasive effects on international trade, economic development, digital transformation, digital financial inclusion, and the accomplishment of the UN Sustainable Development Goals (SDGs) in developing countries and Africa is no oddity.
