3.4.6. Lack of Knowledge and Awareness

There is lack of knowledge and awareness regarding taxes directed towards the taxation of the digital economy, including both DSTs and VAT in African countries, perhaps due to the infancy of regulations. The dearth of tax knowledge affects both tax administrators and taxpayers (Mpofu 2021a). Articulating this challenge with respect to South Africa, Kabwe and van Zyl (2021) state that the reverse charge framework is a fall-back option, in cases where a foreign company registered for VAT does not collect VAT from a South African customer. SARs normally reverts to the customer to claim the VAT not collected and paid, because in terms of the Act, the customer must self-assess. SARs officials seemed not to be aware of the reverse mechanism assessment (Kabwe and van Zyl 2021). In some cases, foreign companies are not aware of the VAT legislation on digital services. This signals the need for effective communication and dissemination of information as well as taxpayer education programs. Without adequate knowledge and awareness, in both B2B and B2C scenarios, the taxpayer may fail to account for VAT due to ignorance or perceptions that it is a burdensome, time-consuming and unnecessary. Revenue authorities in Africa lean more on the honesty of consumers when it comes to the reverse charge framework (Van Zyl and Schulze 2014). This is a weakness in legislation; otherwise, there must be a legal provision in the Act to enforce compliance with specific reference to the reverse charge apparatus. There is indeed a likelihood that a substantial number of B2C transactions escape the VAT legislation. Revenue authorities might consider them insignificant; they might not be substantial when viewed individually, but might be material when aggregated, thus leading to the erosion of the tax base in African countries.

#### **4. Implications and Recommendations for Future VAT Policy in Africa with Respect to the Digital Economy**

This section discusses the implications of employing VAT as a tax revenue mobilization tool in African countries and discusses possible suggestions for ameliorating VAT administration and its effectiveness at tapping tax revenues from the digital economy.

#### *4.1. Implications*

Several implications could be attributed to the implementation of VAT legislation in taxing the digital economy. These ramifications must be effectively assessed in conjunction with the possible constraints as well as the likely opportunities and advantages of applying VAT legislation to the digital economy. Etim et al. (2020) submit the following possible consequences of applying VAT legislation: increased administration and compliance costs, negative effects on other government policies and tax heads, heightened tax evasion and resistance to policy and increased tax burden for consumers. The application could further lead to a reduction in consumption, change in consumption patterns, modifications to the market structure and increased uncertainty for the future growth of the digital economy (Guyu 2019; Munoz et al. 2022).

Katz (2015), while focusing on Gabon, pinpointed problems that could possibly emanate from charging tax on the digital economy. These challenges were explored from the perspectives of telecommunications and e-service providers and consumers. Katz (2015) drew four major conclusions. Firstly, from the consumers' point of view, digital taxes heighten the affordability challenges in the adoption of technology as the tax cost increases the price. The increase in the prices of digital services could negatively affect not only affordability but access and usage. This could affect the growth and profitability of small telecoms business, ultimately affecting the tax heads such as income tax (both corporate and pay as you earn (PAYE)), leading to a fall in tax revenues. VAT could also affect startups and small and medium enterprises as well as self-employment. Overall, this affects employment creation; more so in African countries such as Zimbabwe, Kenya, Nigeria, and South Africa where unemployment is high among youths and these youths have been exploiting the digital space to engage in self-employment. For example, Isiandinso and Omoju (2019) and Etim et al. (2020) cited the Nigerian Investment Promotion Commission table that Nigeria was envisaged to generate USD 88 billion and create over 3 million by the year 2021. Zimbabwe is argued to have the second biggest informal economy in the world which, contributes approximately over 60% of GDP (Medina and Schneider 2018). As of December 2019, Kenya's internet penetration was approximated at 89.5% (Kapkai et al. 2021). If all these projections and statistics are anything to go by. The affordability constraints of digital services could further perpetuate unemployment, poverty, and inequality, leading to a failure to attain the UN SDGs and indirectly crippling digital financial inclusion efforts.

Secondly, even though consumption taxes can be pushed to consumers, the responsibility to account for and pay VAT rests with the digital or e-service providers who may in turn be faced with a decrease in infrastructural investment. This could arise if taxes lead to a reduction in the total amount accessible for capital expenditure. Thirdly, taxes result in taxation asymmetry between global digital providers in the digital sector. For example, companies such as Amazon, Netflix, Google, and Facebook are taxed on online advertising, whereas other online advertising companies and social networks fall outside the ambit of digital taxation. Lastly, the origination of manipulative tax avoidance schemes lead to revenue leakages and losses in market jurisdictions when digital MNEs engage in tax avoidance and evasion measures that result in base erosion and profit shifting (BEPS) (Katz 2015). Chang (2019) states that 80% of Netflix revenues is attributable to international subscribers. While citing Statista (2020a, 2020b), Beebeejaun (2020) states that Facebook made USD 18.7 billion from advertising in the first quarter of 2020 and Google generated USD 160 billion. They also made 74 billion for the year 2019 from advertisements. Beebeejaun (2020) states that some of these digital MNEs engage in BEPS-shifting behavior by shifting profits to tax havens to the detriment of market jurisdictions where these profits are generated. Concerns regarding usage reduction, market distortions and possible negative impacts on economic growth were also proclaimed by Becker (2021), Kennedy (2019), Lowry (2019) and Munoz et al. (2022).

In addition, some researchers have criticized digital taxes for impeding the adoption of novel technologies and this may curtail economic growth and development, negatively affecting financial inclusion and the realization of the SDGs (Munoz et al. 2022, Kearney 2014; Becker 2021). Youssef et al. (2021) emphasizes the role of technology and the digital economy on entrepreneurial development. The researchers posit that digital technologies are playing a fundamental role in the transformation of the global economy, especially the modification of entrepreneurship activities and processes. Levying VAT on digital services and products affects the adoption and usage of technologies, thus negatively affecting entrepreneurial development.

Kearney (2014) alludes to a negative correlation between taxation of wireless services providers' prices and the growth in the 3G internet penetration in emerging market countries. Affirming this, Beebeejaun (2020) states that taxes may disincentivize the provision of broadband mobile network in ways that are detrimental to strategic public policy construction and planning. Domus et al. (2017) and Kapkai et al. (2021) raise the possibility of double taxation implications arising from taxing services such international roaming that could possibly give rise to VAT in the home country and the foreign country visited.

The lack of clarity in VAT legislation, especially in the definition of key terms could be a weakness for most African countries' VAT legislation on the taxation of digital services that can exploited by MNEs to evade taxes or even those expected to account for VAT through the reverse charge mechanism. In addition, the fact that the place of supply rules must be inferred from reading certain sections of the Statutes in isolation or in conjunction with others is problematic in itself. While referring to South Africa, Kabwe and van Zyl (2021) affirm this. The researchers adduce that deducing the place of supply by a combined reading of the charging provision (Section 7(1) of the South African VAT Act and Section 1, which defines vendor, electronic services, and enterprise as well as Section 14, which outlines the place of supply, is confusing for foreign digital services suppliers who are not conversant with South African laws. This could lead to companies genuinely failing to comply out of ignorance or lack of understanding of VAT legislation in African countries, noncompliance due to legislation complexity (unintentional) and not outright tax invasion (Mpofu 2021c). While in terms of the law, ignorance is no defense, Kabwe and van Zyl (2021) asseverate that complexity and lack of clarity in the structure of the VAT legislation on digital transaction could be a vital factor in non-compliance with the tax legislation and an increase in the administrative burdens for tax authorities. Sometimes, revenue authority officers must grapple with numerous calls and emails seeking clarification on the ambiguous areas in legislation, thus leading to frustration and, at times, their seemingly uncooperative nature.

#### Practical and Policy Implications for the Results

The implications discussed above, and the results of the study point to gaps in three areas. These areas are: (1) the level of development of VAT legislation towards taxing the digital economies; (2) VAT legislation implementation and administration; and (3) the evaluative analysis of the possible negative externalities or consequences of the VAT policy on the digital economy and the economy at a large in African countries.

The first gap suggests that African governments and policy would need to reassess and further develop their VAT legislation to cover the current crevices as they open loopholes for abuse. For effective enforcement, legislation must be free from ambiguities and vague provisions as these provide ammunition for taxpayers to avoid taxes, manipulate tax laws to their advantages or even successfully argue their cases in the court of law. All this happens to the detriment of effective domestic revenue mobilization, yet taxes contribute significantly to total national revenue in African countries.

Regarding the second gap, addressing the implementation challenges would equip both the revenue authorities and taxpayers to ensure effective VAT administration, enforcement, and compliance. Lastly, with respect to the third gap, it is key to evaluate policy, both proposed and current, in terms of the cost and benefit analysis, the negative externalities, strengths and weaknesses and the impact on the economy. Tax policy requires governments to continuously evaluate, adjust, and re-adjust in relation to the outcomes of the evaluation to ensure efficiency and effectiveness as well as adherence to other canons of taxation. Tax policy must be able to address other functions of tax policy and not blindly focus on revenue generation.

#### *4.2. Recommendations*

This section addresses recommendations derived from the review and Figure 1 foregrounds the discussions. Figure 1 makes suggestions related to the VAT legislation construction, implementation, and administration as well as areas to focus on in reducing the negative implications on the digital economy and other sectors of the economy.

**Figure 1.** Summary of Recommendations to improving VAT legislation with respect to the digital economy. Source: Author's Compilation.

4.2.1. Full Development of VAT Legislation, Clarity in Definitions, Continuous Revisit and Amendment of VAT Legislation

The researcher acknowledges that most of the tax legislation towards mobilizing revenue from the digital economy is still its nascent stages and is still being developed; therefore African countries are encouraged to work tirelessly towards ironing out the shortcomings. The countries must bring clarity in critical definitions and find ways of effectively communicating the legislation to foreign companies that supply digital services. Key definitions such as digital services, electronic services and place of supply must be clearly defined to enhance the transparency and simplicity of VAT on digital services regulation. Alternative treatment of the place of supply or the possible proxies for establishing it where it is not easy to apply the use and consumption principle must be provided for in regulation. Therefore, tax law should not be static because the business environment evolves, and taxpayers are always devising new ways to avoid and evade tax. Tax law and, in this case, tax legislation on digital transactions should be updated regularly to keep abreast with developments in the digital sector and changes in technology.

#### 4.2.2. Cooperation, Collaboration and Learning from One Another by African Countries

Researchers such as Kabwe and van Zyl (2021) call for international cooperation and consensus on an acceptable or universal definition on the definition of digital services. This article reiterates this call, acknowledging that to apply the registration measures, and administer and enforce VAT legislation on digital transactions on a unilateralism

basis is challenging if not nearly impossible. International coordination and cooperation are key. This has been affirmed by several researchers who urge African countries to join, critique and contribute on international platforms on matters that concern them (Ahmed et al. 2021; Ahmed and Gillwald 2020; Onuoha and Gillwald 2022). Rukundo (2020, p. 22) specifically states, "African countries should participate in global debates through regional and international organizations, pushing for reform and for the development of international tax rules that consider their interests as source or market jurisdictions". While acknowledging the importance of their participation, it is important to note that African countries negotiate from a politically, economically and resource-disadvantaged or weak position.

This article also encourages African countries to work on a continental or regional definition for digital services, electronic services, and place of supply to reduce the complexity of VAT regulation on digital services. African countries should also learn from the mistakes and successes of each other and other developed countries and use the lessons drawn to improve their own digital tax legislation. For example, to limit the inundation with queries and questions, SARs inaugurated a Frequently Asked Question (FAQ) section on the revenue services' website in July 2019. This section is regularly updated. This is a worthwhile development that other African countries could draw on and improve, especially in the context of concerns regarding the ease of accessing the section and navigation raised by Kabwe and van Zyl (2021). Affirming the need for African countries to cooperate sincerely and effectively, Onuoha and Gillwald (2022, p. 20) state: "This will require close collaboration and synergies between the relevant regional institutions on the continent, including economic blocs, the AfCFTA and the ATAF secretariats, in the evolution of policy process that allows African countries to debate issues between themselves without fragmentation, and as a first chance of effectively negotiating their way out of the current North–South hegemony".

The idea is for the African nations to strongly influence tax policy as a unified front and to ensure MNEs pay taxes in the country where the revenue was generated (market jurisdictions).

#### 4.2.3. Capacity Building, Training, Information Dissemination

Revenue authorities need to build capacity to tax the digital economy, train officers and disseminate information to stakeholders on the new or expanded VAT legislation targeting the digital economy. The invisible nature of the digital economy requires revenue authorities to capacitate their workforce with technical skills and knowledge to match this intricate sector. It is also vital for revenue authorities to be capacitated with financial resources so that they invest in digital and technological infrastructure that is current to be able to tap revenue from the sector. The audit departments in revenue authorities must be equipped to use technology to follow the digital footprints of transactions if tax compliance is to be effectively monitored and enforced. African nations could perhaps share technical resources and expertise through trainings and seminars conducted through ATAF or by seconding personnel to revenue authorities that have been using VAT to tax the digital economy for some time, such as SARs or other more developed economies.

#### 4.2.4. Cost and Benefit Analysis

African governments are encouraged to do a cost and benefit analysis in relation to possible digital tax revenue mobilization and the likely creation of taxing distortions, before constructing a relevant indirect (VAT) system. Policymakers must consider the trade-off on revenue mobilization and other costs. Tax systems must build efficiency and reduce the cost of collection, guard against over-taxation and minimize the possible adverse consequences. It is crucial for governments to strike an equilibrium between collecting tax revenue from the digital economy and other important functions of taxation in the economy such as promoting economic growth, redistributing resources, and fulfilling the SDGs such as reducing inequalities, eradicating poverty, creating decent jobs, providing

reliable health services and affordable education. Considering these other roles of taxation, governments must assess how levying VAT will affect these other roles and make evidencebased decisions. Tax policy construction must always strive to adhere to the principles of taxation such as economy, equity, simplicity, convenience, economy, neutrality, efficiency, transparency, and effectiveness.

#### **5. Conclusions**

As the digital economy continues to grow, technology continues to advancing and business models continue to evolve, a new set of challenges for tax administrators will continue to emerge. Revenue authorities must come to reality with the continuous growth of the digital economy and find ways of productively taxing the sector, otherwise significant tax revenue will go untapped. This would be a challenge for African countries that rely heavily on taxes such as corporate tax and VAT to fund government expenditure. The article concludes that revenue collection from the digital economy in African countries remains a formidable task. The issue of which is the most effective method or tax head to use to tax the digital economy remains hotly contested among stakeholders such academics, governments, and tax authorities. While the review revealed some opportunities and strengths of using VAT, challenges and weaknesses were also evident. This points to perhaps the need for future empirical research in countries that have implemented DSTs policy and the VAT policy to evaluate each policy and even make a comparative analysis of the performance of the tax heads (VAT and the DSTs or turnover taxes). This article recommends the need for policymakers to improve on the legislative transparency and clarity of VAT legislation, improve on administration capacity and collaborate on both continental and international levels to build a strong VAT policy and improve administration and enforcement. Since this article is a review article that is based on a review of secondary literature and previous studies, the discussions and findings might be subjective as their foundation is based on the work of others. Secondly, as the conceptual analysis is qualitative in nature, perhaps future researchers could focus on empirical research on the subject area and employ primary data or a quantitative approach. Studies based on literature reviews such as this one rely on secondary data as opposed to primary data to base their findings on, and therefore this is a limitation for this study. Further studies could focus on conducting empirical assessment of the application of VAT legislation in taxing the digital economy in Africa.

**Funding:** This research received no external funding, and the APC was funded by the University of Johannesburg.

**Institutional Review Board Statement:** Not applicable.

**Informed Consent Statement:** Not applicable.

**Data Availability Statement:** This a review article and there is no shared data available.

**Conflicts of Interest:** The authors declare no conflict of interest.

#### **References**


Liganya, Bhoke. 2020. *Taxation of E-Commerce: Prospects and Challenges for Tanzania*. Mzumbe: Mzumbe University.


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