African nations confront digital taxation challenges

by Trevor Lutalo
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In a watershed moment for African nations, the struggle to adapt to the fast-paced digitalisation of economies has surged to the forefront of global concerns. As the digital age reshapes the landscape of international taxation, African countries find themselves grappling with taxation challenges and the associated revenue losses.

These issues have been a major source of worry for Africa for many years, but African Tax Administration Forum (ATAF) members are taking significant strides to address these complex issues.

The heart of the matter lies in the struggle to tax highly digitalised businesses that are reaping profits from the African market. Current global tax rules are deemed ill-suited to address this rapidly evolving digital economy, and domestic regulations in most African countries are equally unprepared for the taxation of digital giants. To tackle this formidable challenge, ATAF initiated the process of offering policy guidance back in 2020.

This initial effort led to the release of ATAF’s “Suggested Approach to Drafting Digital Services Tax Legislation,” offering a range of options to tax digital services. Some African countries have begun contemplating the enactment of Digital Services Tax (DST) legislation, but others have chosen to await the outcomes of international negotiations.

In July 2023, the Inclusive Framework, a global initiative, announced a critical development. They unveiled an Outcome Statement that signaled a milestone in the ongoing efforts to address these issues. The statement announced the delivery of a text for the Multilateral Convention to Implement Amount A of Pillar One (the MLC), which would be opened for signature in the second half of 2023, with a signing ceremony planned by year-end. The objective is to bring the MLC into force by 2025.

The recent release of the MLC’s text and its Explanatory Statement by the OECD Inclusive Framework marks a pivotal moment in the global tax reform agenda. However, this development has sparked concerns among some members, who fear potential delays in the MLC’s implementation, further prolonging revenue losses from untaxed digital businesses. Additionally, the complexity of the Amount A rules has raised eyebrows. The published MLC text and Explanatory Statement together span a staggering 850 pages, reflecting the intricate nature of the proposed rules.

In response to these challenges, ATAF is taking proactive measures to empower its members. On October 17th, they will host a webinar designed to dissect the complexities of the Amount A MLC and explore alternative options available to African countries for effective taxation of digital firms. This webinar is seen as a vital step in assisting African countries in making informed decisions regarding the taxation of digital businesses.

Logan Wort, the Executive Secretary of ATAF, emphasised the pressing need for African countries to tax highly digitalized businesses effectively. “It is vital that African countries effectively tax highly digitalized businesses, which is not possible under the current global tax rules,” he noted. He further stressed that the complexity of Amount A, coupled with uncertainty regarding its implementation timeline, poses a significant challenge.

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