Taxation of online and digital transactions

The Chartered Institute of Taxation Ghana will on Thursday 12th November 2020 gather tax experts in Ghana to discuss the challenges of digital transactions and e-commerce and its effects on Tax and the fiscal policies of Ghana.

Online transactions have in recent times experience tremendous growth, especially following the COVID-19 pandemic.

Companies and individuals now offer almost everything one can buy online. At both domestic and international level technology is changing work and life in general. Online retailer model is a new way of providing online platforms to sell goods or connect buyers and sellers in return for a transaction or placement fee or a commission.

Enterprises across all sectors are increasing their online presence to generate more business by reaching new customers at a reduced cost.

Even traditional government agencies have embraced the benefits of digital activities.

Online advertising companies such as Google, retail shops such as Amazon & ebay, travel companies such as Priceline and Booking.com, consumer asset sharing organizations such Airbnb, Uber & Lyft have created shift in the traditional business operations. Statistics from the worldatlas.com suggests that, internet users in Africa grew by 13,898% since December 2000, from 4.5 million users in 2000 to 527 million users in September 2020. This represents 12.8% of the world internet users.

Digital transactions deliver greater choice, competitive prices, convenience to consumers in remote locations who may face difficulty in physically accessing those services. For many, especially the youth, the utility derived from the consumption of online and related services far exceeds that of non-digital services.

For example, with Google drive- there is no need to import or buy Hard-drive to store data. Cloud computing allows storage of large data in remote areas through the web, Facebook Advertising offers fastest, cheapest way to reach large audience, WhatsApp has caused huge reduction in traditional SMS for telecom operators, iTunes has made importation of CDs a thing of the past, e-Books has changed the way we buy books.

Tax risk posed by the digital transactions

Despite the good side of technology, fiscal policies are less responsive to these new models. The emergence of Mobile money payment system in the with e-commerce has made the whole system difficult to track.

The tax risk, in the form of tax avoidance or evasion posed by digital activities is high and the OECD report on BEPS action 1 puts it this way: “because the digital economy is increasingly becoming the economy itself, it would be difficult, if not impossible, to ring-fence the digital economy from the rest of the economy for tax purposes.

The digital economy and its business models present however some key features which are potentially relevant from a tax perspective”. Thus there is a real tax challenges posed by the digital transactions through business models like e-commerce, app stores, online advertising, cloud computing and participative networked platforms.

The OECD ha suggested to nations to modify their tax laws to address the issues. Digital transactions create challenges for value added tax (VAT) especially where goods and services are bought by individual consumers from suppliers outside Ghana.

Addressing tax challenges on digital and e-commerce transactions:

For domestic transactions, the challenges mainly relate to the GRA not been able to accurately locate this these businesses in order to tax them according to law. But for cross-boarder transactions, the issue becomes more complex.

The fundamental question is whether tax authorities should use the same tax laws to tax online businesses or there is the need to impose special tax on online transactions.

Some tax experts say digital activities are just a mode of doing business and should not be treated differently from any other sector of the economy so tax authorities should find ways of looking for those who transact business online. Imposing special taxes on particular ways of doing business may discourage innovation and risk.

Having special tax imposed on digital activities could have negative consequences for cross-border trade and investment. Countries should rather redefine their Permanent Establishment (PE) rules and Corporate Income Tax should be limited to where the value is created.

Some counties have refined their PE rules to include “Virtual Service or Significant Digital Presence”. Kuwait, Israel and Saudi Arabia’s tax authorities have introduced the concept of a “Virtual Services PE”. This involves online activities that includes substantial advertising, marketing and customer relations management, service contracts signed online by consumers and the use of online services by consumers.

Some tax experts are however of the view that, special tax needs to be imposed on digital activities because the mode of operations possesses unique features. The digital activities provide room for base erosion and profit shifting and so such activities should be dealt with differently.

Indeed as a safeguard to the threat of technology on tax revenue, the OECD recommends (in addition to revamping the PE rules) to introduce options in domestic tax laws on in the form of a withholding tax on certain types of digital transactions and tax equalization levy.

Withholding tax on digital transactions

The OECD suggests that, one way of dealing with the threat of digital activities is to apply withholding tax on certain digital transactions.

Italy: Italy has a web-based taxation called “Tax on digital transaction” in 2018. The Web Tax is levied at a 3% rate on the value of each digital transaction and it is paid by the buyers of the services.

France: The YouTube Tax in France

Digital companies established in France or outside of France, offering access in France to audiovisual content, whether for a consideration or free of charge, are subject to a 2% tax based on the sale price or right of access and on the amounts paid by advertisers and sponsors in an attempt to subject foreign digital business companies to tax.

India 6% Equalization Levy

India imposes a 6% equalization levy to be withheld by Indian residents from service provider for specified digital services including online advertisements. The levy is not an income tax.

VAT on Digital Transaction

For VAT, the reaction has been to protect the revenue at country of destination. Ghana, South Africa, Kenya etc imposes VAT on imported electronic services. In Ghana, the Value Added Tax Act, 2012 (Act 870) of Ghana contains provisions aimed at addressing the challenges posed by digital activities.

Section 16 of Act 870 requires that an unregistered, non-resident person who provides telecommunication services or electronic commerce to persons for use or enjoyment in the country, other than through a Value Added Tax registered agent must register with the GRA if that person makes taxable supplies exceeding GHS200,000.00 in a 12-month period. But because it is self-reporting and payment, compliance was low in practice.

In other countries like Thailand, draft bill on e-commerce proposed that a foreign company providing services through electronic media to a non-VAT registered person, and where the services are used in Thailand, must register and pay tax at 7% VAT for services such as Hotel booking services, e-books, movies, music, advertising, online gaming services and downloadable music and all downloadable digital content.

Uganda passed a social media tax which took effect on July 1 2018 and seeks to charge a fee per day for using 60 mobile apps including Facebook, twitter, Instagram and WhatsApp, yahoo, google hangout, YouTube.

The meeting of expected to generate options on How the digital economy should be taxed.