Digital Taxation: African Union calls for Reforms as it forges a Common Position

In Africa, the renewed focus to raise additional financing for development and narrow the resource gap by accelerating Domestic Resource Mobilisation (DRM), has been at the center of the development strategy in recent years.

However, to fully harness the potential in domestic resources, sealing existing loopholes associated with the Tax revenue under-collection remains a critical issue.

The African Union Commission forecasts that economic growth in Africa will be in the range of -2.1% to -4.9% in 2020, plunging the economy into recession for the first time in 25 years.

The tax-to-GDP ratios in most of African countries have also remained extremely low averaging only 18 percent as of 2018.

To bridge this gap, Africa must address the structural issues such as tax loopholes; illicit financial flows and device innovative systems that facilitate trade and reduce the inefficiencies associated with cross-border payments and settlements.

The strategies and actions employed to address these existing challenges dominated the African Union Ministerial meeting of the Extraordinary Specialized Technical Committee on Finance, Monetary Affairs, Economic Planning and Integration.

Facilitated by the African Union Commission Department of Economic Affairs, the Ministers of Finance, Economic Planning and Integration convened under the theme, “Securing Africa’s Taxing Rights, Stemming Illicit Financial Flows and developing payment system for AfCFTA”, a demonstration of the linkages between prudent resource and financial governance and improved Domestic Resource Mobilization.

The meeting was attended by Permanent Secretaries and Director Generals in the Ministries of Finance, Economic Planning and Integration; Central Banks Governors and Tax Administrators, Commissioners-General and senior officials from the African Tax Administration Forum.

As economies become increasingly digitalized and remote trading by Multinational enterprises (MNEs) on the continent becomes rampant, African countries continue to loss significant tax revenue as such enterprises carry out business in African countries without creating sufficient physical presence in the countries affected.

The loss arises due to the fact that the current international tax rules only allocate taxing rights to a country where a non-resident enterprise creates sufficient presence in that country i.e., creating a ‘nexus’’ in that country.

Besides the challenge of MNEs not creating nexus in African countries, African citizenry continue to create a significant market and new value streams such as user data and participation for the highly digitalized businesses that the current international tax rules on profit allocation does not address.

These key issues of international tax rules have been under focus by the international community especially through the Organisation for Economic Co-operation and Development (OECD) Inclusive Framework on Base Erosion and Profit Shifting (BEPS) where a consensus-based solution is expected to be reached by mid-2021 for addressing tax challenges arising from digitalisation of economy.

Don’t miss important articles during the week. Subscribe to techbuild weekly digest for updates.