Internet use across Africa skyrocketed from 2.1% in 2005 to 24% by 2018—the highest growth rate globally.

That growth has seen global tech companies from Facebook and Google to Uber and Netflix expand their digital services across the continent, not just to capture the still small current market but also to strategically position themselves bearing in mind Africa’s young population and expected population boom.

But, like elsewhere, African governments are increasingly looking to develop a framework that allows them to generate tax revenue from these very popular digital services when used within their territories. The upside is obvious: collecting “digital taxes” will help African countries on their quest to grow their local tax bases which are typically undercut by large and un-captured informal sectors.

Then there’s the benefit of diversifying income sources—a boon especially for some large African economies dependent on the export of raw commodities. And while it’d be important at any time, it’s especially important now given the looming economic challenges of Covid-19 with the Sub-Saharan Africa region set for its first recession in 25 years.

There’s just one problem.

Without provisions in existing legislation and international tax treaties, there’s currently no global standard for setting up and implementing taxes on multinational technology companies. “The law is now just trying to catch up,” says Wole Obayomi, head of tax, regulatory and people services at KPMG Nigeria. For its part however, the Organization for Economic Co-operation and Development (OECD) is working on creating a new global tax framework for multinational technology companies that countries can adopt. But that slow-moving process is not guaranteed to be successful, especially after the United States pulled out of talks last month.

Full speed ahead

Without a global, or even continental standard in place, African countries have typically levied digital operations indirectly through a range of taxes on mobile financial transactions and value-added taxes on communications services including calls and mobile data.

As local internet use has grown among Africa’s middle-class, tech multinationals—from ride-hailing giants like Uber and Bolt, and social media platforms like WhatsApp and Facebook to e-commerce marketplaces like Amazon and Alibaba, and entertainment streaming platforms like Netflix and Spotify—have increasingly provided their services to African users. Even though Africa still accounts for a tiny slice of these companies’ global revenues, their rising prominence and influence in local markets means African governments eye as them as taxable targets regardless of the fact several do not have a physical presence in their countries.

Change the game

And so Nigeria and Kenya—two of Africa’s largest internet markets and most developed tech ecosystems—have stepped up plans to tax multinational tech companies.

After extending the scope of Kenya’s finance laws to allow it to collect taxes on “income earned through digital marketplaces” last year in a move that appears focused on e-commerce, a new law signed by the president at the start of the month will see a digital services tax of 1.5% of gross transaction value imposed on digital marketplaces and platforms that derive income from Kenya. The tax will take effect from January 2021. Kenya’s tax on gross transactions rather than profits is key and likely targets tech giants like Uber which remains “famously unprofitable.”

REUTERS/MAGGIE FICK

In Nigeria, a newly passed ministerial order (SEP order) allows Africa’s largest economy to tax companies that have a “significant economic presence” and are involved in digital transactions or providing services locally even without physical offices or subsidiaries. The order deems companies to have significant economic presence in Nigeria if they derive gross income of over 25 million naira ($64,000) from digital services, use a Nigerian web domain or register a web address in Nigeria, target Nigerian users in advertising and marketing or reflect online payments in Nigeria’s currency.

There’s the obvious question of how these provisions could affect local startups or even Africa-focused startups operating across different countries. Take Jumia, the pan-African e-commerce giant that’s set up shop in 12 African countries. But while Jumia is incorporated in Germany, all of its operations in individual African markets “are fully registered as local entities” and “pay all the local taxes already,” a Jumia spokesperson explains. It’s a similar reality for startups that are wholly registered locally in the countries they operate in and are already subject to existing tax laws, unlike tech giants like Netflix.

But local startups also face the real risk of double taxation, particularly in Kenya where the framing of the digital services tax encompasses all digital marketplaces in the country—and not just those based in Silicon Valley or Europe. As such, locally registered and homegrown e-commerce companies which already face relevant taxes may yet face an additional digital services tax.

“I think the government of Kenya should be igniting the digital economy not seeking to suffocate it in its crib,” says Aly-Khan Satchu, a Nairobi-based financial and investment analyst. “Whatever nickel and dime income the government collects at this juncture will be at the expense of future growth,” he tells Quartz Africa.

Invariably, these efforts to introduce these taxes will likely win support from locally competitive players, as past evidence, and long-running sentiments, suggests. In the wake of Netflix going live across Africa, MultiChoice, the largest pay TV player across Africa, has been vocal about the need for the company to be regulated, bemoaning its operations as an over-the-top service without paying taxes, setting up a local presence or putting down infrastructure.

Telecoms companies across the continent have also pushed for messaging platforms including Facebook’s popular WhatsApp to be regulated because, they say, it undercuts their voice call and SMS revenue. And like in other parts of the world, Uber’s Africa operations have long faced push-back from local taxi groups  who decry its model as anathema to their survival.

REUTERS/AKINTUNDE AKINLEYE

Walking the talk

While proposing these laws and regulations is one thing, implementing and enforcing them is quite another. Without a widely agreed upon standard for taxing tech multinationals, there’s significant potential for unilateral laws to be subject to dispute as recent examples show. France’s attempts to implement a tax on tech giants, including American companies, left it on the brink of a trade war with the United States last year while India’s digital tax plans, in form of an “equalization levy,” have faced pushback from US tech giants.

In the unlikely scenario that tech multinationals voluntarily accept being taxed in African markets without similar resistance, it will only solve just one variable of a more complex equation. As Mustapha Ndajiwo, founder of the African Center for Tax and Governance, notes in a working paper published last month, “the main problem is not taxable nexus, but attribution of profits.”

Essentially, without a global framework in place, countries seeking to collect taxes on digital services first have to ascertain how much profits the companies offering those services have earned within their territories. With subsidiaries of global tech companies often providing administrative and marketing support, mothership companies can potentially allocate costs to their operations in a manner that leaves countries with little or nothing to tax.

“The uncertainties regarding the profits earned from and taxable in Nigeria is a notable issue the SEP order failed to address,” writes Amaka Samuel-Onyeani, senior manager at the Nigerian arm of global tax consulting firm, Andersen Tax.

That gap amplifies the need for international consensus especially as one of the OECD’s key objectives in creating a global digital tax framework will be providing an acceptable formula for profit attribution and taxing. In the meantime however, without clarity on earnings within their jurisdictions, African countries looking to press on will have little choice but to “rely on the integrity” of tech multinationals, Obayomi says – Quarts Africa