As access to Internet services grows across Africa, the continent is realizing the potential economic benefit from taxing the multinational tech companies that provide digital services. The only problem is that there is very little existing legislative framework to do so.
Although Africa remains a very small slice of the total market that technology-based service providers cater to, companies like Uber, WhatsApp, Spotify, and Facebook are positioning themselves to capitalize on Africa’s expected population boom and rapidly growing youth population. Recognizing this trend, Kenya and Nigeria have begun to take steps to put legislation in place that would allow them to earn tax revenue from digital services.
On June 30, Kenyan president Uhuru Kenyatta enacted the Finance Act 2020, which introduced a tax of 1.5 percent on the gross transactional value of income derived from digital trade and services, set to go into effect in January 2021.
And the Nigerian Finance Act 2019 that passed into law earlier this year makes provision for taxing non-resident companies with a “significant economic presence”, which includes businesses using digital transactions or providing local services without a bricks-and-mortar address in the country.
An aggressive tax policy could ultimately prove to be counterproductive
A potential downside to these laws is the prohibitive restraints it places on African tech start-ups, as some face the risk of being doubly taxed or unable to compete against Silicon Valley juggernauts that can weather such tax policies. And although Africa is in dire need of increasing its tax collection capabilities, an aggressive tax policy could ultimately prove to be counterproductive. It could be a disincentive to investment by global tech companies, which might prefer to rather invest in countries with much more favorable tax laws or those that lack any such legislation.