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Digital Tax Inequality in Africa

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Digital Tax Inequality in Africa

Mozambique recently announced its intention to introduce a tax on the digital economy as early as 2024. This raises a complex issue for many African countries. However, if these nations can effectively implement tax measures, their economies will benefit.

Development of the Digital Economy in Africa

The rise of the digital economy in Africa is a major phenomenon that is rapidly spreading across the continent. Recognized by the World Bank as a lever for growth and employment, the digital transition is the focus of many international actors in Africa.

This expansion is being driven by several key factors, most notably the growth of mobile Internet access. Despite the persistence of a digital divide, Internet penetration is steadily increasing, thanks in particular to the efforts of governments and various international partners.

The Smart Africa initiative, a project of the African Union, is also a key factor in the development of the continent’s digital economy. This program aims to promote digital development by creating a single digital market in Africa. In addition, training and technological innovation efforts are stimulating intra-African digital trade.

Digitalization of the economy

The digital modernization of the economy refers to the integration and increasing use of digital technologies in all sectors of the economy. This process changes the way goods and services are produced, distributed, and consumed. It also has implications for work, employment, and the skills required.

In Africa, this digitization is being driven in particular by the explosion of mobile telephony and mobile financial services, and the rise of collaborative platforms and e-commerce. The digital economy is also being driven by various initiatives aimed at harnessing technological innovation to boost industry, trade, and financial services.

Types of employment in the digital economy

The digital economy encompasses a wide variety of jobs in different sectors. There are IT professionals such as application developers, information systems administrators, and cybersecurity specialists. E-commerce also offers a wealth of opportunities, with positions such as web marketer, traffic manager, or e-commerce project manager.

The mobile and fintech sectors require skills such as mobile network architect, mobile project manager, or mobile monetization manager.  We should also note the emergence of new professions related to artificial intelligence and blockchain.

Three pillars and elements of the digital economy

The digital economy is based on three essential and interdependent pillars:

  1. The Technology Pillar : concerns all the technical aspects that enable the digital economy to function. This includes information and communication technologies (ICT), data encoding, storage, processing, and transmission. This pillar is a constant source of innovation, with the emergence of new digital products and services.
  2. The organizational pillar : refers to how companies adapt their internal structures and processes to take advantage of the opportunities offered by digital technology. This is where digital transformation comes in.
  3. The cultural pillar : intrinsically linked to the evolution of attitudes and behaviors towards digital, encompassing both individuals and organizations. The adoption and widespread use of digital technologies depends on the momentum created by this cultural pillar.
  4. Impact of digitalization on the economy

The digital revolution is an ideal solution for reducing fiscal inequalities, thus eliminating dependence on foreign lenders to support the economy. Digitization of public services allows for more efficient tax collection. Efficient collection, reducing tax evasion, and promoting compliance with tax regulations can significantly increase revenue generation.

It is worth noting that Africa loses 60 billion USD annually due to non-digital tax collection and illicit financial outflows. Bento Report’s « Statutory Remittances in Africa » report, which examines the tax systems of 53 African countries, highlights this reality. According to Bento’s CEO, this lost amount exceeds the foreign development aid the continent receives.

Digital Taxation for the Informal Sector

Taxation is a complex process that requires careful consideration to develop an efficient, fair, and sustainable system. That’s why digital tax collection remains the best way to maximize the sector. This is especially true for the informal sector in Africa, which includes economic activities outside of government regulation and oversight.

Unlike wages, taxes are not deducted from income at source. Yet the informal sector represents an untapped opportunity for domestic resource mobilization (DRM). The main challenge is transparency and accountability, as many Africans question the use of their taxes.

Taxation to Raise Public Revenues

The tax systems of many African countries do not generate enough revenue to meet national needs, including education, health, infrastructure, and defense. This is mainly due to the failure to integrate the vast informal sector into the tax system.

The informal sector has an important role to play in domestic resource mobilization. Failure to exploit this opportunity deprives African countries of capital in a sector that affects 85 % of the population and 90 % in sub-Saharan Africa. This situation undermines the ability of African countries to effectively finance their essential public services.

Failing tax systems have forced many countries to turn to their Western counterparts for help. However, with the global economic downturn, African nations can no longer rely on foreign borrowing to alleviate their economic difficulties.

Laws and initiatives to regulate the digital economy

Only Ethiopia and Rwanda have found a way to digitally collect taxes from the informal sector. Their electronic tax filing and collection platform is a testament to the effective transformation of tax collection. At the same time, many African countries are actively digitizing their government services.

Direct VAT initiative with MATAN

In July 2023, Nigeria’s Federal Inland Revenue Service (FIRS) announced a partnership with the Market Traders Association of Nigeria (MATAN).  MATAN has over 40 million traders in 774 local government areas, 36 states, and the Federal Capital Territory (FCT). This collaboration, the VAT Direct initiative, is aimed at collecting and remitting VAT from its members through a unified system. The scheme is particularly targeted at members of the informal sector.

Despite the uncertain outcome of this collaboration, the VAT Direct initiative aims to minimize multiple taxation. The system also aims to deter illegal collectors and increase security in the informal sector. Ultimately, this partnership will broaden the tax base and improve state and local government revenues.

Recos Bento: an example of a solution to informal taxation

The experiences of Ethiopia and Rwanda demonstrate the effectiveness of technological solutions in reducing the tax gap. The creation of a comprehensive database of informal sector actors is advocated as essential for informed budget management. One solution for African governments is the adoption of Bento software. This software allows tax returns and payments to be generated and submitted electronically, reducing the administrative burden.

Taxing e-commerce in Mozambique

At the Fourth Scientific Days of the Mozambican Tax Authority, Carla Louveira, Deputy Minister of Economy and Finance, announced that the country plans to introduce a tax on the digital economy as early as 2024. This measure is part of a broader African context aimed at taxing e-commerce and optimizing tax collection, particularly in the informal sector.

Context of digital taxation

Carla Louveira highlighted the significant impact of the digital economy on national tax systems, particularly in the areas of e-commerce, mobile wallet transactions, and the monitoring of financial activities. The 2019 GSMA report, « Mobile Money Agents: sustainability in a Digital Era Findings from Mozambique », reveals relevant information:

  • 29 % of Mozambican adults had a mobile account, up 3 % from 2014.
  • 54 % of adults in urban areas used mobile money services
  • 13 % of adults used mobile money services in rural areas.

The report notes that the data for 2022 is expected to increase significantly, reflecting the rapid expansion of the mobile money market and the informal sector in the country. To support this growth, a specialized digital economy taxation unit has been established within the tax authority. A preliminary assessment was conducted in November 2023, focusing in particular on the regulation and taxation of online transactions in the tourism sector.

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