Addressing Tax challenges of the digital economy

Our adoption of the internet and its associated products such as cloud computing, e-commerce, mobile applications and cryptocurrency have brought around dramatic changes in the way business is conducted. Whilst in many cases this has brought about a positive outcome, it can be argued that our current tax systems, which are a product of 20th Century policy thinking, are not yet suited for this new reality - both at corporate and individual level.

As the Government prepares for the 2018/19 budget and seeks to reduce tax evasion, double taxation or loopholes brought by these trends, the principle challenge will be to find new solutions, rather than recycle old ideas that might no longer fit the realities in which individuals and businesses conduct their affairs.

For example, whilst the internet has greatly eased business operations and introduced new industries, it has also provided businesses with the ability of having a significant digital presence in the economy of one country without being liable to taxation in the other country.

This practice might cause challenges for businesses operating in Tanzania as our tax legislation provides that business profits are taxable in Tanzania only to the extent that the enterprise has in the country a "permanent establishment" to which the profits are attributable.

A permanent establishment can be determined by various factors, including location of your business, substantial business equipment or length of time spent in the country performing your business activities. However, this definition of permanent establishments does not directly consider factors relevant to an online retail shop, where the tangible products, management, computer servers and customers might each be in different jurisdictions.

The ambiguity equally creates challenges for value added tax (VAT) collection, particularly where goods, services and intangibles (e.g. software) are acquired by private customers from suppliers abroad. It has previously been proposed that Tanzania considers entering into more bilateral tax treaties with its major trading partners or introduce a withholding tax on certain types of digital transactions.

Recently, there has been a surge of local entrepreneurs and start-ups looking to ride on the internet wave and reap the benefits of the digital era. To support the development of these businesses, which add value by transforming the way we do things, the Government should consider the impact of current tax policies to these types of businesses and provide for a fair tax environment for local entities as we prepare for the upcoming financial year.


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