Taxing digital economy

CAIRO - 27 January 2021: According to a 2019 report by the United Nations Conference on Trade and Development (UNCTAD), the size of digital economy ranges between 4.5% and 15.5% of the world's economy. Such wide range indicates how it is difficult to measure the value creation, and subsequently, carry out taxation. Since that sector has been rising in steady paces in Egypt, it is worthy to examine how the tax base can be determined in digital economy for that taxation would not be exclusive to physical economic activities causing them to get disadvantaged in competition.

The Scene of Egypt's Digital Economy

A 2015 Payfort report showcases that Egypt has approximately 15.2 million e-shoppers. Of whom, 72% prefer cash on delivery. The North African state has the largest number of e-shoppers and the third market size in the MENA region. Payfort estimates that the size of digital economy in Egypt will quadruple to record $2.9 billion in 2022 up from $700 million in 2015. In Egypt, online retail takes place through both online shopping platforms and social media by creating pages and accounts offering products for sale. For the latter, cash on delivery is almost the only means of payment. Nonetheless, if the products are imported by order, the seller usually asks for 50% in advance, and always the transaction takes place through mobile wallets.

Assessing Taxation of Digital Economy

Former Vice Minister of Finance for Tax Policy Amr El Monayer tells Business Today Egypt there are two main obstacles to the taxation of digital economy. One is determining the income that should be subject to tax. The other is collecting the tax, if the party that must pay is based abroad.

Monayer notes that such impediments apply to business-to-consumer in contrast to business-to-business whereas the process is much easier given that both companies – if based in the same country – usually have licenses, and thus, have to submit financial declarations to the tax authority. The process is also easy when the transaction takes place in business-to-government.

For business-to-consumer, there are two types of transactions. "One is clickthrough such as downloading apps, songs, videos, and others. The other is purchasing goods," Monayer explains. The tax expert points out that "it is hard to determine such transactions, particularly if the seller and buyer are in different countries." 

"Here, there is another problem pertinent to which country is entitled to impose the tax…Some countries took unilateral actions incurring double taxation and triggering counteractions. A case in point is France when it imposed a 3%-tax on giant digital platforms, the United States retaliated by imposing tariffs on French goods because almost all those platforms are American," the former vice minister of finance clarifies.

The Financial Times reported in January that the United States postponed putting into force tariffs on $1.3-billion worth of French goods that include handbags and make-up. The 25-percent tariff was declared after France levied digital tax in 2020.

The Organization of Economic Cooperation and Development (OECD) examines a multilateral solution for taxation of digital services. The European Union (EU) is preparing another bill in case negotiations within OECD fail. After demanding millions of euros in digital tax from giant players like Facebook and Apple, France agreed to pause until consensus is reached among OECD members. However, it intends to resume demanding the tax, if no multilateral solution is reached, according to The Financial Times.

Monayer clarifies that there is an orientation at present towards big online shopping platforms submitting sales declarations that also include sales that took place offshore. If they abstain, they would be subject to tax evasion penalties in the country where sales took place and their work can even be considered illegal.

That has to become an international bill the same as the permanent establishment (PE) principle has been adopted in taxation for foreign businesses in a given country. PE means that if a firm carries out work in a certain state exceeding a particular period of time, it must be subject to taxation in that country, Monayer explains.

The former vice minister of finance asserts that when it comes to digital tax, exchange of information, relevant to sales declarations submitted by online platforms, between countries is crucial to inhibit double taxation. Monayer highlights that Egypt is already part of exchange of information treaties.

The tax expert highlights that the big five tech corporates are Facebook, Amazon, Apple, Netflix, and Google, and that they are collectively dubbed FAANG. Monayer explains that those would be supposed to collect VAT from consumers, if an international bill is adopted.

The former vice minister of finance underlines that the tax is imposed in the country where the largest portion of "value creation" takes place. Usually, value creation mostly happens in the country where the product is consumed. That is why the "destination principle" is applied in international taxation allowing VAT to be collected in the country where a product is consumed.

Monayer elaborates that the revenues and costs of such giant corporates are hard to calculate so they would be subject to turnover tax, which is often a 1-3% tax imposed on the total amount of revenues.

Speaking of online ads, not only the digital platform will pay taxes but also the advertisers and such tax shall be collected by the tech company, Monayer notes. For instance, advertisers in Egypt pay a 20% tax when they publish advertisements in the newspapers, which collect the sum on behalf of the government. That also shall be indicated in the statements digital companies submit to governments. The same applies to content creators making money on such platforms such as Youtubers among others.

To sum up, giant digital companies shall be submitting sales statements to the governments of countries where their products are consumed, and hence, value creation mostly occurs. Subsequently, they would be paying a tax equivalent to a certain percentage – commonly 1-3% - of their revenues. In some cases, they would be collecting taxes on behalf of the government from individuals making money through such platforms, and businesses advertising their products.