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Debate rages as governments eye excess digital profits

By Adeyemi Adepetun and Helen Oji
01 September 2020   |   4:31 am
As part of measures to widen tax nets in Nigeria and other African countries, the need for countries to invest in technologies and track digital transactions has been echoed.

• MNOs claim N5.75tr tax payment since 2001 • Sector decries impact of 39 taxes, levies
• Excess profit already taxed, says FIRS • Upward review will turn off investors, economists insist

As part of measures to widen tax nets in Nigeria and other African countries, the need for countries to invest in technologies and track digital transactions has been echoed.

This formed part of observations made at the just concluded meeting of the African Tax Administration Forum (ATAF) and the African Union Commission (AUC), with the support of the African Development Bank (AfDB), the 4th High-Level Policy Dialogue under the theme: ‘Taxing Rights For Africa In The New World and Effects Of Covid-19: The Role Of Tax Policymakers And Tax Administrators,’ held virtually in Addis Ababa, Ethiopia.

Those who led the charge were the Executive Secretary, ATAF, Logan Wort; Chairman, ATAF Executive Council, Muhammad Nami, and Commissioner of Economic Affairs, African Union Commission, Victor Harison.

They noted that the COVID-19 pandemic had brought to the fore the focus on the rapidly growing shift to digitalised economy across the globe. The social and economic lockdowns imposed by government worldwide has pushed many individuals and companies onto online platforms to conduct their business.

While other sectors of the economy have come to a standstill, the digital sector has boomed. This has huge implications for business models going forward and makes it even more urgent that solutions be found for the taxation of the digital economy that are equitable for source and market jurisdictions.

In Nigeria, for instance, amidst a general downtrend across sectors leading to a dip in the country’s Gross Domestic Product (GDP) by six per cent, the telecommunications sub-sector shone in the second quarter of this year as it grew by 18.1 percent. This performance led to a 15.09 percent growth in the real GDP of the Information and Communications Technology (ICT).

Economy experts noted that the performance of the telecoms sector was not unexpected, as it remained the only active sector when the economy was shut down in the second quarter due to the COVID-19 pandemic. Interestingly, it is expected that the growth will be sustained as the telecommunications industry remains a major driver of the economy even before the pandemic.

According to the National Bureau of Statistics (NBS), the ICT sector contributed 14.06 per cent to total nominal GDP in Q2 2020, higher than the rate of 13.83 per cent recorded in the same quarter of 2019 and also higher than the 10.31 per cent it contributed in the preceding quarter.

AUC noted that Africa’s GDP growth was projected to contract by between -4.9 per cent and -2.1 per cent in 2020, which would lead to a reduction of between $135 billion and $204 billion from pre-COVID–19 GDP of $2.59 trillion.

AUC said African countries were already reporting a reduction in tax revenues, especially from the non-digitalised sectors. It pointed out that the decline in the prices and demand for commodities and the impact of the pandemic on the travel and tourism sectors, which African countries mainly depend on for tax revenues, led to significant loss of revenue losses.

The body submitted that in the light of this crisis, it was imperative that African policymakers respond with heightened urgency to the issues raised by the impact of the COVID-19 pandemic on African economies and take a closer look at the proposals for the taxation of the digital economy and their likely implications for revenue collection for the continent’s states.

AUC said African countries must rethink their economic and fiscal policies to ensure that the recovery after COVID-19 is faster, with a more significant impact on the lives of their citizens.

Regarding tax policy and tax administration measures, AUC said it had become critical that tax practitioners on the continent collaborate and pursue tax measures to shore up revenue that will foster economic development and bridge the gap that would follow reduction in aid.

The body pointed out that on the table as a source of untapped revenue must be businesses in the digital economy, which have a significant economic presence in African countries and benefit from economic activity but have little obligations to pay tax because they do not have physical presence in these countries.

This has become even more urgent as the COVID-19 crisis has increased dependency on digital services in the face of social distancing. For example, in the last few months, there has been a boom in adoption of video conferencing services like Zoom and Microsoft Teams. As African citizens continue to acquire more digital services, the growth, expansion and remote presence of digital multinationals in Africa, will continue to impact tax revenues across the continent.

Reacting to this development, President, Association of Telecommunications Companies of Nigeria (ATCON), Olusola Teniola said digital economy faced a multitude of fees, levies, charges and taxes that impact negatively on profit margins.

According to Teniola, the industry would not support excessive tax, as it would add more burdens to consumers desirous of cheaper internet access and lower cost of data. He argued that additional digital taxes would increase costs of doing business online and create affordability issue amongst end users.

Teniola said looking at the totality of taxes, licensing fees, spectrum charges, CIT, AOL, ITF, among others since 2001 when the Digital Mobile Licence (DML) was issued, the sector must have paid between N3.5 trillion to N5.75 trillion to governments.The ATCON president noted that it was hard to see why government was not giving incentive to the ICT ecosystem instead.

“We still need at least 120,000km of optic fiber across the breadth of our country, we still require 90 per cent 4G penetration, we still need schools connected, we still need hospitals brought online and we have growing and expanding youth unemployment.

“What we don’t need are additional taxes but policies that address infrastructure deficit and the creation of jobs by spending on building a Digital Economy. We encourage the Ministry of Finance and Budget Planning to collaborate with the ICT ecosystem in creating jobs and those jobs created will bring in PAYE and CIT taxes to the treasury,” he stated.

To cushion the effect of the pandemic on the sector, the ATCON boss wants government to resolve the Foreign Exchange (FOREX) challenge. He said the ICT ecosystem heavily relied on importation and access to FOREX to purchase both hardware and software to make the industry needs readily available.

According to him, the removal of multiple taxes and harmonisation of taxes should be reviewed by the Minister of Finance to provide a one-stop shop as recommended by the Nigerian National Broadband Planning committee (NNBP 2020-25) to the Federal Government. President, National Association of Telecoms Subscribers of Nigeria (NATCOMs), Deolu Ogunbanjo, noted that increase in tax on digital ecosystem could trigger job losses.Ogunbanjo said government should not burden with multiple taxations.

The Guardian gathered that about 39 different taxes were currently imposed on the sector. These include Right of Way (RoW), Fumigation, Effluent Discharge, Aviation Clearance, Building Permit, Withholding Tax, PAYE, Site Inspection Fee, among others.

Joining calls for no tax, the Global System for Mobile Telecommunications Asociation (GSMA) said the positive contribution of the mobile sector to the economy is well recognised. It, however, noted that the tax treatment of the sector is not always aligned with best principles of taxation, and this may have a distortive impact on the industry’s development.

GSMA noted that countries with higher taxes and fees would likely have relatively low levels of readiness for mobile Internet connectivity,
In an interview with The Guardian, GSMA Head of Africa, Akinwale Goodluck, said the telecoms body would oppose moves by people/government to impose excessive tax on the telecoms industry.

“For instance, you are taxing mobile like it is a seen product. There are industries over the world that government typically taxed because it is to discourage certain behaviour. But mobile is an enabler, so it should be encouraged.”

From the Federal Inland Revenue Service (FIRS), the Acting Co-ordinating Director, General Services, Innocent Ohagwa, said there were no considerations for an upward review of tax structure for telecoms, stating that existing tax laws already made provisions on how to tax excess profit. According to them, FIRS will monitor the sector appropriately to ensure cost does not erode the profitability.

“The law is not discriminatory. The law is already on ground to tax every company or sector according to profitability.

“Ours is to ensure the cost they are booking is not capable of eroding their profit. The revenue service would monitor the sector closely and scrutinise their returns diligently.”

Professor of Economics at Babcock University, Segun Ajibola, maintained that any upward review of telcos taxation aside the statutory levy would be disincentive to investment.

“I do not succumb to any charge or levy on telecoms operators besides those that are statutorily allowed. Otherwise, it becomes a disincentive to the operators and akin to killing the goose that lays the golden egg.

“The telecoms industry remains one of the few vibrant industries in Nigeria’s economy. The reasons for this are not far fetched. The Nigerian population, size and structure of the business activities, the depth of the commercial segment, all account for the good performances of the telecoms sector.

“This should not attract any punitive measure from the authorities. Nigeria should continue to nurture the telecoms industry for sustained good performances.

“So long they keep meeting their statutory responsibilities to the state and contributing to Nigeria’s GDP, tax revenue, employment generation all with the attendant multiplier effects on the other sectors of the national economy, the country should feel contented with that,’ he said.

A former President of the Chartered Institute of Bankers of Nigeria, Dr. Uche Olowo, said existing tax template should be followed despite the amount of profit made by the firms at the end of any financial year.He pointed out that any increment outside what is currently obtainable would hamper investment in the sector.

Olowo argued that the industry could be persuaded to engage more in Corporate Social Responsibilities (CSR), especially in the rural areas through moral suasion.

An independent investor, Amaechi Egbo admitted that the nation’s tax-to-GDP ratio is relatively low when compared to other emerging countries. He argued that any further upward review for the telcos would be equivalent to double taxation, citing the withholding tax on dividend being collected by government and other charges paid to regulators.