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Potential measures to address the challenges of the taxation of the digital economy

The rapid pace of global digitalization has necessarily changed the way businesses operate, and consequently how tax revenues are generated. In the new digital landscape, businesses do not necessarily need to have a physical presence in a jurisdiction to operate and generate revenue there, and tax rules designed for the era of bricks-and-mortar businesses may no longer be fit for purpose. In Ghana where tax revenue contributes a relatively smaller percentage to the gross domestic product (GDP), this narrowing of the tax base is a concern that remains to be fully addressed.This article provides an overview of the emergence of the digital economy, the global response to its taxation, and suggested approaches for Ghana to adopt a comprehensive policy for the taxation of the digital economy.

 

Overview of the digital economy

Constant changes in technology have made it difficult to define what constitutes the “digital economy” as the space continues to evolve and new models are emerging all the time. However, in general, the digital economy can be broadly considered as all economic activities generated from the interaction of people, businesses, and systems through a digital infrastructure. This broad definition covers traditional business operations which may not ordinarily be seen as part of the digital economy, as it is increasingly difficult for businesses to operate in today’s environment without the use of any digital tools.Aside from the traditional income streams of selling goods and providing services, the digital economy may generate revenue from other sources such as advertising, sales of digital content, subscriptions, content or technology licensing, and exploitation of user data.Due to these new revenue sources and the lack of a physical presence, the digital economy can create a gap in the taxation of income. Traditional income tax rules which rely on physical presence as the basis for allocating taxing rights may overlook digital income streams because a physical presence is either not created, or is created in a location separate from where the income generating activities occur (“the nexus”). This poses a challenge to tax authorities everywhere who may still be relying on traditional tax rules.

 

Global responses to the taxation of the digital economy

To address the tax challenges posed by the emergence of the digital economy, the OECD/G20 Inclusive Framework on BEPS (“inclusive framework”) proposed the two-pillar solution. Pillar One allocates the taxing rights of profits from multinational cooperations to the markets where the revenue generating activities are carried out, regardless of whether the entity has a physical presence in that jurisdiction. This is to address the challenge of a business operating and earning income from a jurisdiction, but without creating any physical presence in that jurisdiction. Pillar Two includes provisions to ensure that multinational corporations are subject to at least a 15% effective tax rate on corporate profits in all jurisdictions in which they operate.

Aside from the inclusive framework, individual jurisdictions have introduced policies and new taxes targeted at bringing the profits derived through the digital economy within the scope of their domestic tax regime. Popular among the fiscal responses to the digital economy is the amendment of national VAT rules to tax the consumption of digital services, and new digital services taxes (DSTs), which have been introduced in many jurisdictions, including several African nations. For jurisdictions that are part of the inclusive framework initiative, DSTs and similar taxes are merely temporary measures, required to be repealed (subject to certain transitional provisions) as part of the implementation of “Amount A" of Pillar One.

 

Ghana’s framework for taxing the digital economy

Ghana’s Value Added Tax Act, 2013 (Act 870) requires nonresident suppliers of telecommunications services and electronic commerce to register for VAT to the extent that such services are provided for use or enjoyment in Ghana and not made through a VAT-registered agent in Ghana. Although this provision was effective as from 2014, it was only in April 2022 that the Ghana Revenue Authority (GRA) provided administrative guidelines for its implementation. Ghana’s parliament also passed the Value Added Tax Amendment Act, 2022 (Act 1082) in September 2022 to provide further clarity on the services covered for the purpose of registration by these nonresident suppliers. Act 870 treats all business transactions that take place through the electronic transmission of data over the internet as e-commerce, and this includes services such as social networking, online gaming, cloud services, video or audio streaming, digital marketplace operations, and online advertising services.

Implementation of this provision in Ghana imposes a consumption tax on domestic consumers of such services; however, a tax gap remains for the income generated by nonresident companies. Implementation of VAT on digitally supplied services gives the GRA an overview of businesses operating within the Ghanaian digital economy and how much revenue is generated from their activities subject to VAT. With an increasing number of jurisdictions implementing measure to tax profits derived from the digital economy, it is time for Ghana to take the next step and propose legislation that would tax the income generated by these entities from their activities conducted in Ghana, despite the lack of a physical presence.

A DST on income could take the form of a withholding tax, requiring residents making payments to nonresidents for telecommunications and e-commerce services to withhold a certain percentage of the gross payment. Alternatively, nonresident companies that generate income from the digital economy could be directed to pay a percentage of their gross income as income tax. The design of a DST regime in Ghana would require a careful review and targeted amendment of the existing income tax legislation or the introduction of specific new laws.

 

Conclusion

Although Ghana is not part of the inclusive framework, instead taking a “wait and see” approach on adopting the two-pillar solution, the government’s revenue demands and current economic pressures make it necessary to consider how income generated in Ghana through digital activities can be brought within the scope of the Ghanian tax system in the shorter term.Ghana has a target to achieve a tax-to-GDP ratio of 18%-20% by 2027. Achieving this target requires that Ghana captures every possible revenue stream, and digital economy activities remain a largely untapped sector for income tax. Instead of focusing solely on taxing the consumption of digital services, the burden of which primarily falls on already heavily taxed entities, in Deloitte Ghana’s opinion, the government should join its regional peers and introduce a comprehensive policy to bring nonresident telecommunications and e-commerce service providers into the tax net, and tax its fair share of the income generated from the country.

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