For most companies around the world, selling goods and services via the internet is an attractive business model. For one, digital transformation can ensure a company’s long-term survival by accessing the global market at minimal cost, and most governments don’t have the resources or laws to tax online revenue.
COVID-19’s acceleration of the digital economy brought the taxation problem into the spotlight. “If there were any lingering doubts about the necessity of digital transformation for business longevity, the coronavirus has silenced them,” said a May report by the law firm BDO United States. “With rare exceptions, operating digitally is the only way to stay in business through mandated shutdowns and restricted activity.”
However, successfully taxing the virtual world will prove tricky. “How to tax the digital economy is one of the difficult questions to be tackled,” wrote an undated post on the website of KPMG International Cooperative, an international professional services network.
The global e-commerce market was about $3.46 trillion in 2019, up from $2.93 the year before, according to research firm Digital Commerce 360. Meanwhile, the Federation of Egyptian Banks said e-commerce in Egypt grew from $560 million in fiscal year 2015/2016 to $3 billion last fiscal year. “Egypt [is] one of the most actively developing countries in the region both in affiliate marketing and e-commerce,” according to a report by Admitad, a think tank and marketing consultancy.
In 2018, the OECD, an organization of developed countries, published a report and interim recommendations on taxing the global digital economy but stopped short of suggesting permanent regulations that would require the approval of all nations. “Global consensus remains elusive on whether and how to tax businesses with a substantial digital footprint but no physical presence in a jurisdiction,” said the KPMG post.
Another issue is countries have widely varying tax laws. The United States imposes a sales tax. Europe, most of Asia, Africa, Australia and South America use a value-added tax (VAT). In the GCC not all members have income taxes or VAT. In July, Saudi Arabia increased its VAT from 5 percent to 15 percent in violation of the 2016 Common VAT Agreement, which fixed the rate at 5 percent. Bastian Moossdorff, a senior tax adviser at Baker McKenzie, told Gulf Business in May that even registration thresholds and the definition of “electronically supplied services” differ among GCC countries using VAT.
In 2016, the Israeli Tax Authority amended regulations regarding permanent establishment (PE) conditions, corporate tax and VAT for foreign companies offering digital services to locals. The amendments allow a digital company to have PE status even if it has no physical location or servers in Israel, according to a note from Orbitax, an Israeli tax firm. Once the state establishes PE for a business, it taxes them like other local establishments.
That same year, India instituted a tax on digital transactions called the Equalization Levy. The tax rate is 6 percent on online advertising services and applies solely to nonresident businesses, said Daniel Bunn, vice president of global projects at the Tax Foundation, a U.S. think tank. India plans to levy a 2 percent tax on e-commerce operators and suppliers. “The change will … essentially expand the equalization levy to nearly all online commerce by businesses that do not have a taxable presence in India,” he said.
In 2017, Australia announced a 10 percent tax on the “sale of electronic/digital services by nonresident providers,” according to a government statement. That includes paid streaming or download services, e-books, online professional services and cloud-based storage.
In 2019, the Zimbabwe budget included a proposal for a 5 percent tax on foreign digital companies or service providers making $500,000 or more in the country. It also would apply to e-commerce platforms providing services on behalf of international clients.
Since March, Turkey has been charging a 7.5 percent tax on online advertisements and sale of content. On April 1, the U.K. levied a 2 percent tax on online companies making GBP 25 million in the country and GBP 500 million worldwide from social media services, search engines or an online marketplace, according to its government.
Austria, Belgium, the Czech Republic, France, Hungary, Italy and Spain are taxing digital services at rates of 3 to 7 percent. Taxable services include online advertising, sales of user data and paid services.
Imposing a tax on online transactions could heighten tensions with the United States. The 2020 KPMG paper estimates that of the 120 to 150 digital companies that would be taxed, “about half [are] in the United States,” including Facebook, Google, Apple, Amazon and Microsoft.
A note by RSM, an accounting, tax, and consulting group, identified “one common cause for success that these companies share: mastering the art of tax avoidance.”
In June, the U.S. Trade Representative (USTR) office announced it is investigating India, Brazil, the EU, Indonesia, Turkey, and the United Kingdom “for imposing or considering digital services taxes that may affect American companies,” wrote The Hindu Business Line. On June 2, USTR Robert Lighthizer stressed: “We are prepared to take all appropriate action to defend our businesses and workers against any such discrimination.”
A few weeks later, CNBC reported France postponed its digital tax to 2021, despite Finance Minister Bruno Le Maire saying in May it would be launched this year, as reported by Reuters. CNBC said the delay came after the United States threatened higher taxes on French exports.
Later this year, OECD members, which include the United States, UK, and EU nations, will meet to discuss how to enforce a global digital tax. Dexter Thillien, a senior industry analyst at Fitch Solutions, told CNBC in May he wasn’t optimistic a deal could be reached.
The Egyptian government has tried to tax online platforms since mid-2019. “We are working on an e-commerce law that we will share with the public soon,” said Finance Minister Mohamed Maait at a press conference in July 2019. Among other things, that law would tax digital transactions using the VAT technical framework.
Emerging from the COVID-19 lockdowns, Egypt should expedite the implementation of taxes on digital transactions to increase treasury income. Developed countries see taxing digital transactions as an economic savior. “Using the EU budget to finance economic recovery from coronavirus may see Brussels taking an increased interest in the attractive potential tax base of e-commerce and digital services,” David Livingston, an analyst at research firm Eurasia Group, told CNBC.
The Egyptian government, however, should proceed with caution. On the one hand, RSM noted that digital taxes create a level playing field for businesses and increase government revenue. Both are essential to attracting investments. However, with most startups selling services and goods online to capitalize on Egypt’s fast-paced digital transformation, taxing them would increase their costs. Moossdorff of Baker McKenzie told Gulf Business: “These may require a balancing act of … an equitable tax system that ensures neutrality in the taxation of various business models (including traditional and digital) whilst facilitating ease of compliance for businesses.”