In my last article, “Why put an end to VAT?”, I was determined to present an argument in favour of a Value Added Tax (“VAT”) regime, and provide evidence of the challenges of Sales Tax. This particular article was originally intended to deliver details of “sales tax by design”.
However, having fortunately received the announcement that Sales Tax would no longer be introduced I have modified my subject of conversation. For the avoidance of doubt, on 27 September 2019, in his inaugural 2020 National Budget speech, the Minister of Finance, Dr Bwalya N’gandu announced that Sales Tax would not be introduced and the VAT regime would be maintained.
The Minister stressed that his speech was not about transforming the tax regime but more about improving efficiencies within the current tax regime. That being said there were important changes made that have a serious impact on industries such as mining that were artfully pronounced. Separate concentrated evaluation is required to discuss these reforms, and I intend to share my thoughts soon.
However, in this editorial, I would like to discuss topical tax trends and tax challenges. It is obvious that heavy reliance has been placed on the mining industry to generate tax revenue for the Zambian Government. Zambia is among very few countries in the world whose mining tax regime has repeatedly and erratically been amended over the past decade. This is a sign that Zambian tax legislation, Regulations, and Statuary Instruments may be drafted to fix what is deemed a current problem and not prepared to adapt to trends, be forward-looking, and achieve equity and certainty.
Where is tax going?
It is important that we begin to look at our tax regime progressively and actively work alongside international organisations and Tax Institutes such as the Organisation of Economic Development (“OECD”), the United Nations (UN) and Tax Institutes worldwide to ensure that the Zambian tax regime is about fairness and up to date. Fiscal policies should include solutions to tackling current global tax challenges.
The digital economy
A buzzing discussion in the tax world now is how to tax the digital economy. Businesses are continually looking forward and considering strategies to adapt to global and economic trends.
Globalisation has brought about radical business model transformations as a result of the opportunity to reach markets across borders. In order to access international markets without difficulty, businesses have become digitalised and trade though e-commerce has skyrocketed. Direct sales from business to consumer have allowed consumer territories like Africa to access the latest products and services, as and when they are released.
The evolution of Information and Communication Technology (“ICT”) has been characterised as rapid technological processes that have brought down prices of ICT products and spurred the use of technology in business models.
Globally, all sectors of the economy have adopted ICT to enhance productivity, enlarge market reach and reduce operational costs. This adoption of ICT is illustrated by the spread of broadband connectivity in businesses, which includes businesses operating in almost all member countries of the OECD and UN.
The widespread adoption of ICT, combined with the rapid decline in price and increase in performance of these technologies has contributed to the development of new activities in both the private and public sector. Together, these technologies have expanded market reach and lowered costs, and have encouraged the development of new products and services (OECD, 2019). These technologies have also changed the ways in which such products and services are produced and delivered, as well as business models used in companies. The digital economy has similarly allowed for the innovation in financial transactions and digital currencies such as bitcoin.
The digital economy brings excitement to business transactions and access to all four corners of the globe. In addition, it creates many benefits including business growth and flexibility in business operations.
Some schools of thought suggest that the digital economy should be viewed as a stand-alone economy, but in my opinion, this is not correct, the digital economy should be viewed as an extension of business strategy.
Tax challenges
At the same time, the digital economy gives rise to a number of challenges for policymakers. The global challenges extend well beyond domestic and international tax policy and touch upon areas such as international privacy law and data protection, as well as accounting and regulation (OECD, 2019).
From a strategic tax policy perspective, the uptake of digital technologies may potentially constrain the options available to policymakers in relation to overall taxes imposed on both top-line and bottom-line figures. For years, companies have contributed to ZRA through a range of indirect and direct taxes. The development of the digital economy has the potential to enable Multi-National Enterprises (MNEs), and general online traders, to operate in ways that avoid or considerably reduce their tax liability within the jurisdictions they operate such as Zambia. This may increase the pressure on a smaller number of taxpayers to compensate for a loss of Government revenue. Furthermore, it highlights the importance of designing corporate income and consumption tax systems that promote growth and investment, while reducing inequality and establishing a level playing field amongst industries (OECD, 2019).
Taxing income generated from digital sales is not only complicated but can also be prejudiced to jurisdictions where suppliers are resident. In an effort to regulate the taxation of the digital economy a task force was constituted by the OECD Base Erosion Profit Shifting (“BEPS”) inclusion framework[1] to prepare an analysis on the digital economy highlighting tax exposure and tax risks.
It is commendable that the members of the inclusion framework, which include Zambia, have been presented with an opportunity to contribute to the analysis by providing their opinion on tax challenges originating from each respective jurisdiction.
Suffice to say, the consistent challenges that are faced by African Tax Authorities may remain under the digital economy.
A common challenge faced by African Tax Authorities is poor administration and the inability to capture a wide tax base, this means failure to identify taxpayers and manage systems efficiently.
The OECD’s program of work on the digital economy looks at the revised Pillars, one and two. Pillar one reviews technical issues grouped into three building blocks; new profit allocation rules, new nexus rules (or in simple terms permanent establishment rules) and new taxing rights. Pillar two, now under the new name “Global anti-Base Erosion” GloBE proposal, reviews the income inclusion rule and the tax on base eroding payments. Basically the policy rationale for the GloBE proposal is to ensure that all the income of an MNE is subject to tax on at least a minimum effective rate of tax in a country such as Zambia.
The issues raised by the OECD under the two pillars are important because Africa is a land of consumption where the growing population of consumers including the fast-growing young professionals are continuously accessing goods and services through the internet. The aim of these discussions is to have a global consensus based proposal that meets the needs of African Countries. Our participation as a country is essential in these discussions to ensure that both developed and underdeveloped nations equally benefit from revenue generated through e-commerce.
Nations such as Kenya who have a highly advanced e-commerce industry have paved the way for doing business digitally through applications such as M-Pesa. However, monitoring mechanisms have proved difficult with the growth of e-commerce. Ironically Zambia’s tax regime is far more advanced than Kenya’s (with respect to OECD BEPS Action plans), but administration of the Zambian tax system falls short.
Learning point
It is important to note that if fundamental tax systems are not effective, there is a risk that any new OECD or UN influenced policy shift will not achieve its desired outcome. Further inconsistent and incoherent tax legislation causes confusion and is a deterrent for voluntary taxpayer registration.
Zambia must maintain a balance between responsiveness to global trends and what is happening locally (economically). I.e. keeping an eye on monetary and fiscal policy whilst looking at opportunities to broaden the tax base through the digital economy (if disposable income is already being squeezed, those in formal employment may opt to increase participation in the informal economy where monitoring of financial transactions is already a challenge).
In addition to participating in international tax dialogue, ZRA should take the lead in collaborating with regional Revenue authorities like the one in Kenya,
Year on year ZRA struggles with administrative challenges, this is evident in the inefficiencies in the VAT regime such as poor management of VAT refunds and failure to complete basic exercises such as individual Tax Payer Identification Number registration timely to name a few.
The use of ICT is not only beneficial to commercial businesses, all organisation should adopt digital operations to improve efficiency, access important information speedily, and hasten tax processes such as registration and compliance. Furthermore, ICT should encourage the use of integrated systems, for instance, Ascyuda and ZRA. Most importantly ICT can be used to achieve the recurring objective – to widen the tax base.
The fast growth of the digital economy should be an indication that ZRA needs to have systems in place to adapt to change swiftly. Yes, the digital economy does present immense opportunities to commercial businesses but most importantly it allows for policymakers and tax professionals to be innovative, open-minded and engage with peers of multi disciplines to support the continuous improvement of tax in Zambia.
Towera Nkanza is a Tax Manager with KPMG Zambia. The views expressed in this article are her own and not necessarily those of KPMG
Reference
OECD (2019), OECD/G20 Base Erosion and Profit Shifting Project – Addressing the tax challenges on the digital economy, OECD Publishing, Paris. https://doi.org/10.1787/ctt-2018-en
[1] OECD/G20 Base Erosion and Profit Shifting Project – Addressing the tax challenges on the digital economy.