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Should Government Tax Online Services?

Thursday August 29 2019

By JOHN WALUBENGO
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The question of whether or not to tax online services depends on the definition of what an online services is.

In the broadest definition of the word, an online service is any service delivered over the internet. At the highest level, this would include voice, video and data services.

SUBSCRIBERS

Traditional providers of these services, namely telcos and ISPs are already taxed and so that may not be the target of the upcoming policy to tax online service providers.

The target group for the new tax bracket would be Netflix, YouTube, the Facebooks, the Googles, and the Ubers of this world.  Essentially, the target group is the global digital players with consumers within the local or domestic markets.

It is a fact that these players make insane amounts of money, largely from selling advertising services to their millions if not billions of subscribers scattered across the globe.

They however only pay tax to the countries in which they are headquartered.

This means that Kenya and most of the emerging markets do not get to benefit from this tax income – even as most of the new consumers of these digital services are from these emerging markets.

So a deliberate policy to tax these services does seem fair and timely, particularly because other developed countries in Europe are considering taxing these largely American digital companies.

It is however quite easy to publish tax law requiring these digital companies to remit taxes based on the number of users they have in Kenya. The bigger question revolves around implementation.

Just because Europe or China can force Netflix, Facebook or Google to pay tax in their jurisdiction does not necessarily mean Kenya can do the same.

COUNTERPRODUCTIVE

The incentive to operate in the lucrative European or Chinese markets makes it easy for these digital giants to comply with any tax laws proposed in these markets.

Kenyan or African markets on the other hand may have a promising number of current and future users; they do not however translate to significant advertiser revenues.

In other words the digital service providers may weight the cost benefit of paying the tax demanded vis a viz the advertisement revenues accruing from the African market.

If it is not worth their time and money, many of the giant digital players may opt to move out of the African Market.

Already there are video clips on the internet that do not ‘play-back’ to African viewers simply because they find our ‘eye-balls’ not worth the traffic load on their servers – given that we rarely click on the adverts let alone buy products featured on these free online services.

A poorly thought out tax regime on online services may in the long run be counterproductive if majority of the global players chose to opt out of the African markets.

One maybe tempted to patriotically shout that these global digital players must pay tax or go away.

LOCAL PRESENCE

However, not having Netflix, Google, Facebook, WhatsApp and others in your domestic market may translate to lower benefits to the consumers when compared to the tax the government maybe chasing.

I am not proposing that these players should not pay tax.  Am simply saying there could be better ways to extract move value from them than simply trying to tax them.

Netflix for example has recently started investing in West African Content. What policies can we have to attract Netflix to start producing East African Content?

That way, they create a local presence has presents a broader tax regime that applies to would apply to the whole body corporate, PAYE, VAT and others as opposed to having a single focus of taxing only the online service.

Such an approach to digital services may provide better returns.  After all, we are in a global market place and digital service providers would simply relocate or simply pass on the tax portion to the local consumers.

Ultimately, Kenya would be taxing and punishing its citizens rather than the digital service providers.

Mr Walubengo is a lecturer at Multimedia University of Kenya, Faculty of Computing and IT.

Email: [email protected], Twitter: @Jwalu