African countries are missing out on significant tax revenues because multinational tech giants are failing to collect and pay VAT on services, according to new research.
A new report published by TaxWatch finds that Microsoft, Google and Facebook are not collecting VAT on sales made to customers in most African countries, even in some countries where they have a local office.
The companies say that they will only collect VAT and sales taxes in countries that have levied specific taxes on digital products, claiming that it is up to the customer to pay any taxes due.
However, analysis from TaxWatch shows that these companies should be required to register for VAT under existing VAT rules in many African countries if they make significant sales.
VAT, a tax on the final consumption of goods and services, is an important source of revenue for tax authorities. An analysis from the OECD shows that on average VAT accounts for 30% of tax revenues in Africa, as opposed to taxes on individuals, which make up just 15.4%. Taxes on corporations account for 18.6% of tax revenues on average.
Since 2013 a number of African countries have changed their laws so VAT is collected on products, such as advertising, sold to customers.
The report does not make any estimate of the amount of money that could be raised if digital companies registered for VAT, as this would require detailed knowledge of the amount of sales made in each country. However, evidence from countries that have enacted a digital sales tax shows that the gains could be significant.
In 2014 South Africa became one of the first countries in the world to introduce specific legislation on VAT and digital services. The South African Revenue Service has said that it has collected an additional R600m a year since the introduction of the rules.
TaxWatch Executive Director, George Turner, said: “Big tech has for years traded on the myth that because they invoice their clients from offshore, they somehow have no obligation to pay any taxes. Our research demonstrates that this simply is not the case. If these companies have made significant sales in any country that levies VAT, then they should register to pay VAT locally.
“Google, Facebook and Microsoft wouldn’t get away with such an approach in Europe or North America anymore.
“I would encourage tax authorities across the continent to cast a close eye on the activities of these companies in their jurisdiction, and pursue them for any VAT payments that should have been made. This is likely to be a far more significant issue than any corporate tax avoidance engaged in by tech companies, as VAT makes up a far higher proportion of tax revenues than corporate profits.”
When questioned on the findings of this report, a Microsoft spokesperson stated: “Microsoft is fully compliant with all local laws and regulations in every country in which we operate. We serve customers in countries all over the world and our tax structure reflects that global footprint.”
Google did not respond to our requests for comment.
The report is available on our website here and in PDF here.
This research was featured in Law360 and PQ Magazine.