Digital Services Tax Emerging in Africa

Digitalization of the economy has caused quite a conundrum in the world of international taxation. Addressing the tax challenges raised by digitalisation is currently the top priority for the OECD/G20 Inclusive Framework, and has been a key area of focus of the Base Erosion and Profit Shifting (“BEPS”) Project since its inception.

17 Dec. '20 5 min. Patrick T.F. Schrievers

Under Action 1 of the BEPS Project, titled “Addressing the Tax Challenges of the Digital Economy”, the OECD has set out to establish a set of international standards to address BEPS in the digital economy. However, given that the work of the OECD/G20 Inclusive Framework is on-going, some countries have already undertaken unilateral tax measures to tackle the challenges posed by digitalization. Most recently (on 30 September 2020), the African Tax Administration Forum (“ATAF”) released its “Suggested Approach to Drafting Digital Services Tax Legislation” that proposes a Digital Services Tax (“DST”) of 1% to 3% on gross annual digital services revenue earned by a company or multinational enterprise (MNE) in any country. The key aspects of the proposal, which may impact European MNEs conducting business in Africa, are discussed in this blog. The blog also compares ATAF’s DST to a similar proposed article in the UN Model Tax Convention as well as the OECD’s approach towards addressing the tax challenges raised by digitalisation.

ATAF’s proposed DST legislation

ATAF’s proposed DST is not in the form of an income tax but a final withholding tax on gross turnover. The following digital services are proposed to be included under the DST legislation:

  1. online advertising services,
  2. data services,
  3. services delivered through an online marketplace or intermediation platform, and
  4. digital content services, online gaming services and cloud computer services.

This list is more or less similar to that proposed by the OECD/G20 Inclusive Framework in the Pillar I blueprint.

Further, the DST is proposed to be:

  • levied at a fixed rate (ranging between 1% and 3%, or at such other rate set by each country), calculated by reference to the consideration paid for those services (i.e. gross turnover attributable to the in-scope business activities); and
  • charged in addition to any income tax, and not creditable or eligible for any other type of relief against income tax.

Consequently, the proposed DST is not a tax covered by double tax treaties (“DTTs”) and therefore, countries can introduce the DST unilaterally, without the need to renegotiate their DTTs.

The member states of the East African Community have agreed recently to jointly develop strategies for taxing digital services revenue. Kenya, Nigeria, Tunisia and Zimbabwe are on the verge of implementing the DST, whereas some other African countries have already implemented the DST through value added tax (“VAT”) system.

UN Model Tax Convention’s “automated digital services tax”

In August 2020, the UN proposed to include a new Article on “Income from Automated Digital Services” in the UN Model Tax Convention. The proposed Article 12B allows a contracting state to tax income from certain digital services paid to a resident of the other contracting state on a gross basis at the rate negotiated bilaterally, but recommends a “modest” rate of 3% or 4% in order to prevent excessive or double taxation.

This “automated digital services tax” would be levied by the source state by way of withholding tax on the gross revenue at a percentage to be established during bilateral DTT negotiations. The tax would be levied on income from automated digital services, which would include any payments in consideration for any services provided on the internet or an electronic network requiring minimal human involvement from the service provider.

One of the criticisms levied against this proposed tax is that it only follows the location of the actual payment and does not regard where value is created.

ATAF’s DST versus UN’s Article 12B from Tax Base, Transfer Pricing and Tax Treaties Perspectives

  • Tax base: For both, the ATAF’s DST and the UN’s Article 12B, the tax base is gross turnover. However, Article 12B of the UN Model Tax Convention provides an option that a taxpayer can elect to pay tax at the country’s domestic rate on its qualified profits (or deemed profits), based on a formulaic approach. No such option has been provided under ATAF’ DST.
  • Transfer Pricing: ATAF’s proposed DST does not require countries to apply the arm’s length principle in order to compute the DST. However, under the proposed Article 12B of the UN Model Tax Convention, the arm’s length principle would apply in the case of deemed profits based on a formulaic approach.
  • Tax Treaties: The inclusion of income from automated digital services under Article 12B would ensure that these specific services are no longer covered by Article 7 (i.e.” business profit”)’. ATAF’s DST is a unilateral measure imposing a tax charge that is not covered by the DTTs, and hence, there would be a risk of heavy taxation (i.e. DST + income tax).

Comparison to OECD reports on addressing the tax challenges raised by digitalisation

ATAF’s proposed DST and the proposed Article 12B of the UN Model Tax Convention are substantially based on the OECD’s work on addressing the tax challenges raised by digitalisation. However, unlike the OECD approach, which also covers ‘consumer facing businesses’, ATAF’s DST and Article 12B are concerned only with the automated digital services and do not cover consumer facing businesses (i.e. businesses that sell goods and services that are primarily intended for consumers). Further, OECD Pillar I suggests a threshold of EUR 750 million in consolidated revenues for applying a digital services tax, whereas ATAF’s DST and Article 12B do not provide any threshold.

Implications for European MNE’s doing busines in Africa

  • MNEs may encounter cash leakage (WHT/indirect tax) and partial double taxation (outside the scope of DTTs with no corresponding credit/exemption available).
  • Reasonably speaking, tax disputes are inevitable but most African countries do not have the capacity to undertake arbitration procedures (even though there has been an improvement in international dispute resolution based on BEPS/MLI).
  • MNEs need to consider the interplay between the proposed DST and their transfer pricing policies. For instance, the interplay with standardized transfer pricing (blending approach) – substantiated with documents.
  • MNEs’ may wish to gross up such taxes with the total service payments, which will then be borne by the African companies responsible for withholding the proposed DST.


The information contained in this blog is of general nature and does not address the specific circumstances of any particular individual or entity. Hence, the information in this blog is intended for general informational purposes and cannot be regarded as advice. Although we endeavour to provide accurate and timely information and great care has been taken when compiling this blog, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. We do not accept any responsibility whatsoever for any consequences arising from the information in this publication being used without our consent.

Patrick T.F. Schrievers

Patrick T.F. Schrievers is a tax lawyer and member of the Dutch Association of Tax Advisers (NOB) and the International Fiscal Association (IFA).

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