Higher digital service tax costs in Tanzania?

Netflix and other streaming platforms have replaced the conventional cinematic / TV experience. It has been a long time since I visited a cinema to watch a movie – the preference now is to watch movies at the comfort of your home. The digital world is evolving continuously and at a faster pace. Transactions happening over the internet have increased exponentially – be it a sale of goods or provision of services. A service provider in China can easily reach Tanzanian customers through a digital platform.

Tanzania, like many other countries, did not have a mechanism to collect tax from non-residents providing such services.  However, the 2022/23 Budget read in June 2022 announced that measures in relation to non-resident digital service providers (“NRDSPs”) to (i) enable them to register and account for VAT (18 percent) and (ii) to also require them to account for  a new digital service tax (“DST”), charged at 2 percent.  Subsequently, on 1 July 2022 regulations were issued for both taxes, which required all existing providers of electronic services to have been registered by 31 December 2022.  At the end of 2022 the online portal for registration became available and a 30 December 2022 public notice issued by the Tanzania Revenue Authority (“TRA”) explained the NRDSP registration process.   So what is in scope with regard to electronic services? Well, it is quite broad, ranging from website hosting, software update services, imaging services, subscription based media, self-education packages, music, films, gaming activities and many more. So, yes the likes of Netflix, iTunes and so on will be covered.

Whilst the application of VAT on imported services is not a new concept, in practice it is only recently that its application has been extended by many countries to electronic services. By contrast, DST is a relatively new concept being a mechanism that many countries have recently adopted to tax NRDSPs; for example, Kenya introduced it in January 2021 (at a rate of 1.5 percent), other African countries with a DST include Nigeria, Tunisia and Zimbabwe.

So what might the challenges be with the implementation of DST?  From my side I have two concerns – firstly, relating to the lack of a threshold for application of the tax; and secondly, relating to the interaction of DST with global tax policy developments to tax digital services.

Currently, there is no threshold for DST registration in Tanzania hence any NRDSP providing electronic services to customers in Tanzania would have an obligation to register irrespective of size of turnover. By contrast reference to a threshold is common in many other countries including India, France, Italy, Nigeria and Zimbabwe.

The global tax policy challenge arises bearing in mind the development of the work on the so-called “Two-Pillar” (“2P”) model (being the OECD approach to address the tax challenges arising from the digitalisation of the economy). Pillar One (“P1”) is focused on the reallocation of (a portion of) the consolidated profit of a multinational enterprise to jurisdictions where sales arise as well as the standardisation of the remuneration of routine marketing and distribution activities. Pillar Two (“P2”), on the other hand, introduces a global minimum effective tax rate of 15 percent.  It will be interesting to see how P1 will interact with existing DST laws in countries that are part of the so called “Inclusive Framework” (“IF”) (a collaboration of various countries on the implementation of measures to tackle tax avoidance, improve the coherence of international tax rules and ensure a more transparent tax environment). In fact, the Two-Pillar model requires among other things that countries remove DST and other similar measures already in place. One example of the way forward is India, which has agreed a transitional arrangement with the USA (home to the majority of NRDSPs) to grant a credit for DST incurred up to December 2023 until the expected implementation of P1.

For countries that are part of the IF, it is pretty clear that P1 implementation will see the end of unilateral measures (DST regimes in these countries).  What is not so clear, is what will happen to countries that are not part of the IF (such as Tanzania) and therefore not obliged to adopt the 2P approach and whether in practice they will be able to continue with their independent DST measures without reciprocal action from the jurisdictions of the NRDSPs (the US in particular).

So, from a Tanzanian perspective what do I see going forward? Well, I guess the first thing might be as to whether this new cumulative 20 percent tax (18 percent VAT, and 2 percent DST) will result in an increase in the prices for services received through a digital marketplace.

Secondly, it is to keep an eye on where Tanzania sees itself in the context of the IF and whether ultimately it will become part of this global initiative to tax the digital economy. In the meantime, hope you enjoy your next movie on Netflix but do watch out for any price changes in your next subscription renewal!

Kunj Sinai is a Manger, Tax Services at PwC Tanzania.