Journal of International Economic Law, 24 March 2025
Par Karishma Banga, Alexander Beyleveld and Martin Luther Munu
Trading away tax sovereignty? How trade rules shape taxation of the digital economy in Africa
Abstract
The advent of digital and data-driven business models has heightened the risks of tax base erosion and evasion, adversely affecting revenue generation, economic recovery, and advancement of tax justice in African economies. We develop a framework examining how trade rules on services, electronic transmissions, and digital products shape the ability of African countries to tax their digital economies. We consider four types of taxation instruments: (i) corporate income tax; (ii) value-added tax; (iii) customs duties on electronic transmissions; and (iv) digital services tax. To illustrate the practical implications, we apply our framework to Kenya, Rwanda, and South Africa. These three case studies reveal that trade rules in services and electronic transmissions have a direct effect on the legal position of the country to tax its digital economy, whereas digital trade rules, such as those related to data flows, localization, and source code sharing, produce both indirect and administrative effects on tax measures. These rules can alter tax structures, taxation rights, data collection, and the capacity to monitor and implement tax measures.
Introduction
Digital technologies have rapidly changed the way businesses operate, produce, and sell their products across different sectors. Big multinational enterprises (MNEs) are at the forefront of this shift, selling both traditional and digital goods, as well as services like online advertising, algorithmic trading, and data mining. Effectively taxing this growing digital economy is critical for revenue generation and the post-pandemic economic recovery of developing economies as well as advancements in human rights through fair tax practices.1 However, the advent of digital and data-driven business models has only heightened the risks of tax base erosion and evasion, with revenues from digital activities being channelled to low-tax jurisdictions.2 Since traditional tax instruments, such as corporate income tax (CIT) and value-added tax (VAT), are no longer effective in accurately taxing the digital economy,3 countries are contemplating additional taxation instruments, such as a digital services tax (DST) and customs duties on electronic transmissions (CDET).
The African continent is at a critical juncture, with negotiations being simultaneously conducted on taxation of the digital economy and digital trade. Twenty-seven African countries4 are involved in the ‘Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy’ developed by The Organisation for Economic Co-operation and Development (OECD) and the Group of 20 (G20) in 2021.5 They are also considering the United Nations General Assembly’s (UNGA) tax resolution, aiming to enhance international tax cooperation.6 In terms of international trade, in February 2024, the African Union (AU) Assembly of Heads of State and Government adopted a Digital Trade Protocol (DTP) as an Annex to the African Continental Free Trade Area (AfCFTA).7 The AfCFTA DTP is an important legal instrument for harmonizing rules on promoting intra-African digital trade, defined in the protocol as ‘digitally enabled transactions of trade in goods and services that can either be digitally or physically delivered, and that involve natural and juridical persons’.8 Additionally, nine African countries are part of the Joint Statement Initiative on Electronic Commerce (E-Commerce JSI), showing a shared interest in discussing the ‘trade-related aspects of electronic commerce’ among 91 World Trade Organization (WTO) Members.9 Meanwhile, some African countries have, or are pursuing, individual free trade agreements (FTAs), such as the US–Morocco FTA or the ongoing talks on the US–Kenya FTA.
In this article, we explore how trade rules critically affect a country’s ability to tax its digital economy. We ask if, and how, trade rules on services, electronic transmissions (ET), and digital products affect four types of taxation instruments; (i) CIT; (ii) VAT; (iii) CDET; and (iv) DSTs. To illustrate what is at stake in practical terms, we use case studies of Kenya, South Africa, and Rwanda. Our rationale for choosing these countries is guided by three characteristics; firstly, these economies tend to be highly dependent on revenue generation. Tax revenue, as a share in GDP, stands at 27.1 per cent in South Africa, 16.5 per cent in Rwanda, and 16.8 per cent in Kenya.10 Secondly, the negotiations on digital trade and tax are likely to have critical implications for African countries, given that trade in digitally deliverable services (DDS)11 already accounts for a sizeable US$24 billion in Africa.12 As fiscal pressures mount, it is imperative that African countries beware the implications of digital trade provisions for their ability to tax the digital economy. Thirdly, the varied involvement of the chosen African countries in the Two-Pillar negotiations, the AfCFTA DTP, and the e-commerce JSI makes for interesting comparative cases.
The rest of the article is organized as follows. The section on Taxation of the digital economy explores the evolving approaches to taxing the digital economy. The section on Trade rules and taxation of the digital economy develops a conceptual framework on trade rules and taxation of the digital economy, drawing on the existing literature. A handful of recent studies have explored the tax dimensions of digital trade policies, including the analysis of how proposed global e-commerce rules could impede taxation of the digital economy,13 taxation of digital services in trade agreements,14 the development implications of tax-related provisions of digital trade rules under negotiation,15 and the legal issues on taxation of the digital economy under the General Agreement on Trade in Services (GATS).16 Our study contributes to this nascent literature by examining how trade rules affect the ability to tax the digital economy. Further, we add a tax dimension to the growing literature on the development implications of digital trade rules.17
The section on Illustrative case-studies from Africa applies this framework to the cases of Kenya, Rwanda, and South Africa. Both Kenya and South Africa are major players in different regional economic communities, and while Rwanda is not far off from Kenya geographically, it adds a different perspective as a least developed country. The section on Conclusion summarizes the study by offering policy recommendations for the African continent, and for developing economies broadly.