Can digital taxes help fund the Covid-19 recovery in emerging markets?

The following article is from Oxford Business Group’s new series on COVID-19 Economic Impact Assessment

With digital payment services and streaming platforms experiencing rapid growth during the coronavirus pandemic, governments in emerging markets are looking at introducing digital taxes as a way of expanding state revenue.

The pandemic and associated lockdowns have caused commerce to shift online, as consumer purchases are increasingly made through digital channels. Meanwhile, streaming networks have seen a significant uptake in traffic over the first few months of the year, as have online conferencing services.

In light of these trends – and the significant economic pressures associated with the virus – governments have been looking to enact or update digital tax policies to better reflect shifts in consumption patterns.

Worldwide momentum

In July Indonesia imposed a 10% value-added tax (VAT) on digital products sold by foreign companies. This tax covers streaming services – such as those offered by Spotify and Netflix – as well as applications and digital games.

The Indonesian government expects state revenue to drop by 10% this year, leading to a fiscal deficit of 5.1% – the largest in a decade. However, given that the country’s booming digital economy is expected to generate revenues of $130bn by 2025, the tax could significantly boost state coffers as officials look to support post-pandemic growth.

This development followed similar moves in India, where the government introduced a 2% tax on digital services provided by foreign companies. While covering streaming services, the law also taxes e-commerce revenues on sites such as Amazon.

Going forward, the government in the Philippines is reviewing a proposal that would tax online shopping, social media advertisements and video and music streaming, while similar proposals have been advanced in Kenya.

Digital taxation is also gaining traction in developed markets. France, which had been debating a tax on digital services for several years, announced in May that it would implement a levy by the end of the year.

Pre-coronavirus measures

Although the economic fallout of the pandemic has accelerated the introduction of taxes on digital services, some countries had already taken steps in this direction prior to the outbreak of COVID-19.

For instance, Malaysia introduced a 6% digital tax on January 1, while Singapore also expanded its good-and- services tax (GST) to include digital services at the beginning of the year.

Elsewhere, Norway was one of the first to include digital services in VAT rules back in 2011, at a rate of 25%. This was followed by similar moves in New Zealand, which extended its 15% GST in 2016, and Russia, which introduced a digital tax of 18% in 2017 that has since been revised upwards to 20%.

Opposition to tax reform

Such attempts to tax digital services have faced some opposition – both before and during the pandemic. This has largely come from the US, where most of the world’s largest digital firms are based.

In June the US Trade Representative, the government agency responsible for developing trade policy, announced that it was launching probes into a number of countries and trade blocs for implementing or planning to introduce new taxes on digital companies.

The country is investigating Austria, Brazil, the Czech Republic, the EU, India, Indonesia, Italy, Spain, Turkey and the UK amid concerns that taxes have been specifically crafted to target US companies such as Apple, Facebook, Google and others.

Furthermore, in mid-June international media reported that the US had suspended talks with France, Italy, Spain and the UK over proposed changes to global taxation law, warning that they could face increased tariffs if they pressed ahead with digital taxation plans.

The dispute threatens to derail international efforts to implement a new global tax framework for tech companies.

Prior to COVID-19 the Organisation for Economic Cooperation and Development (OECD) had been working with nearly 140 countries to rewrite global tax rules in response to the rising prominence of tech firms over the past few decades.

New digital platforms emerging

Parallel to this, the ongoing boom in digital services has led to an increase in local options in emerging markets.

In June, GoPlay, the video streaming service of Indonesia’s multi-purpose app GOJEK, announced that it had secured funding from Singapore’s Golden Gate Ventures and Chinese investment firm ZWC Partners. Although officially undisclosed, regional media reported the funding was to the tune of $15m.

This development is a seen as a vote of confidence in GoPlay, which was launched in September last year. Elsewhere, telecoms company Airtel Nigeria expanded into television services in January following thelaunch of its Airtel TV platform.

While there has been growth in some streaming services during the period of COVID-19 restrictions, that demand has not always translated into profits.

Regional media reported earlier this month that the Malaysian-headquartered, pan-Asia streaming service iflix is in talks to sell its operations amid persistent losses and debt troubles, while the company has ended its streaming operations in Bangladesh.

Notwithstanding such cases, the proliferation of local digital options is a positive indication of the digital economy growth potential in emerging markets.