The emerging threats of e-commerce to taxation in Ghana (I)
The high usage of e-commerce in developing economies is gaining prominence among retailers and consumers. It is rapidly altering the ways in which businesses, consumers and governments are interacting among themselves.
Unlike other developed countries which have experienced rapid growth in e-commerce, the tendency for apt increase in developing countries cannot be over emphasised.
In their 2015 information economic report, the United Nation Conference of Trade and Development (UNCTAD) estimated the global value of business-to-business (B2B) e-commerce to have exceeded US$15 trillion whiles the global business-to-customer (B2C) accounted for US$1.2 trillion in 2013.
The report further revealed that more than three quarters of the B2B ecommerce were accounted for by the United State of America (USA), United Kingdom of Great Britain, Northern Ireland, Japan and China. In the case of B2C e-commerce, China emerged as the largest global market measured both by online customers and revenue.
Unfortunately, Africa account for only two per cent of the global value however, it has enormous potential to grow. Currently, Africa e-commerce is estimated over US$8 billion and is projected to soar to US50 billion in 2018. Considering the rapid switch from physical market to e-markets, taxation of revenues from e-commerce will become unnecessarily sophisticated necessitating the possible tax losses to various economies even though some countries have been able to address tax related issues in e-commerce.
Unlike taxes from real markets, there seems to be no clear answer to whether e-commerce companies could be evading taxes. In Ghana, it’s worth asking if our tax laws have adequately addressed e-commerce transactions.
If it has, then one may ask if the Ghana Revenue Authority (GRA) is well-equipped and resourced to mitigate any threat from e-commerce. In fact, it is from this background that this article sought to assess the potential threat of e-commerce to tax revenue in Ghana.
Before assessing the potential threat of e-commerce to tax collection, it will be expedient to explicate the concept of e-commerce. The Organisation for Economic Corporation and Development defined e-commerce as: “the sale or purchase of goods or services, conducted over computer networks by methods specifically designed for the purpose of receiving or placing of orders.
The goods or services are ordered by those methods, but the payment and the ultimate delivery of the goods or services do not have to be conducted online. An e-commerce transaction can be between enterprises, households, individuals, governments, and other public or private organisations. To be included are orders made over the web, extranet or the method of placing the order.
The type is defined by the method of placing the order. To be excluded are orders made by telephone calls, facsimile or manually typed e-mail”
For the purpose of this article, the concept of e-commerce will be limited to the purchases and sales of goods and services conducted over the global computer network applications using multiple devices, including electronic data interchange (thus laptops, personal computers, mobile phones). The four major framework of e-commerce UNCTAD identified are the B2B, B2C, C2C and B2G frameworks.
The B2B framework (thus business-to-business) involves business transactions among companies and normally operate within the distribution chain. For instance, a business transaction between a manufacturer and a wholesaler, or between a wholesaler and a retailer.
It has been revealed that B2B e-commerce offers greater potential benefits for small and medium enterprises (SMEs) than any other e-commerce and account for majority of e-commerce globally. B2C (thus business-to-customers) involves the direct selling of goods and services to customers via ICT networks.
This is facilitated through the traditional bricks-and-mortar retail or manufacturing firms that add an online sales networks to customers.
Some of the wide range of channels deployed by B2C e-commerce to reach customers include crowdsourcing platforms, social networks, dedicated e-commerce websites and mobile applications. On the other hand, C2C is the modern version of using classified advertising section in a local newspaper or going to auction.
It covers online auction platforms and sales within online communities by offering opportunities for informal enterprises to engage in e-commerce. B2G e-commerce are similar to B2B except that the buyer in this case is a government entity, as in the case of a public e-procurement. It is clearly evidenced that the role of ICT applications has changed the phase of the entire value chain process resulting in a shift towards e-commerce which has transformed the behavior of businesses and customers.
The figure below is the pictorial view of e-commerce transactions among businesses and customers:
As a customer, purchasing goods on-line normally takes four processes thus the information, agreement, transactions and delivery processes.
At the information stage, the customer browses the various e-platforms to solicit information for the purpose of comparing prices and quality of products. At the second and third stages, online applications and payment solutions represent alternative solutions to having to visit a shop or making a phone call, using cash or paying by ATM cards (credit/debit card) at the shop in question. Finally, some products can be delivered digitally (example, downloading an e-book) as opposed to physically (shipping a book).
Tax and Legal implications
Considering the complex nature of taxation in cyberspace, it makes it extremely difficult for tax authorities to adequately monitor the operations of e-commerce companies. Most e-commerce companies in countries such as India, the United State and some European countries have managed to avoid tax. This arises from the worldwide nature of online business transactions which is characterised by “jurisdiction” of the company. It makes it difficult for tax authorities to levy e-commerce business because they are borderless and can sometimes exist almost totally in cyberspace by using technological tools to interact with their stakeholders.
For instance, revenues generated from advertisement by companies like Google, YouTube and yahoo are not liable to pay tax in Ghana due to principles of permanent establishment, sales points, and product and income classifications. In fact, e-commerce allows businesses to generate revenue without any physical presence in a particular country making it difficult for tax administrators to levy and collect taxes from their operations.
To address the menace of e-commerce to various tax authorities, the Ottawa Conference was organised by the Organisation for economic Corporations and Development (OECD) to study and establish new emerging ways of conducting businesses and the conventional taxation principles that should be applied to e-commerce among countries.
Under the OECD model income tax convention, in the event a company is deemed under an indigenous law to be a resident of more than one country, it will be considered to be a resident of the country in which its place of management is situated.
To be specific, the location of effective management is recognised to be the place where managements and boards of directors meet to formulate and make top-level decisions.
In situations where these individuals transact their activities in their normal decision-making processes from different countries through online platforms, it becomes difficult to identify the place of effective management. In such circumstances, the OECD has suggested a company’s residence status to be: The country with which its economic relations are closer;
The country in which its business activities are primarily carried and; The country in which its senior executive decisions are primarily made.
This explanation to the place of effective management will probably remain the main focus in determining whether the physical presence of a company will trigger source-based tax liability in the context of e-commerce. The OECD model treaty underscored the physical presence of companies to constitute fixed place of business through which the business of an enterprise is wholly or partly undertaken.
Secondly, when a person other than an agent of an independent status is acting on behalf of an enterprise and has, and habitually exercises, in a contracting state an authority to conclude contracts that are binding on the enterprise.
To meet the test for a fixed-place-of business, the OECD provided the following three conditions: There must be a distinct place, such as premises, or in certain instances, machinery or equipment ("place-of-business test"); It must be established with a certain degree of permanence ("permanence test") and; Business must be carried on through the place, usually by personnel of the enterprise ("business-activities test").
Furthermore, the treaty provided that although human beings can be a "place of business" for tax purposes, customers would qualify only if they could be classified as agents. However, because they are not representatives of the company in any way, they cannot be agents.
In addition, unless the company laid its own cables and set up its own computers for customers to use in the foreign country, these would not qualify as a place of business. A web page may satisfy this part of the analysis if the actual purchase and sale were considered to have taken place through the web site.
The Ghanaian experience
It is an undeniable reality that the swift emergence of e-commerce will change the physical nature of business transaction in Ghana even though, the phenomenon is not as swift as other developing countries like South Africa, Tunisia and Nigeria. Currently, there are twenty (20) e-commerce websites in Ghana providing a platform where goods can be bought online and delivered to customers’ doorstep.
Apart from these indigenous Ghanaian e-commerce enterprises, it is estimated that customers in Ghana transact businesses with hundreds of international online companies. Today, it is easy to place an order and have the product delivered in your place of destination through e-commerce in Ghana.
The most critical question to ask is whether the GRA has the capacity to track the volume of e-commerce transactions in Ghana? How do they assess the revenue of the indigenous and the numerous international on-line companies which generate revenue in Ghana? A quick look at the volume of transactions by the indigenous on-line companies could easily suggest low revenue as compared to their international counterparts however, I wonder if the country has taken critical look at the tax implications of these transactions and whether the existing tax laws are adequate to cover e-commerce.
As a citizen, I have bought and paid for goods and services online and, I always wonder if the government earns any tax revenue on it. Whereas the profits of Ghanaian private Universities are taxed, international online universities which operate without physical existence in Ghana have field day to operate without paying taxes.
Registered Ghanaian businesses levy VAT on sales but what about these e-commerce businesses? In the next part of this article (part II), a contextual analysis of the Ghanaian tax regime vis-à-vis the USA and Indian tax administration in connection with e-commerce businesses will be reviewed.