A VAT Digital Toolkit Will Help Tackle Africa’s Tax Challenges

The VAT Digital Toolkit for Africa was produced through a partnership of the OECD, World Bank Group, and the African Tax Administration Forum. It’s the last in a series of three regional value-added tax digital toolkits, following the publication of editions for Latin America and the Caribbean and for Asia-Pacific.

The project to produce these regional toolkits was a direct response to interest from a growing number of countries—particularly developing and emerging economies—for more detailed practical guidance on implementation and administration of the Organization for Economic Development and Cooperation’s international VAT standards and recommendations.

This work belongs to a wider OECD strategy to address the tax challenges arising from the digitalization of the economy.

Importance of VAT in Africa

VAT is a major revenue source for most jurisdictions in Africa, representing on average over one-fourth of total tax revenues on the continent, ahead of corporate income taxes and personal income taxes.

VAT constitutes a greater proportion of total tax revenues on average in Africa than in Asia-Pacific and in OECD member countries, while representing a similar share of total taxes in Africa as in Latin America and the Caribbean.

In 2020, VAT amounted to 27.8% of total tax revenues across the 31 African jurisdictions that featured in the OECD’s Revenue Statistics in Africa series in 2022.

Growth of Digital Trade

Safeguarding these crucially important VAT revenues in economies that are being transformed by digitalization and globalization is a priority for many governments in Africa.

Africa has experienced rapid e-commerce growth in recent years, and the continent holds great potential for further strong expansion of digital trade. The number of African consumers making online purchases increased significantly between 2014 and 2018, at a higher annual average growth rate of 18%, compared to the global average of 12%. This number is expected to almost double between 2020 and 2025, to reach more than 500 million shoppers. Forty percent of the African population is expected to shop online by 2025, compared to just 13% in 2017.

The outbreak of the Covid-19 pandemic was an important driver for continued strong e-commerce growth in Africa. The pandemic accelerated the adoption of digital technologies by individuals and businesses, leading to a significant increase in digital consumption globally.

Challenges for VAT Systems

The strong growth of digital trade has created challenges for VAT systems globally, and in Africa particularly. Traditional VAT rules often lack effective provisions to impose the tax on supplies that don’t require the supplier to be physically present in the jurisdiction of its customers, leading to no, or inappropriately low, amounts of tax being levied.

There has been strong growth in the volume of imports of low-value goods from online sales, on which VAT isn’t collected effectively under the existing rules and procedures, and which therefore often enter jurisdictions untaxed.

Where there is no effective VAT reform to address these challenges, continuous digital trade growth causes increasingly significant VAT revenue losses. There is also unfair competitive pressure on domestic businesses that can’t compete against the continuously rising volumes of online sales by nonresident suppliers on which no, or inappropriately low, VAT is levied.

Governments worldwide have recognized that the VAT challenges created by the digitalization of the global economy require a globally coordinated response. The OECD has delivered a comprehensive internationally agreed policy framework for addressing the challenges, reflecting broad consensus among tax authorities worldwide.

The core standards and principles that lay the foundation for this policy framework are included in the International VAT/GST Guidelines and in Addressing the Tax Challenges of the Digital Economy, Action 1—2015 Final Report. These OECD standards and recommendations have already been implemented in close to 90 jurisdictions worldwide, including Ghana, Kenya, Nigeria, South Africa, and Uganda.

VAT Digital Toolkit

The new toolkit is directed at all types of e-commerce and takes account of Africa’s specific needs and circumstances. It covers all the key design, administrative, and operational elements of implementing major VAT reforms for the taxation of international e-commerce, including:

Policy design and legislative reform
Building the infrastructure to support registration and ongoing compliance processes
Communication strategy
Effective audit and risk management strategies, including concrete measures to tackle VAT fraud associated with online trade

The toolkit has been developed in close consultation with tax administrations across Africa. It provides comprehensive and detailed guidance for the policy design, implementation, and operation of a comprehensive VAT strategy targeted at digital trade in Africa. It’s based on the internationally agreed OECD policy framework and draws on the expertise and best practices from jurisdictions that have successfully implemented these standards:

Sections 2, 3, and 4 provide a detailed analysis of the various components of the recommended policy framework for the application of VAT to digital trade, and practical guidance for their implementation in light of the specific challenges, opportunities, and circumstances in Africa. They focus respectively on internationally traded services and digital products, on importations of low-value goods resulting from online sales. and on the sharing and gig economy.
Section 5 presents detailed guidance on the administrative and operational implementation of the recommended policy framework for collecting VAT on international digital trade. This includes designing a simplified compliance regime for nonresident online suppliers and digital platforms, developing an online portal for registration and payment of the VAT by these businesses, and integrating this simplified compliance regime into a tax authority’s existing administrative and IT framework.
Section 6 advises policymakers and administrators on implementing an effective communication strategy and robust compliance risk management strategies. Such strategies aim to ensure compliance by nonresident online suppliers and digital platforms with their obligations under the recommended policy framework for the application of VAT to digital trade.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Alfredo Collosa is a consultant and tutor in tax administration at the Inter-American Center of Tax Administrations, CIAT. He holds an Official Masters in Public Finance and Tax Administration (UNED-IEF).