Rwanda proposes levy on digital services

Rwanda is considering implementing a value added tax and income tax on digital services such as Netflix and Amazon consumed in the country. This move aligns with the global trend where numerous countries are shifting towards taxing the digital economy. Dieudonne Nzafashwanayo, Senior Associate at ENSafrica, discussed this development with CNBC Africa. The rise of new technologies has led to a phenomenon known as digital scale without physical presence. Companies can now operate at a global scale without the need for physical operations in various countries. As a result, many countries are reevaluating their approach to taxing the digital economy. Rwanda is now joining other nations in adopting this approach to tax digital transactions. The proposed taxes in Rwanda include income tax and value-added tax. The income tax, a direct tax, is making progress with a draft law currently in parliament. This law includes provisions for taxing income from digital services, such as income derived from social media activities. Implementing this tax may involve different approaches based on the location of the service provider. For local businesses in Rwanda, income tax on digital services is straightforward as they will be taxed similarly to other businesses. However, taxing foreign businesses providing services in Rwanda may require different strategies. One option is to levy a VAT on payments made to foreign entities by local customers, provided the customers are registered with the tax administration. Another approach involves requiring foreign businesses to register for income tax in Rwanda if they exceed certain thresholds and declare profits from digital services. The least favorable option, joining the OECD framework, poses challenges for economies with lower GDPs. International cooperation in tax matters will be crucial for Rwanda to enforce taxation on global companies like Netflix and Amazon. With Rwanda's membership in the OECD convention on mutual administrative assistance in tax, the country can seek assistance from other tax administrations to ensure compliance and collection of taxes. The proposed tax in Rwanda will impact a range of digital services, including online marketing, platform services like Amazon, digital content services like Netflix, social media services, and data supply services. As Rwanda moves towards taxing digital services, it faces complexities in enforcing tax compliance on global companies. However, international cooperation and strategic approaches can help Rwanda navigate this new territory of taxing the digital economy.