What you need to know:
- Local innovations are the right response to the growing dominance by multinationals.
- With the right policy and support, this country can churn out its own multi-billion-shilling techpreneurs and the benefits will trickle down.
The digital economy is the fastest-growing sector, estimated at 15.5 per cent of the world’s GDP by Unctad’s “Digital Economic Growth Report 2019”, growing 1.7 times faster than the general economy.
The ugly side of it is its lack of physical presence, complex nature of transactions cutting across borders and reliance on intangible assets. The challenge it poses in taxation is loss of revenue that would have been duly collected — known as Base Erosion Profit Shifting (BEPS).
Google’s ‘Double Irish Dutch sandwich’ best illustrates profit shifting. The Guardian reports that Google shifted $23 billion to a tax haven in Bermuda using a Dutch shell company — ideally, to avoid triggering US and European taxes.
Several policy responses mooted to counter this tax loophole, the most recent being US President Joe Biden’s push for a global minimum tax favoured by the G7. Although the challenge is more pronounced in developing countries, Kenya has made significant efforts to tax the nascent sector — as seen in recent law amendments, the latest being the Finance Bill 2021.
Vast digital space
The risk of tax base erosion and the concerted effort to exploit the potential of this grand economic sector raises one fundamental question: Why is it only a concern in taxation?
Through industrial revolutions, policymakers in developing countries have emphasised import substitution — replacing consumption of imported goods and services with local ones. Local innovations are the right response to the growing dominance by multinationals.
The digital space is vast, evergreen and attractive to innovation. To tap in, policy and resources need to be directed towards IT training, infrastructure, legal framework and incubation funding to start-ups. Successful innovations should then be supported through domestic consumption but with a strategy for foreign markets.
With the right policy and support, this country can churn out its own multi-billion-shilling techpreneurs and the benefits will trickle down.
Mr Mwinzi is a lecturer at KCA University. firstname.lastname@example.org.