HomeAnalysisDigital business: Need for regulations

Digital business: Need for regulations

Jeffrey Ndhlovu
OVER the years, digital companies such as Apple, Amazon and Microsoft have grown to surpass traditional brick and mortar enterprises that have existed for centuries, such as Boeing, JP Morgan Chase and The British American Tobacco Company.

In 2020, Apple, Amazon and Microsoft became the world’s first trillion-dollar companies (Bloomberg, 2020).

While other business models faced closure in the wake of strict lockdown measures that were imposed by various governments in order to contain the Covid-19 pandemic, the digital economy thrived instead.

In 2020, according to Statistica, global e-commerce sales amounted to US$4,9 trillion, a rise of more than 60% from the 2019 sales (US$3,5 trillion) and this figure is projected to be US$7,3 trillion by 2025.

The growth of digital business models and their adoption has not only been witnessed on a global scale but on a local scale as well. According to a report published by DataReportal, an independent company which produces data, insights, and trends on the use of the internet, in January 2022, there were 4,65 million internet users in Zimbabwe, which translates to a penetration rate of 30,6%.

To show the potency of such internet usage, data from Statistica (2019), also shows that in 2019, Zimbabwe shutdown the internet for 144 hours and this cost the economy US$34,5 million dollars, a statistic that suggests that country generated more than US$240 000 per hour through the internet.

The thriving and growth of digital business may be beneficial to economies and the business world but this has not been without negative effects on the local economy and traditional business models.

Amid the physical and movement restrictions that characterised 2020 and 2021, remote working became bullish as businesses started to realise that fully returning to offices may take time.

One of the industries in Zimbabwe that has been affected by remote working has been the Audit, Assurance and Consultancy industry. The year, 2021 saw international players, such as, Sapro and Makosi tapping into the local industry for talent acquisition.

These companies offered locally trained experts far more lucrative contract arrangements, such as, better USD salaries, flexible working arrangements (working from home) and better work life balance and perhaps the most lucrative part was that instead of relocating to another country, these people could enjoy all these benefits while remaining in the country.

This development saw many experienced professionals in the industry leaving their local jobs and joining these international players, a phenomenon that has become popularly known as the ‘Great resignations’.

The government has responded to the rise of the digital business models and the rise of the internet in a number of ways.  On January 1, 2019 Zimbabwe introduced a 5% general income tax on income deemed to have accrued from a source within Zimbabwe to non– resident satellite and e–commerce platform service provision.

Besides the fact that this law taxes digital economy companies based on revenues while resident companies are taxed on profits, there are other fundamental tax law variations that were imbedded in this law that differ from how other companies are normally taxed in terms of the country’s Income Tax Act (Chapter 23.06), which included doing away with usual permanent establishment tax law requirements returns filing and tax collection methods.

On January 20, 2020, Zimbabwe also introduced VAT on non-resident satellite and e–commerce service provisions and on the other hand, in order to regulate the cyberspace, the government also introduced the Cyber Protection Act, which mainly regulates how data can be used commercially and non-commercially.

While these developments in regulation have yielded positive results, such as, revenue generation for the government, some industry experts have bemoaned the regulations, arguing that their intended effects will be to curtail the use of cyberspace and the potential growth and adoption of digital business models.

For instance, one of the major criticisms of Zimbabwe’s 5% tax on foreign digital companies largely differs from the globally proposed Two-Pillar Solution framework for the international taxation of the digital economy.

Although other countries had enacted similar unilateral tax laws, in the interim, most of them have agreed to suspend those laws pending the development of a global solution.

However, Zimbabwe has kept its unilateral measure.

Another tax law regulation that industry experts bemoan, especially those that have joined the remote working gig for international players is the local requirement that their salaries should be taxed at the same rate as local salaries, arguing that they are already contributing to the local economy by bringing the much-needed foreign currency through their salary remittances.

These experts further argue that unlike under traditional migration arrangement where a person takes their whole family and moves to another country where they spend most of their money in a foreign country and then send any residue at home, the new ‘remote working’ gig allows them to spend almost all their money locally.

This means their income supports:

Local banks since the money is deposited directly into a Zimbabwean bank;

The local schools since they do not have to necessarily relocate their children;

Local businesses since they can buy locally and ultimately; and

The government always gets some benefit from all these activities either directly and indirectly.

There is obviously a need for engagement and research around the effects of the current regulations and the views of industry experts on the issues of the current local space on digital business models and remote working but the challenges that these two phenomena present are well documented.

The key features of the digital economy such as:

The ease of mobility business functions, users and intangible assets;

The heavy reliance on data and user participation;

Network effects;

Multi-sided business models;

Tendency towards monopoly and oligopoly and volatility will definitely continue to trouble governments as to how this new economy can be regulated but one thing is certain; this economy is here to stay.

Perhaps the government of Zimbabwe should move towards increasing the support of the economy rather than increased regulation.

  • Ndhlovu is a post-graduate researcher at Chinhoyi University of Technology (CUT) currently studying towards a Master of Philosophy in Accountancy at CUT under CAA sponsorship. He is also a full member of ACCA and holds a bachelor’s degree in Accountancy from CUT.

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