12.01.2021

Digital Services Taxation in Afghanistan

In a new series of policy briefs, our YLFees discuss current political challenges and recommendations

Digital Services companies, massive social media platforms have several income sources that are not limited by national borders and cause many concerns. Digital Services Tax (DST) or taxation of companies generating income from the virtual world, such as Facebook, are reviewed or already implemented in countries that are not the headquarters to giant digital corporations. European countries are the pioneers in digital taxation as most have either announced or enforced new DST policies. Advertisements on social media platforms reach at least 3.6 million users in Afghanistan. Also, a significant number of Afghan businesses and influencers use digital services to make money. Taxation policy for digital services can help the Afghan government increase its revenue, regulate businesses and influencers in terms of business affairs, and support the digital economy. The government can create its approach based on the European Commission's proposals as a starting point and digital tax corporations based on online advertisement and selling users' data. The government can use DST revenue to enhance the situation for influencers or businesses based on these giant platforms. This brief depicts an explicit picture of contexts, current practices, and recommendations on specific policies or approaches that the Afghan government utilizes in DST for big digital corporations and small Afghan businesses that generate revenue through these giant platforms.

Facebook is the most popular social media platform in Afghanistan, with 3.4 million active users. Instagram (450,000 users), LinkedIn (350,000 users) and Twitter (205,000 users) come in second, third and fourth place respectively.  While these social media platforms actively generate money from the Afghan market, there is no taxation on Afghanistan's social media. According to Facebook's analysis, Facebook advertisements reach 14% of Afghanistan's population above 13, with a 3% growth rate or 100,000 users per quarter. This paper will clarify value creation in big digital platforms, explain some common DST practices, and recommend a DST approach for the Afghan government.

Social media platforms provide the opportunity for Afghan businesses and individuals to launch their startups. For instance, Kabul Fans, an Afghan YouTube channel with 171 thousand subscribers, earns up to $4,700 a month through the YouTube monetization system. As business in social media platforms is new to Afghanistan, there is little to no literature on their activities. For the sake of this paper, I thus interviewed five Afghan social media influencers. Using the interviews, this paper depicts an explicit picture of contexts, current practices, and recommendations on specific policies or approaches that the government utilizes in DST for big digital corporations and small Afghan businesses that generate revenue through these giant platforms.

Sources of Income:

Social media companies have different sources of income. The first is through venture capitalists and investors who bought their shares in the stock market. Since the initial public offering of Facebook in 2012, Facebook's stock price has jumped from about $38 per share to $210 as of February 6th, 2020, indicating a 453% increase. The second source is the users, as each user account is treated as a product for social media companies. According to Investopedia, "The real transaction in here isn't you receiving enjoyment in the form of a free temporary distraction created by a media company at great expense, but rather, that media company renting your eyeballs to its advertisers." Based on a Post Beyond analysis, one typical LinkedIn account is worth $17.10, Twitter $9.22, and Facebook $0.25. The third key source of income is online advertising, rising every day. Google and Facebook earn approximately two-thirds of all global advertising revenue. In a nutshell, value emerges through the combination of algorithms, user data, sales functions, and knowledge in the digital economy.

At the same time, social media fosters businesses and enables influencers to make money via advertising products and services. "They make regular posts about that topic on their preferred social media channels and generate a large following of enthusiastic, engaged people who pay close attention to their views". Cristiano Ronaldo, for instance, "makes more money being an influencer on Instagram than he does playing soccer for Juventus".

DST Practices:

Digital companies currently pay their taxes to the country in which they are headquartered. As they make revenue within countries around the world, governments are looking for ways to benefit from these unregulated revenue streams. European countries counted as pioneers in digital taxation, and most have either announced or enforced new DST policies. In general, the European Commission has made two legislative proposals, with the first proposal aiming to reform corporate tax rules as a long-term solution. This rule recommends that significant interactions between businesses and users through digital channels should be registered and taxed. The European Commission has defined three criteria for digital presence:

  • It exceeds a threshold of €7 million in annual revenues in a European country
  • It has more than 100,000 users in a European country in a taxable year
  • Over 3,000 business contracts for digital services are created between the company and business users in a taxable year.

The second proposal is an interim tax. This tax targets revenues which are generated mainly by users' activities. The creation of value from selling online advertising space, creating value from digital intermediary activities (influencers), and creating value from the sale of data generated from user-provided information will be taxed under this proposal.

However, European countries react differently to DST. Some, such as Austria, France, Italy, Turkey, Hungary, Spain, the UK, and Poland, have already implemented a DST. The Czech Republic, Slovakia, and Belgium have prepared DST proposals, and Latvia, Norway, and Slovenia have announced their intentions to implement taxation on social media.

The taxation method varies between these countries as well. For example, Spain is implementing digital services taxation starting January 2021 by enforcing a 3% tax on online advertising services, sales of online advertising services, and sales of user data. Belgium has suggested a 3% tax solely on user data sales, while Austria announced a 5% tax on online advertising.

DST in Afghanistan:

According to the current taxation regime in Afghanistan, foreign corporations must pay a 20% income tax. There is no provision about non-resident international corporations or those not registered in Afghanistan, indicating no enormous digital corporations' taxation regulations. The critical challenge is how the government calculates their incomes, especially when the social media corporations are reluctant to calculate their income on a country-by-country basis.

DST helps the government to increase its revenue. With 3.6 million social media users in Afghanistan, the large digital companies have a tremendous opportunity to ensure their online advertisements reach a significant number of users. Social media companies also use user data to target advertisements for different companies. Hence, digital corporations have two clear sources of income in Afghanistan: online advertisements and selling users' data. Like European governments, the government can implement a 2-5% tax on these two sources.

DST supports the digital economy. The small businesses based on these platforms have a great potential for supporting the economic growth of Afghanistan. My interviews have shown that watching Afghan YouTubers' channels is a way for Afghan immigrants to stay connected to Afghanistan. Afghanistan has produced three million refugees and immigrants in different parts of the world, indicating a potential market with at least three million customers, excluding users within Afghanistan. For example, 'helping needy people', a reality show in Kabul Fans Channel, is looking for the poor in Afghanistan, making a program about them, and then urging Afghan immigrants overseas to support that family. Interestingly, there is always someone donating to that family.

DST regulates businesses and influencers in terms of business affairs. The lack of regulations for digital firms creates various challenges for the industry in Afghanistan. It starts with digital services registration; the government does not have an independent category of business licenses for those companies as their business revenue model is based on social media platforms. In the absence of any regulations, there will be no exact procedure for litigation and taxation. The government can spend its revenue from the taxation of giant corporations on building better infrastructure. According to Afghanistan Taxation law, Value Added Tax (VAT) is 10%. The government can decrease their VAT for this category to support them.

Besides all the mentioned DST advantages, it can indirectly help the government ensure data privacy for Afghan users and decrease fake news and hate speech. Some influencers use fake news or hate speech to increase their revenues. In April 2020, Noshakh Media, another Afghan YouTube channel, created a short video based on fake news about the relationship between Shukria Barakzai, a former Afghan MP and active politician, and her husband. The video has been watched 246,045 times on YouTube, while another video about Afghanistan commandos that doesn't have any fake content was viewed only 685 times. Taxation policy can help in regulating such income generation from fake news.

Conclusion:

Taxation policy for social media or digital services can help the government increase its revenue, regulate businesses and influencers in terms of business affairs, and support the digital economy. The Afghan government can create its approach based on the European Commission's proposals as a starting point and digital tax corporations based on online advertising and selling users' data. The government can use DST revenue to enhance the situation for influencers or businesses based on these giant platforms.

Policy Recommendations:

  • The government should assign a team in the Tax Revenue Department of the Ministry of Finance to calculate big digital companies' income in Afghanistan.
  • The government should tax digital corporations based on their income from advertising and selling data.
  • It is good that the government taxed them between 2-5%, as it is common practice worldwide.
  • The government should conduct a baseline assessment to make regulations and support influencers.
  • The government should draft and enforce regulations for digital services and social media influencers in Afghanistan.
  • As part of the regulations, the government should provide an independent category of digital services business licenses for influencers.
  • The government should support influencers by decreasing the VAT.  

Ali Reza Hussaini is a member of the 2020/21 Young Leaders Forum.

This article has also been published in Dari by Afghanistan Today. The views expressed in this publication are those of the author and not necessarily those of Friedrich-Ebert-Stiftung.

Friedrich-Ebert-Stiftung
Afghanistan

Kabul
Afghanistan

+93 (0) 700-280-441
+93 (0) 787-776-611

info(at)fes-afghanistan.org

Contact us

back to top