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The structural weaknesses of mobile money taxation in emerging markets

6 September 2022

From their emergence to these days, mobile money services have become the formal financial service of choice for many underserved groups in developing countries. Their rapid adoption and widespread use -as expected- attracted the attention of tax authorities seeking to expand their revenue base. After all, in these regions the formal economy represents only a small proportion of the population, putting extra pressure on states to seek new sources of revenue and mobile money services have been such an opportunity.

But, as the latest report of GSMA highlights, despite the diverse methods proposed to tax mobile money, in most cases the resulting taxes (especially the mobile money transaction ones) are controversial, proving the structural weaknesses of taxation in emerging markets. According to “The causes and consequences of mobile money taxation” report, “state authorities are unable to fully understand the nuances of emerging sectors, such as mobile-money services or even the wider digital economy. The result is “badly designed taxes which, although they may seem attractive at first sight, fail to consider the impact on the broader economy and society”.

The report of GSMA examines several Sub-Saharan Africa countries, revealing aspects of the problematic way in which mobile money services are treated, such as the specifics of the population that uses these services or the negative impact on financial inclusion those taxes have.

According to GSMA’ analysts, at the policy level, there is a lack of capacity within research units and also lack of national policy frameworks to guide them. As a result, the full impact of mobile money taxes across the whole of the tax system is not properly assessed. “Political economy factors are ever present too, which leads to these taxes being implemented without established processes being followed” the report argues, adding that where these taxes have been implemented, mobile money transaction values have contracted and “their growth trajectory reduced with negative implications for wider CIT and VAT tax takes”. As the report notes, many mobile money users belong “to marginalised societal groups and the negative impact on financial inclusion and broader development goals is significant”. On the other hand, these taxes don’t extend to the banking sector, suggesting that they are regressive in nature, undermining the fundamental concept of tax equity.

How can these shortcomings could be addressed? Here are some proposed measures:

• Τax policy units could recruit specialists who understand the nuances and complexities of emerging mobile money and digital economy sectors.
• Developing countries need to have a louder voice at international fora, such as the OECD, that look to reform global taxation policy for the digital economy to ensure that their needs are met.
• Priority to targeting taxable income within both the formal and informal sectors rather than a blanket targeting of informality.

 

The report concludes that there are lessons to learn regarding appropriate approaches to taxation of the sector. “If badly designed taxes have a negative impact on the overall tax take, conversely removing them could have a broader positive economic impact as well as assist with the attainment of wider development goals”. Are state authorities ready for such a shift?