Trading away tax sovereignty? How trade rules shape taxation of the digital economy in Africa

The advent of digital and data-driven business models has heightened the risks of tax base erosion and evasion, adversely affecting revenue generation, economic recovery, and advancement of tax justice in African economies. We develop a framework examining how trade rules on services, electronic transmissions, and digital products shape the ability of African countries to tax their digital economies. We consider four types of taxation instruments: (i) corporate income tax; (ii) value-added tax; (iii) customs duties on electronic transmissions; and (iv) digital services tax. To illustrate the practical implications, we apply our framework to Kenya, Rwanda, and South Africa. These three case studies reveal that trade rules in services and electronic transmissions have a direct effect on the legal position of the country to tax its digital economy, whereas digital trade rules, such as those related to data flows, localization, and source code sharing, produce both indirect and administrative effects on tax measures. These rules can alter tax structures, taxation rights, data collection, and the capacity to monitor and implement tax measures.