Digital Advertisement Tax in Nepal?

Nepal is a country in between of the two highest internet users all around the world.

It is transforming rapidly from traditional economy to the digital economy through the use of internet and digital technologies. The transformation from traditional economy to the digital economy has established varieties of complexities in the taxation to those entities. Huge revenue is being generated by social media platforms, search engines and online market place and is currently growing at exponential rate. Nepal being a developing country has also been facing the challenges to tax the digital economy.

Multinational tech companies who are service are generating trillions of dollars in revenue from their services from the world. Policy makers all around the world are discussing the mode of tax to be applied to those multinational tech companies. However, they are of consensus that, income of multinational tech companies should be taxed in that country where economic activities are performed and where value is created.

Current Digital Market Situation

Most of the startup in todays world are mostly linked with technological investment. Traditional as well as new business requires the involvement of digital marketing place. These digital market place is made available by multination tech giants such as Google, Facebook, Twitter, Linkedin etc. 

Due to the lack of official international payment channel, government is unable to identify the amount spent by Nepalese business house and individuals in the form digital marketing. Due to which entities are using unofficial channel for making payment to the multinational social media, search engines etc. which results in nil advertisement revenue from Nepal.

When the government allows the payment out of Nepal, it could identify the quantum of money paid for digital marketing and get it taxed in Nepal. Facebook, Twitter, Linkedin, Youtube, Google etc. data shows zero income from Nepal. The problem it created is, remittance money which would have come into the Nepal is not entering in the country.

How to tax Digital Economy?

Taxation in a digital economy has its challenges with the complexities in the business model in which it operates. Further, most of the renowned digital economy is being run by multinational tech giants who do not have physical location in Nepal, however they are carrying business in Nepal and earning revenue.

Multinational tech companies have been accused of not paying taxes in Nepal despite earning significant revenue from offering services such as online advertising to customers in Nepal. Government wants to regularize and tax the multinational tech giants such as Facebook, Google, Twitter, Linkedin etc. and force them to establish their offices in Nepal.

Domestic Corporation and entities are spending a good amount of money on digital marketing in the form of social media advertisement. The social media which have place of business in Nepal are paying taxes to the government however the multinational social media are not physically located in Nepal and do not have branch office are not paying taxes to the tax department. Further, the government is unable to tax the multi national tech giants because it is unable to identify the amount paid for digital marketing to such tech giants.

Nepal have a large internet consumer base with around 16.19 million internet users which accounts for 55.6% penetration of the total population. There are about 10.52 million facebook users in Nepal and facebook average revenue per user as of 2019, of Asia Pacific region is $3.57 which also shows that there is huge economy which has not been regularized. Total revenue of facebook in the year 2019 is USD 70.7 billion which is more than two times of GDP of Nepal. There are many other global digital marketing  players such as google, twitter, linkedin, tiktok etc who are earning quite a good amount of money.

Digital Advertisement in Nepal

The trend of advertising on social networking sites is growing rapidly. Tracking, regulating and bringing such sites under tax bracket would not only boost the government revenue, but also make it easier for those who wants promotion and publicity on those sites. Nepal government is taxing domestic transaction on traditional advertisement, the government has been levying 13% value added tax on advertising transaction within country. The government is not been able to track advertisement by Nepali businesses or nationals on social networking sites which are mostly carried out informally. Many advertisements of Nepali business, products and services is being carried out in various social networking platforms.

In the lack of legal payment option, businesses or individuals, who seek to advertise on social networking sites run by foreign companies, are using informal channels to foot their advertising bills. Generally, advertisers request people holding international payment cards to pay for such services and repay them back in Nepal. 

How to tax Multinational Tech Companies in Current Scenario

This can be explained with the help of an example.

Case 1: Google office registered in Nepal under VAT

For eg: You spend Rs. 1,00,000 on Google Adwords. In this case, VAT and TDS would be applicable as follows:-

Google Ad Expense                                                                              Rs. 1,00,000

(Add)   VAT @ 13% (13% of Rs. 1 Lakhs)                                                     Rs. 13,000

(Less) TDS @ 1.5% (1.5% of Rs. 1 Lakhs)                                                    Rs. 1,500

Balance amount payable                                                          Rs. 1,11,500

Out of 1,11,500 received from the advertiser, Google Nepal office needs to pay NRs.13,000 to the tax office, with net balance amount of 98,500. The amount of TDS deducted can be claimed while making tax assessment by Google.

Case 2: No Google Office in Nepal

This can be explained with the help of an example.

For eg: You spend Rs. 1,00,000 on Google Adwords. In this case, VAT and TDS would be applicable as follows:-

Google Ad Expense                                                                             Rs. 1,00,000

(Add)   Reverse VAT @ 13% (13% of Rs. 1 Lakhs)                                    Rs. 13,000

(Less) TDS @ 15% (15% of Rs. 1 Lakhs)                                                     Rs. 15,000

Balance amount payable                                                       Rs. 98,000

However, In case 2, VAT of 13,000 will be paid by the advertiser in Nepal instead of Google as reverse VAT and 15,000 will be deducted as TDS while making payment to Google. Reverse VAT needs to be deposited by service receiver in Nepal and pay to Govt. of Nepal which can further be claimed after making payment.

What should be done?

New law on information technology requires the social media running entity to register itself in Nepal. Almost all the multinational tech companies operated in Nepal do not have branch office in Nepal. So the question arises, how to tax the entity which operate businesses and sell, even if they do not have physical presence. Google is already making their presence in Nepal via Google Business Group, Google Map group and even installing cache server in Nepal in tie up with Nepal Telecom.

Following are the work to be done:

a) Government should formulate policy to allow Nepalese firms and individuals to make international payments in the form of digital marketing expenses.

b)  Tax laws needs to be amended in order to provide incentives and benefits to those tech giants to register branch in Nepal.

    c) Tax rules and regulation should prioritize to make payment in Nepal for digital marketing expenses by providing comparative advantage with respect to payment out of Nepal.

    d) Separate revenue code needs to be created for deposition of direct or indirect tax attached with digital expenditure payments.