South African companies are unable to compete with multinationals selling goods and services online in the country, partly as a result of tax laws.
This is according to financial services group PwC, which argues that the country has not kept pace with the changing global economy.
“Currently, multinationals in the digital economy that sell goods and services in the South African market and elsewhere do not have to comply with the same rules as local companies,” said Charles de Wet, head of indirect tax, PwC Africa.
Globally, there have been numerous reports regarding multinationals that pay little or no tax in the markets in which they generate profits.
“Not only is this position unsustainable but it distorts competition between companies, as well as placing the multinational at an advantage over local businesses operating in the market,” said de Wet.
Foreign entities are only subject to tax in SA on income derived from a source in the country, the tax specialist said. However, the source rules were developed a century ago, before the digital economy existed and do not take into account the way in which the modern economy operates.
It pointed out that multinationals are also accused of exploiting loopholes in the global tax system by setting up structures in low-tax jurisdictions and shifting profits from the markets in which they operate. They are able to pay much lower taxes on their global profits.
This gives these companies a cost advantage over local businesses that are fully within the South African tax net and have to pay tax on the profits they make at comparatively high rates.
PwC said that the Organisation for Economic Co-operation and Development (OECD) has taken the lead globally to confront the tax challenges faced in the digital economy.
In September 2014, the world body released its final report on the tax challenges of the digital economy under its Action Plan on Base Erosion and Profit Shifting (BEPS). The report acknowledges that the digital economy has increasingly become the economy itself.
Majority of countries however, have not yet taken steps to implement legislation targeting the digital economy or have cautioned against unilateral action, PwC stated.
Italy, PwC said, took steps to introduce a ‘Google tax’ that would have seen the taxation of on-line advertisements. The tax was subsequently cancelled. More recently the UK introduced a diverted profits tax that addresses the way multinationals shift profits around the world to minimise their tax bills.
Closer to home, South Africa as an observer of the OECD has begun to consider its place in the digital economy and the issues of neutrality associated with it.
National Treasury implemented legislation in June 2014 which seeks to levy Value-Added Tax (VAT) on foreign entities providing electronic services to local consumers within the South African market place.
In order to achieve this, the VAT Act was amended to require foreign entities providing certain electronic services to South African consumers to register for and charge VAT on their services.
Currently, the scope of the tax is limited to a handful of electronic services (e.g. educational services, games, auction services, e-books, audio visual content, still images, music and subscription based services.)
However it has been proposed that this list will be expanded during the course of 2015 to include software, PwC said.
Currently, SA companies are taxed at the rate of 28% for corporate tax purposes. Conversely multinational companies selling digital goods and services escape paying corporate tax in SA.
“This is because they do not fall within the South African tax net, either because their income is not sourced in South Africa in accordance with our domestic rules or because of relief provided by a double taxation agreement entered into between South Africa and the foreign country,” said PwC.
Finance Minister Nhlanhla Nene announced in his 2015 Budget that proposed changes would be made to the rules for the digital economy in line with the recent guidance issued by the OECD in its report on BEPS.
The changes for South Africa are based on the interim report of the Davis Tax Committee which contends that there is limited scope for South African residents to shift profits to offshore tax haven jurisdictions by way of e-commerce transactions.
The opposite is true in relation to e-commerce transactions carried out by non-residents with South African consumers.
The report proposes a number of recommendations in respect of the proposed design of the new tax legislation relating to e-commerce transactions in order that a level playing field is created so that South African companies can compete with multinationals.