President Cyril Ramaphosa’s 4IR Commission has published a new report looking at the state of technology in South Africa, and possible tax changes the country could introduce to help it prepare for the ‘fourth industrial revolution’.
The commission is composed of 33 experts and 60 groups, including listed companies and government departments, mandated to look at changes government can introduce as part of its focus on technology.
Among the recommendations is a series of tax proposals, including a new digital tax for companies such as Netflix, Amazon and Facebook, which operate in a number of territories internationally.
The three tax changes proposed include:
- Digital tax for international technology companies;
- Tax structure on processed minerals used in 4IR components; and
- A Research and Development (R&D) tax incentive for industry 4.0 start-ups.
The commission said that it is a ‘priority’ that South Africa participates actively in international efforts to ensure that technology companies pay a fair share of tax in the countries in which they operate.
It said that key infrastructure and other subsidised services and state investments can only be sustainably funded if technology companies are not allowed to avoid and evade tax in the manner in which they currently do so.
It cited tax avoidance techniques such as transfer pricing and the selling IP to tax havens where the profits are allowed to accumulate, with little or no tax accruing in the countries where the companies actually operate.
This avoidance is increasing the gross inequality within and between nations which has to date characterised the 4IR, it said.
The commission said that the government should adopt a digital taxation draft law – pointing to similar legislation which was announced in Turkey in 2019 and became effective from 1 March 2020.
Under Turkey’s new tax, turnover generated from certain digital services are subject to 7.5% Digital Services Tax in the country.
The commission also recommended that the government develops tax policies that can better account for operations of digital and virtual companies ‘that have seen exponential growth as their services have become ubiquitous’.
Other tax proposals
The commission also made proposals for other technology-focused tax changes in South Africa – including changes to taxes around components and minerals, as well as tax incentives for research.
The commission said that South Africa should review tax structure on processed minerals used in 4IR components e.g. components for robots and robotics that are produced within the borders of our country.
It said that the country should impose a tax that will be less than when the minerals are exported without them being processed.
These taxes will incentivise companies to build factories within the country and create products that speak to the future of the country and ultimately create jobs, it said.
The commission said that South Africa should also look at the introduction of tax incentives to promote Research, Development and Innovation (RDI) in the country.
It said that building capabilities through education and RDI is a prerequisite for national economic competitiveness, but to harness strengthened capabilities towards economic objectives may require dedicated policy interventions.
“Some countries, for example Italy, have introduced a R&D tax incentive for industry 4.0 start-ups. A tax deduction related to training and skills development as well as building of manufacturing plants is an option,” it said.