The South African government will need to keep an eye on international developments before introducing a digital tax in the country, says Wally Horak, head of tax at law firm Bowmans.
Government has hinted at the possible introduction of a digital tax for companies such as Netflix, Amazon and Facebook, which operate in a number of territories internationally and make up a substantial amount of lost revenue.
However, Horak said that the main obstacle to such a unilateral digital tax is the basic, existing rule of double taxation agreements (DTAs).
A DTA only allows the source jurisdiction to impose tax on a resident of the other contracting state if that resident carried on business via a permanent establishment in the source state, he said.
Horak added that several of the countries which have threatened to impose the new digital tax have decided to suspend the effective date of the new tax in view of the uncertainty whether the tax may be declared invalid by the relevant courts.
“This is most likely the result of the approach of the USA, which has indicated that it would encourage its residents to oppose the imposition of the tax in court,” he said.
However, Horak highlights that the Organisation for Economic Co-operation and Development (OECD), in conjunction with the G-20 countries, has developed a new framework which proposes changes to the existing international tax system to allow countries to impose such digital taxes.
A main objective of the framework is to grant a right to market jurisdictions to tax part of the profits of multinational enterprises (MNEs), with reference to the income generated from customers in that jurisdiction, irrespective of whether the MNE has physical presence in that country, he said.
“The OECD/Inclusive Framework has remarked that a multilateral agreement amending the relevant DTAs to allow such taxation by the market jurisdictions could be signed by the middle of 2021, which could result in the implementation of the new rules in 2022,” Horak said.
“Therefore, it is advisable for the Government to await this international action to ensure cooperation of other states, notably the USA, since most of the targeted MNEs are USA-based.”
New laws needed
In line with the recommendations in the OECD framework, Horak said that the government should commence the drafting of the relevant legislation to impose such digital taxes.
This should include provisions to deem income generated by a non-resident from supplies to residents by digital means as South African source income.
“Government should also consider amending the foreign tax credit provisions to allow a tax credit for foreign digital taxes imposed on digital supplies by South African companies to foreign customers,” he said.
“The current foreign tax credit provisions would generally not provide such relief since the source of the supply would generally be regarded as in South Africa where all the inputs for the website in question are provided and where the products or services sold via a website may originate.”
President Cyril Ramaphosa’s 4IR Commission also 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’.