As the economy sheds jobs and business closures mount because of the Covid-19 pandemic, South Africa has its work cut out in attempting to expand the tax base.
This would be difficult, but not impossible to achieve, says Robyn Berger, executive of Tax at law firm Bowmans – but government should step lightly to avoid spurring any trade wars.
“Taxing the digital economy and the informal economy could potentially bring many new taxpayers into the net, although both routes could pose considerable challenges,” she said.
Of the two, taxing the digital economy would likely face the biggest hurdles – particularly if SARS follows through on its proposal to unilaterally tax the gross revenues that digital companies make in South Africa, Berger said.
“Currently, South Africa taxes limited aspects of the digital economy through the value-added tax system.
“Although SARS has indicated it would prefer to align with the initiatives of the Organisation for Economic Cooperation and Development (OECD) on such matters, it is taking longer than anticipated for the OECD to develop a single set of rules for use globally.”
Berger said that there are also concerns that the current OECD approach would not benefit South Africa as a developing country.
“SARS has therefore suggested that a more immediate, unilateral approach may be appropriate, in line with many other countries across the globe that have elected to institute what seems akin to a withholding tax on gross revenue generated from the country.
“This approach is not without difficulty and may prove fruitless if bilateral tax agreements are not amended to allow South Africa to impose such taxes,” she said.
The problem with a unilateral approach is that these measures are perceived as targeting mainly US corporations, leading to trade wars, said Berger.
“South Africa cannot afford counteraction from the US at this time. I think the imposition of VAT may be more acceptable because ultimately it is the consumers who would foot the bill.”
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.
In October 2020, president Cyril Ramaphosa’s 4IR Commission published a 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’.
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’.