SA must not miss out on e-commerce tax revenue, says Davis committee
SOUTH Africa’s tax authorities need to beef up the country’s tax laws and regulations to ensure it derives its rightful dues from the digital economy and e-commerce, the Davis committee says.
The committee’s interim report on base erosion and profit shifting, released for public comment last week, said gaps in the law governing both the direct and indirect taxation of e-commerce needed to be tightened.
It noted that revenue lost through the digital economy was a growing concern of governments internationally. It was also important that there be a level playing field in terms of taxation between South African and international companies dealing with digital goods and services.
The main challenge posed by transactions conducted over the internet is that they transcend international boundaries and so have no fixed location, a central pillar of any tax system. Tax treaty rules for taxing business profits apply the concept of a permanent establishment to determine whether or not a country has taxing rights over the business profits of a nonresident taxpayer.
“E-commerce creates difficulties: in the identification and location of taxpayers, the identification and verification of taxable transactions, and the ability to establish a link between taxpayers and their taxable transactions, thus creating opportunities for tax avoidance,” the report said.
“This is especially so with the development of various electronic payment methods such as Bitcoin, a decentralised digital currency that enables instant payments to anyone, anywhere in the world.”
While there was very limited scope for South African residents to shift profits to offshore tax havens via e-commerce transactions, this was not the case for nonresidents transacting over the internet with South African customers. Nonresidents were subject to tax in South Africa only on any income derived from a source in South Africa.
However, the committee’s report noted that the source provisions in section 9 of the Income Tax Act required that the nonresident conduct some activity or have some degree of physical local presence in the country before business profits could be regarded as derived from a source in South Africa and thus be subject to tax.
There was no specific reference in the act to electronic transactions.
“Currently there is no adequate legal basis for the expansion of the South African fiscal jurisdiction to allow for the taxation of income derived by a nonresident from e-commerce transactions with South African residents. Thus companies like Google can avoid tax in South Africa because the originating cause of their income is not in South Africa.”
The report recommended that new source rules dealing with the taxation of the digital economy be enacted to cover the proceeds derived from the supply of digital goods and services in South Africa. Also, rules were needed requiring nonresident companies with South African-sourced income to submit income tax returns even if they do not have a permanent establishment inside the country to ensure that they were included in the tax system.
The committee also recommended that the tax authorities await the outcome of the Organisation for Economic Co-operation and Development’s ongoing work on the permanent establishment threshold for the digital economy rather than trying to come up with its own unilateral solutions.
