SARS is losing out
Tax laws are lagging behind the digital economy.
As changes in the digital realm continue to outpace the speed at which legislators can work, and borders increasingly blur because of the internet, SA needs to play catch-up when it comes to tax.
Currently, the only digital tax of any consequence is the year-old introduction of value-added tax (VAT), which is now being charged on services bought from international vendors via the World Wide Web. Yet, this additional source of income doesn't go nearly far enough to help fill government's coffers. The International Monetary Fund has forecast that the local economy will grow at just two percent this year, down from the previously expected 2.3 percent.
As economic growth continues to slow, government is tightening its belt, seeking to eke out every last cent of each rand it spends. But there is potential income that could be brought into the economy.
Charles De Wet, head of indirect tax at PwC Africa, says South Africa's tax laws have not kept pace with the growth of the digital economy and the changes in the way in which business is conducted. He adds that local tax laws were designed at a time when today's technology and business models were the work of science fiction, and companies could only transact in countries they were based in.
There is an increasingly virtual encroachment into SA, as more people get online and buy virtual books, downloadable movies, and software from international vendors. South Africa has already moved to benefit from this tide, with the year-old introduction of value-added tax on services bought online.
However, that tax shift has come under fire from detractors, who argue that only the big boys, like Amazon and Google, will stick to it, despite the safeguards put in place. When National Treasury decided to add VAT onto services such as e-books, music and other digital goods and services, commentators argued this would not be enforceable because consumers would simply find ways to avoid what amounts to a 14 percent additional cost on such items, while small companies would avoid compliance.
Folkert Gaarlandt, indirect tax director at EY, says these recent changes are not the last as software is set to be included in e-services. If this happens, he says, the impact on transactions, especially in the business-to-business space, will be massive. Yet, says Gaarlandt: "There shouldn't be a distinction between the digital economy and the rest of the economy."
There is potentially a substantial amount of money that, theoretically, is already subject to tax, but is not being collected properly, or at all, says Anne Bardopoulos, senior VAT manager at Deloitte. She cites a hypothetical example of 14 million internet users, buying just R100 worth of electronic services each year from foreign suppliers, would amount to R1.4 billion in sales, and around R196 million in VAT that should be paid over to the South African Revenue
Yet, adds Bardopoulos, just R100-worth of spending a year is relatively low, considering the types of services people acquire over the internet, such as security apps, movies, books and music. In addition, because the rand has been so battered, the total VAT bill could go into the region of R980 million.
This, says Bardopoulos, is just one indication of the amount of tax government could be recouping, without even considering other taxes such as that levied on corporates.
Bardopoulos notes VAT is the easiest tax to levy in the digital economy, and is the route SA has taken. However, she says, there are nuances and application conflicts that must be overcome, and it is becoming increasingly important for countries to harmonise principles, common definitions and terms so that VAT works effectively.
While the digital economy has increased cross-border transactions and globalisation, making it 'easier for multinationals to exist and operate in multiple countries', this has also created virtual borders, says Bardopoulos.
This creates an opportunity for multinationals to structure their businesses so they pay taxes in those countries that offer the best tax breaks, she adds.
This sort of profit-boosting is mostly achieved through legal means, she says. Although legal, this practice of transfer pricing is becoming an international issue as 'countries feel they may not be collecting taxes that 'rightfully belong' to that country'.
"The digital economy has made this issue worse and more difficult to determine which country is entitled to corporate tax, especially as not all jurisdictions follow the same income tax principles." Bardopoulos adds the use of cloud services is also complicating the issue, because this makes it difficult to work out which jurisdiction can impose tax. She says these issues are being talked about through the Organisation for Economic Development and Coordination (OECD), with a view to finding a solution.
Because dealing with the digital economy is a new area for governments, there will be potential loopholes, some of which may not even have been spotted yet, says Bardopoulos. This could include a tech-savvy consumer who changes their IP address so it seems they live in a different jurisdiction, thus avoiding being taxed.
De Wet also notes multinational companies that stream content to local users, such as Netflix, are not being taxed, to our detriment. He says because international companies are not taxed at the same rate as their local counterparts, South African suppliers are feeling an economic pinch as they pay VAT as well as corporate tax of 28 percent.
"This further increases the gap between domestic and foreign players in the online media industry and has a negative impact on revenues collected to finance necessary public services for South African residents," adds De Wet.
As a result, says Billy Joubert, transfer pricing director at Deloitte, what SA can - and should - do until there is an international dispensation, which is currently in the works, is to update its source principles as soon as possible to ensure that it can tax income derived by foreign companies in SA from the digital economy. "SA's chances of gaining extra tax income from foreigners will depend on SA - and the global community - making the changes to domestic and international tax rules."
Justin Liebenberg, international tax director for EY Africa, says the Davis Tax Committee, which is investigating the South African tax system, made recommendations in its draft report that the current tax laws should be extended to include the digital era.
"The issue of taxation in relation to the digital economy is going to become more and more challenging. Think of someone downloading a plan or pattern to create a product using a 3D printer. In the past, this product would have been developed somewhere, produced somewhere, transported across borders, attracting tax all along the way."
This article was first published in Brainstorm magazine. Click here to read the complete article at the Brainstorm website.