Taxpayers can expect an announcement in this year’s Budget Review to broaden existing regulations on the taxation of the supply of digital products and electronic services.
Charles de Wet, head of indirect tax services for PwC Africa, says: “Currently, many suppliers of electronic services remain outside of the scope of the South African tax system. National Treasury and the South African Revenue Service (SARS) have acknowledged that more work needs to be done to ensure that foreign suppliers operating in the South African market place are taxed in line with local businesses.”
President Jacob Zuma stated in the 2016 State of the Nation Address that a resilient and fast growing economy is at the heart of South Africa’s radical economic transformation agenda, and expanding South Africa’s tax base will allow the Government to increase funding to further invest in the economy and to address socio-economic issues.
While South Africa has made significant strides by expanding the scope of Value Added Tax (VAT) to cover certain electronic supplies made by foreign suppliers, other opportunities exist. “Many foreign suppliers of electronic goods and services to South African consumers are not subject to South African corporate income tax on profits generated here, and this is an area that National Treasury must be considering in the light of declining revenues and a stalling economy,” adds de Wet. South Africa is not alone, and globally there is an increase in sentiment to embrace laws which ensure a fairer tax treatment of these types of technological advances.
The Minister of Finance stated during the 2015 Budget Speech that the regulations governing the provision of electronic services in South Africa would be broadened to include the supply of ‘software’, which is one type of ‘electronic service’ not currently covered by the law. Finance Minister Pravin Gordhan may take the opportunity during the forthcoming 2016 Budget Speech, to provide further details on this change and other developments which seek to protect and expand the South African tax base.
The recent Google decision in the UK marks an interesting development in the way that countries have tried to adapt traditional tax systems to the modern world. While its treatment, efficacy and application is still subject to debate, the introduction of the diverted profits tax model by HMRC seeks to address the manner in which multinationals shift profits around the world to minimise their tax bills. The new approach represents a welcome change as many suppliers will no longer be able to keep themselves outside the ambit of local taxation and the intention is that this will ultimately create fairer trading conditions for local and foreign suppliers. Ultimately, the proposed broadening of the current electronic services provisions to include software would level the playing fields between local and foreign business.
Other jurisdictions are also considering the introduction of similar rules, such as Australia. These rules would apply where income is derived by a foreign entity in respect of activities carried out in Australia by an Australian resident that is related to the foreign entity. In these circumstances, the determining factor would be whether it is reasonable to conclude that the operating model was designed to avoid the foreign entity having a permanent establishment in Australia, and that the operating model has a principal purpose of avoiding Australian corporate income tax.
In light of these global efforts, South Africa will need to work harder to ensure that foreign suppliers operating in the South African digital marketplace are taxed in line with local businesses. While the existing South African legislation is not without its problems, opportunities exist in the immediate term for National Treasury to strengthen the effectiveness of its existing laws, without necessarily introducing wholesale changes.
“While continuous efforts are being made to ensure the effective implementation and collection of consumption taxes in South Africa, there are more opportunities for National Treasury to consider to further assist government in protecting the South African revenue base and to level the playing field between domestic and foreign suppliers,” concludes de Wet.