Charles de Wet: Head of Indirect Tax, PwC Africa.
‘Significant digital presence’ test in South Africa may be necessary for digital giants to pay their fair share of taxes.
Multinational companies that supply content via online streaming or subscription services to the South African market do not have to comply with the same tax rules as their local counterparts and in some instances are not taxed. “We are living in an era of unprecedented digital change. South Africa’s tax laws are outdated and have not kept pace with the growth of the digital economy,” says Charles de Wet, Head of Indirect Tax, PwC Africa. “Digital giants should be held accountable and pay their fair share of South African taxes.”
The content streaming market has exploded with countless service providers such as Netflix, DSTV BoxOffice, Hulu, Node, HBO Go, MTN FrontRow, Vidi and Amazon Prime Instant Video, as well as online magazines, news and newspaper providers becoming household brands in South Africa. Their popularity with internet users continues to spike, notwithstanding that many foreign content providers may not officially supply services to South Africa. Despite this, South Africans are accessing these services by means of ‘location masking’ virtual private networks (VPN).
While foreign content providers relish the ‘tax-free’ nature of their services supplied to South African consumers, local suppliers are feeling the ‘economic ‘pinch, as domestic content providers are required not only to levy South African value-added tax (VAT) on services supplied to the local marketplace, but pay South African corporate income tax of 28% on profits generated. ‘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.
This aside, technology companies have always stepped on one another’s toes to try to become the peoples’ gateway to the digital world – to be the only place people need to go to get what they want. The digital economy is rapidly becoming the economy itself and South Africa needs to make sustainable provisions for these changes.
According to the Organisation for Economic Co-Operation and Development (OECD) revenue authorities have an important role to play in realising the full potential of electronic services. The OECD suggests that it is necessary to provide a fiscal environment within which electronic services can flourish, while still monitoring its influence and impact on the economy.
The OECD, as part of the Base Erosion Profit Shifting (BEPS) debate, has come up with a so-called ‘Action 1’ to address the tax challenges of the digital economy which seeks to align taxation with economic activities and value creation.
Implemented on 1 June 2014, the South African VAT electronic services provisions, although novel, are not a new concept for South Africans, despite the understated awareness campaign of the changes these provisions usher in. While the current legislative provisions seek to create equality between local and foreign electronic service providers, the legislation remains narrow and there continues to be an unfair advantage in some areas.
In South Africa, application of the VAT electronic services provisions are restricted to three proxies or presumptions, including payment from a South African bank, the consumer identifies as a South African resident and/or the consumer’s address being a place in South Africa. Where a foreign supplier is able to confirm any two of these proxies, they are required to register with the South African Revenue Service (SARS) and pay South African VAT of 14% on services supplied to South African consumers. Adding complexity to the issue, however, is the South Africa consumer’s ability to mislead foreign suppliers by providing false or incorrect details which cannot be easily verified by the supplier, and which means many foreign electronic service providers are under the impression that they are not required to register and account for South African VAT.
Adds de Wet: “The VAT legislation provisions are also not broad enough to encompass the relentlessly developing digital landscape. For example, the European Union (EU) has developed more proxies in their qualifying provisions to ensure that the VAT net is not cast too narrowly thereby limiting inclusion. Qualifying factors for registration and payment of VAT in the EU include the use of Internet Protocol (IP) addresses, Wi-Fi hotspots, customers phone numbers and other location based services which are notably absent from South African legislation.
“Yet, VAT is the only tax that some foreign suppliers are not paying,” he says. “A key concern is that there is no place of taxation rules in the South African corporate tax landscape and foreign suppliers can interact with customers with no physical presence resulting in no South African income tax obligations.”
The OECD is working to address this problem and by developing guidelines on location based taxing rights. Concludes de Wet: “While taxing concepts such as a ‘significant digital presence’ test or a ‘virtual permanent establishment’ may seem far-fetched, these may be necessary to require foreign electronic service providers to pay their fair share of South African taxes.”
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