The rapid growth of the digital economy has meant that tax laws in South Africa, and worldwide, have not been able to keep pace.
Nevermind online purchases — the problem is figuring out how to tax services companies such as Facebook and Google.
According to Charles de Wet, head of indirect tax at PwC Africa, South Africa has introduced amendments to the VAT legislation that allows for foreign digital goods to be taxed.
De Wet says multinationals that sell goods and services in South Africa have an advantage over local companies as they do not have to comply with the same rules.
“Foreign service providers pay no tax in South Africa, but consumers who buy products from a South African corporation will still have to be subject to a 28% corporate tax.”
So, for example, Amazon would pay no tax for goods sold in South Africa, while a local company like Takealot would be subject to 28% corporate tax.
It is unlikely that Amazon pays tax anywhere else in the world on that.
Nevertheless, South Africa introduced legislation concerning the digital economy before the European Union, according to Matthew Besanko, associate director of tax services at PwC.
Following a process of consultation in 2013, the country wrote legislation in 2014 to cover certain digital transactions.
However, Besanko says the focus was more on consumer goods and did not include corporate tax.
Finance minister Nhlanhla Nene announced in his budget vote speech that the scope of the tax would be widened to include the purchase of software. However, PwC says government needs to go further.
De Wet says multinationals such as Facebook and Google pay little or no tax in markets where they generate profits.
Currently, foreign entities only pay tax on income derived from a source in South Africa. Multinationals avoid paying tax as the source of their income is not in South Africa, although they operate in the local economy.
Kyle Mandy, director tax services at PwC, says multinationals fall outside South African tax law. Mandy says the rules need to be rewritten to capture the digital economy.
Cor Kraamwinkel, associate director for corporate international tax at PwC, says South African legislation is not the only challenge.
“If you were to apply our multilateral tax treaties, foreign multinationals will escape paying tax. He suggests that working with multilateral organisations such as the Organisation for Economic Co-operation and Development are essential to resolving the digital tax dilemma.” — © 2015 NewsCentral Media