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The South African government will need to keep an eye on international developments before introducing a digital tax in the country, says Wally Horak, head of tax at the Bowmans law firm.
The government has hinted at the possible introduction of a digital tax for companies like Netflix, Amazon, and Facebook, which operate in various territories internationally and account for a substantial amount of lost revenue.
However, Horak said that the main obstacle to such a unilateral digital tax is the existing ground rule of double taxation agreements (DTA).
A DTA only allows the home jurisdiction to tax a resident of the other contracting state if that resident conducted business through a permanent establishment in the home state, he said.
Horak added that several of the countries that have threatened to impose the new digital tax have decided to suspend the effective date of the new tax due to the uncertainty of whether the tax can be declared void by the corresponding courts.
“This is most likely the result of the approach of the United States, which has indicated that it would encourage its residents to oppose the imposition of the tax in court,” he said.
However, Horak notes that the Organization for Economic Cooperation and Development (OECD), together with the G-20 countries, has developed a new framework that proposes changes to the existing international tax system to allow countries to impose such taxes digital.
A primary objective of the framework is to give market jurisdictions the right to tax part of the profits of multinational corporations (MNEs), with reference to the income generated by customers in that jurisdiction, regardless of whether the MNEs have a physical presence in That country. , he said.
“The OECD Inclusive Framework has indicated that a multilateral agreement modifying the relevant DTAs to allow such taxes by market jurisdictions could be signed in mid-2021, which could result in the implementation of the new rules in 2022,” he said. Horak.
“Therefore, it is advisable that the Government await this international action to ensure the cooperation of other states, in particular the US, since most of the selected multinational companies are based in the US.”
New laws are needed
In line with the recommendations in the OECD framework, Horak said the government should start drafting the relevant legislation to impose such digital taxes.
This should include provisions to consider income generated by a non-resident from supplies to residents by digital means as South African source income.
“The government should also consider amending the foreign tax credit provisions to allow a tax credit for foreign digital taxes imposed on digital supplies by South African companies to foreign customers,” he said.
“The current foreign tax credit provisions would generally not provide such relief, as the source of supply would generally be considered in South Africa, where all inputs to the website in question are provided and where products or services sold through from a website. “
President Cyril Ramaphosa’s 4IR Commission also said the government should adopt a digital tax bill, noting similar legislation that was announced in Turkey in 2019 and entered into force on March 1, 2020.
Under Turkey’s new tax, the turnover generated by certain digital services is subject to a digital services tax of 7.5% in the country.
The commission also recommended that the government develop fiscal policies that can better explain the operations of digital and virtual companies “which have seen exponential growth as their services have become ubiquitous.”
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