South Africa's tax laws have not kept pace with the growth of the digital economy and changes in the way in which business is conducted.
So says Charles de Wet, head of indirect tax, PwC Africa, who points out that South African tax laws were designed at a time when today's technology and business models were the work of science fiction and the ability of a company to conduct business in a country required a physical presence in the country.
The digital economy refers to an economy that is based on digital computing technologies. The digital economy is also sometimes called the Internet economy, the new economy, or Web economy.
Globally, there have been numerous reports regarding multinationals that pay little or no tax in the markets in which they generate profits.
Countries like Australia are introducing punitive measures for foreign companies using complex cross-border structures to avoid paying tax. The Financial Review reports that the Australian laws were aimed at 30 multinationals, such as Google, Apple and Microsoft, which have adopted structures to avoid having a taxable presence in Australia, diverting billions of dollars in profits offshore.
According to consultancy firm, Accenture, in its Technology Vision 2015 report, pioneering enterprises are tapping into a broad array of other digital businesses, digital customers and even digital devices at the edge of their networks to create new digital ecosystems.
"We are living in an era of unprecedented digital change - the type of change that is reshaping the relationship between customers and business, and prompting forward-looking CEOs to question the very business they are in," says De Wet.
"Currently, multinationals in the digital economy that sell goods and services in the South African market and elsewhere do not have to comply with the same rules as local companies. Not only is this position unsustainable, but it distorts competition between companies, as well as placing the multinational at an advantage over local businesses operating in the market," explains De Wet.
He notes that foreign entities are only subject to tax in SA on income derived from a source in the country.
However, he adds, the source rules were developed a century ago before the digital economy existed and do not take into account the way in which the modern economy operates. As a result, multinationals can avoid paying tax in SA because the source of their income is not in SA, notwithstanding that they operate in the local economy.
Multinationals are also accused of exploiting loopholes in the global tax system by setting up structures in low-tax jurisdictions and shifting profits both from the markets in which they operate and those in which they do have a physical presence to these low-tax jurisdictions, De Wet points out.
By doing this, they are able to pay much lower taxes on their global profits, he states, adding this gives these companies a cost advantage over local businesses that are fully within the South African tax net and have to pay tax on the profits they make at comparatively high rates.
"It is not surprising that the tax laws have not kept up with the digital era and South Africa is not unique in this regard. The pace at which the digital economy is growing will require action from South Africa's tax authorities, as well as an overall global solution to level the playing fields so that South African companies are able to compete with big multinationals on a level playing field," says De Wet.
The Organisation for Economic Co-operation and Development (OECD) has taken the lead globally to develop the tax rules and to confront the tax challenges faced in the digital economy. In September 2014, the OECD released its final report on the tax challenges of the digital economy under its Action Plan on Base Erosion and Profit Shifting.
The report acknowledges the digital economy has increasingly become the economy itself, it is not possible to ring-fence the digital economy from the rest of the economy, and more technical work needs to be done to evaluate the broader tax challenges posed by the digital economy and potential options to address them.
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