SOUTH AFRICA – Tax revenues from the digital economy – Peter Dachs (ENSAfrica)

International tax lawTax laws form the backbone of any nation’s revenue system, setting the rules that govern how individuals and corporations contribute financially to support government functions. These laws define the types of taxes, the applicable rates, and the regulations regarding payment and compliance. They also outline the rights and obligations of taxpayers, ensuring a balanced and fair approach to funding public... principles deal with the allocation to various jurisdictions of taxing rightsFiscal Sovereignty is the inherent authority of a state to independently manage its financial and economic policies, especially the power to levy and collect taxes within its jurisdiction. Central to national autonomy, fiscal sovereignty enables governments to shape economic policies that reflect their priorities, ranging from welfare programs to defence and infrastructure investment. It also underpins each country’s approach to... in respect of the business profits of a multi-national company. The basic idea is that the country of residence of a company (ie whether a company is incorporated or where its board of directors make their decisions) can tax all the business profits of the multi-national company.

However, if the multi-national company operates through a “permanent establishment”, ie a “bricks and mortar” office in another jurisdiction, then such other jurisdiction (the source state) has primary taxing rightsFiscal Sovereignty is the inherent authority of a state to independently manage its financial and economic policies, especially the power to levy and collect taxes within its jurisdiction. Central to national autonomy, fiscal sovereignty enables governments to shape economic policies that reflect their priorities, ranging from welfare programs to defence and infrastructure investment. It also underpins each country’s approach to... in respect of the business profits relating to that office. The country of residence must then either exempt these profits from tax or provide a tax credit in respect of the tax imposed by the source state.

If the multi-national company does not operate through a ‘bricks and mortar’ office then only the state of residence has taxing rightsFiscal Sovereignty is the inherent authority of a state to independently manage its financial and economic policies, especially the power to levy and collect taxes within its jurisdiction. Central to national autonomy, fiscal sovereignty enables governments to shape economic policies that reflect their priorities, ranging from welfare programs to defence and infrastructure investment. It also underpins each country’s approach to... over its business profits.

The problem is obvious in the context of the digital economy. The likes of Google, Apple, Facebook and Amazon do not need to have a ‘bricks and mortar’ office in a jurisdiction in order to derive significant profits from that country. And in the absence of this office only the USA as the country of residence has taxing rightsFiscal Sovereignty is the inherent authority of a state to independently manage its financial and economic policies, especially the power to levy and collect taxes within its jurisdiction. Central to national autonomy, fiscal sovereignty enables governments to shape economic policies that reflect their priorities, ranging from welfare programs to defence and infrastructure investment. It also underpins each country’s approach to... in respect of business profits arising for these global tech giants. The issue is, of course, much wider than these tech giants and involves all multi-nationals operating in the digital economy.

The international tax rules have simply not kept pace with the developments in the digital economy and so in July 2019 the French took matters into their own hands and imposed a digital service tax on certain digital service revenues at the rate of 3{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} on the gross revenues derived from such digital activities.

The French took the view that the relevant issue is where value is created as opposed to where a physical office is located and pointed out that significant value is created by the collection and selling of data in the jurisdiction where the users or subscribers are based.

France stated that as soon as the international tax authorities (ie the OECDThe Organisation for Economic Co-operation and Development (OECD) is an international organisation comprising 38 member countries, established to foster economic growth, trade, and development on a global scale. Founded in 1961, the OECD provides a forum for governments to collaborate, share policy experiences, and develop solutions to common economic challenges. The OECD's core mission is to promote policies that improve...) amend the relevant international tax rules they would withdraw this tax, but as long as there is no international solution it intends to continue to impose this tax.

The US threatened unprecedented legal action against France and accused the French of singling out successful US tech firms and breaching existing principles of international taxationFOR MORE INSIGHT ON INTERNATIONAL TAXATION, PLEASE READ THIS ARTICLE: Introduction to International Taxation: Key Concepts & Guidelines International Taxation encompasses the framework of laws, principles, and treaties that govern the tax obligations of individuals and entities engaged in economic activities that span multiple jurisdictions. This field addresses how income, profits, and gains are taxed when operations or investments extend.... President Trump threatened to impose tariffs on French wine and pointed out that, in his view, US wine was superior to the French varieties.

Whilst the French have been the only country brave enough to stick their heads above the parapet and incur the wrath of the USA by imposing this tax on a unilateral basis, many other European jurisdictions have draft laws along the lines implemented by the French and are also considering implementing such taxes on a unilateral basis in the absence of appropriate amendments to international tax principles by the OECDThe Organisation for Economic Co-operation and Development (OECD) is an international organisation comprising 38 member countries, established to foster economic growth, trade, and development on a global scale. Founded in 1961, the OECD provides a forum for governments to collaborate, share policy experiences, and develop solutions to common economic challenges. The OECD's core mission is to promote policies that improve....

The OECDThe Organisation for Economic Co-operation and Development (OECD) is an international organisation comprising 38 member countries, established to foster economic growth, trade, and development on a global scale. Founded in 1961, the OECD provides a forum for governments to collaborate, share policy experiences, and develop solutions to common economic challenges. The OECD's core mission is to promote policies that improve... is now under significant pressure to provide a multilateral solution that moves away from the old “bricks and mortar” concept in order to allow the market or user jurisdiction to tax certain of the profits of, amongst others, the tech giants.

Instead of requiring a physical office, a new nexus is being considered by the OECDThe Organisation for Economic Co-operation and Development (OECD) is an international organisation comprising 38 member countries, established to foster economic growth, trade, and development on a global scale. Founded in 1961, the OECD provides a forum for governments to collaborate, share policy experiences, and develop solutions to common economic challenges. The OECD's core mission is to promote policies that improve... which is unconstrained by a physical presence. One of the potential approaches of the OECDThe Organisation for Economic Co-operation and Development (OECD) is an international organisation comprising 38 member countries, established to foster economic growth, trade, and development on a global scale. Founded in 1961, the OECD provides a forum for governments to collaborate, share policy experiences, and develop solutions to common economic challenges. The OECD's core mission is to promote policies that improve... would be to allocate a portion of the non-routine profit of a tech company to the market jurisdiction, ie, where the user or subscriber is based. The nexus could be based on revenue thresholds, certain marketing activities and digital engagement in that market jurisdiction.

This is a politically sensitive topic since, under the current rules, the right to tax all the business profits of the tech giants is allocated to the USA in which these companies have their tax residence. The new approach would allocate taxing rightsFiscal Sovereignty is the inherent authority of a state to independently manage its financial and economic policies, especially the power to levy and collect taxes within its jurisdiction. Central to national autonomy, fiscal sovereignty enables governments to shape economic policies that reflect their priorities, ranging from welfare programs to defence and infrastructure investment. It also underpins each country’s approach to... to the market jurisdictions with the USA essentially losing the tax revenueTax Revenue is the income collected by governments through various taxes imposed on individuals, corporations, and transactions. It is a primary source of funding for public expenditures, including infrastructure, healthcare, education, and social services. Tax revenue can come from different types of taxes, such as income tax, corporate tax, value-added tax (VAT), excise duties, and customs tariffs. The level and... allocated to these other jurisdictions.

The question arises how South Africa should respond. It is no secret that our tax revenues are lagging behind budget. Earlier this year SARSThe South African Revenue Service (SARS) is the official tax authority responsible for the administration and enforcement of tax laws in South Africa. It plays a crucial role in managing the country’s fiscal policy by collecting revenue, administering customs, and ensuring compliance with tax legislation. Established under the South African Revenue Service Act, No. 34 of 1997, SARS functions independently... reported revenue shortfalls for the 2018/19 year of R57.4 billion. Is this an appropriate time to at least consider a unilateral approach such as that taken by the French or should we continue to wait until the OECDThe Organisation for Economic Co-operation and Development (OECD) is an international organisation comprising 38 member countries, established to foster economic growth, trade, and development on a global scale. Founded in 1961, the OECD provides a forum for governments to collaborate, share policy experiences, and develop solutions to common economic challenges. The OECD's core mission is to promote policies that improve... introduces a multilateral solution through the amendment of international tax rules? The potential tax revenues in this regard of course extend way beyond the scope of the USA tech giants and include all aspects of the digital economy. Interestingly, the French have anticipated that they will raise approximately EUR400 million from this tax in 2019.