New digital tax for South Africa proposed

The Parliamentary Budget Office (PBO) has detailed a possible digital tax on consumption and income generated by digital economic activities and cross-border activities.

This formed part of a presentation ahead of finance minister Tito Mboweni’s Medium-Term Budget Policy Statement next week.

The PBO, which provides independent, objective and professional advice and analysis to parliament, said digital tax is gaining international attention.

“The global discourses to rethink the allocation of taxation rights has intensified. South Africa taxes consumption through VAT, but not income of digital economic activities,” it said.

This is not the first time the PBO has promoted a digital tax, noting that in 2014 South Africa was one of the first countries to introduce tax measures on the consumption of digital products through VAT.

However, South Africa has continued to lose revenue because it does not have measures in place to tax the income raised by digitalised economic activities.

“Given that South African corporate tax revenue as a share of revenue has declined over the years, and that more businesses have become more digitalised, it is necessary to consider taxation measures that enable revenue to be raised from digital economic activities income,” it said.

“By applying this approach, South Africa would be following recent international trends, which would not only guarantee additional needed revenue but also ensure that all business activities contribute their fair share into the fiscus.”

The PBO said South Africa could also generate additional revenue from customs duties on cross border digital economic activities.

It noted that the current tax regime only makes provision for custom duties for non-digital cross border products and services.

The group added that online global imports and exports have grown faster than physical imports over the last decade.

However, taxation on online global imports is restricted by a World Trade Organisation (WTO) moratorium that has been in place since 1998.

“The revenue losses of Sub-Saharan Africa are expected to range between $600 million and $2.6 billion (R10.8 billion and R46.8 billion) annually in potential custom duties due to the WTO moratorium,” the PBO said.

“South Africa is estimated to have lost between $25 million (R475 million) and $37 million (R700 million) in potential custom duties revenue as a result of the WTO Moratorium.”

“Unsurprisingly, South Africa and India have raised concerns about the fiscal impact of the 1998 WTO Moratorium over the years, and the duo submitted a proposal to end the WTO Moratorium in March 2020,” it said.

Digital tax preparation in South Africa

Deloitte has recently published information regarding digital taxes in Africa which said it would not be surprising if the South African government explore the introduction of a direct digital tax.

South Africa was one of first African countries to bring digital services within its indirect tax (VAT) net. To date developments on the direct tax front have been placed on the backburner.

This has, however, changed with tax revenue collection expected to decline significantly because of the COVID-19 pandemic and lockdown.

“In this regard, most of the groundwork has already been covered by the Davis Tax Committee (DTC) which published its final report in 2016,” Deloitte said.

The DTC recognised the balance that must be struck between the implementation of a digital tax and the unique economic circumstances and economic policies that are aimed at encouraging foreign direct investment to foster economic growth.

The DTC recommended that South Africa should expand its current source rules to include a provision that the source of the proceeds from the supply of digital goods or services is located where the payor for the digital goods or services is located.

Framing the source rule on the basis of the payor’s location, would bring within the South African tax net digital transactions in terms of which goods and services are delivered in South Africa but payment is made to electronically to a non-resident.

Republished with permission from BusinessTech.

Now read: Tax increases in South Africa – What experts say

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New digital tax for South Africa proposed