South Africa is considering implementing a new digital tax on services such as Netflix and Facebook that would require these companies to pay tax on their local operations to the South African government.
The idea has been brought forward by the Parliamentary Budget Office and stressed as a crucial step by the President’s Fourth Industrial Revolution (4IR) commission, but there is currently no proposed legislation to this effect.
However, a guideline for the drafting of this legislation for African countries has been published, giving an idea of what the legislation could look like.
There are a number of countries around the world seeking to impose a digital tax on these multinational corporations, but the Organisation for Economic Co-operation and Development (OECD) has been slow in implementing an international framework that would circumvent double taxation agreements.
Double taxation agreements currently protect services like Netflix from being charged a digital tax by other countries, but this is expected to be bypassed once an agreement on the abovementioned framework has been reached.
If South Africa is to impose a digital tax on international services, however, it must begin drafting the legislation soon, according to Bowmans head of tax Wally Horak.
“In line with the recommendations in the OECD/Inclusive Framework reports, the Government should commence the drafting of the relevant legislation to impose such digital taxes, including provisions to deem income generated by a non-resident from supplies to residents by digital means as South African source income,” Horak said.
The African Tax Administration Forum (ATAF), an international organisation which facilitates cooperation among African tax authorities, has published a guideline for drafting new laws that would enable this digital tax.
South Africa is a member of ATAF, and the organisation’s offices are in Pretoria, South Africa.
Suggested digital tax laws
A document titled the “Suggested Approach to Drafting Digital Services Tax Legislation” outlines details the potential scope of the legislation, which may include everything from social media payments to online gaming.
“This paper, which has been prepared by the ATAF Cross Border Taxation Technical Committee and ATAF Secretariat, contains a suggested approach to the drafting of Digital Services Tax (DST) legislation,” ATAF said.
“It is intended to provide African countries that are considering introducing a DST with a suggested structure and content for their legislation.”
The drafted laws are based on those implemented in other jurisdictions around the world but are tailored for the local market.
Key points from this document include a suggested digital tax rate of 1-3% on digital services revenue, which is defined as the total amount of revenues derived from a country by a company in connection with the provision of digital services.
Importantly, the term “digital services” encompasses the following:
- Online advertising services
- Data services
- Accommodation or transport online marketplace (Airbnb, Uber, etc.)
- Digital content services (Netflix, Spotify, etc.)
- Online gaming services (Steam, Epic Games, individual game microtransactions)
- Cloud computing services
- Services delivered through social media or an Internet search engine.
The implementation of a tax on the above could have a significant impact on the South African digital market.
While many international companies may accede to the imposition of this new tax, other may simply opt to pull out of the country if this is implemented, particularly if they are still able to offer services to South Africans without local representation.
South African adoption
It is important to note that the ATAF document does not describe South Africa’s draft regulations, as these have not yet been published.
The suggest laws are based on international best practice, however, and South Africa is a member of the organisation, which means many of the suggestions may end up in local draft regulations.
If this were to occur, it would make a significant number of international companies liable for digital tax in South Africa – including YouTube, Airbnb, Uber, Netflix, Steam, Facebook, Microsoft, Amazon, various apps which earn money from local advertisements, and video games which offer microtransactions.
MyBroadband asked the National Treasury whether the government had begun drafting legislation to implement a digital services tax in South Africa.
We also asked if the government would draw on the suggestions made by the ATAF document for the construction of its draft legislation.
The National Treasury did not respond by the time of publication.
The full suggestion document created by ATAF on digital tax in African countries is embedded below.