The South African government, along with governments around the world, are presently looking into ways to include companies that provide digital goods and services into their respective “tax nets”, in order to scoop up tax income from the so-called “digital economy”.
The problem, as discussed a press briefing held by PriceWaterhouseCoopers (PwC) this morning, is tax legislation isn’t exactly keeping pace with the technological developments driving modern-day change, and companies that earn income from South African sources without having a physical presence in the country aren’t paying the South African government any tax.
Partly because of this, international companies are able to offer digital goods and services that local companies are unable to compete with, because their prices don’t take into consideration the 14% VAT that South Africans must pay on goods with a South African origin.
Yes, and…?
What does this have to do with you, you may ask? Well, if you’ve bought an app from the Play Store, or paid for music or TV subscription from companies like Spotify and Netflix, or even bought a game from Steam or the Xbox Live/PlayStation marketplaces, no portion of the final sale price went to the South African government as it would have had those services had a South African origin.
While that’s great for you, it’s not great for a government that counts on tax to keep the country going, and as the global economy becomes more digital and traditional economies shrink, losing out on taxes derived from digital revenues is bad news for both countries and local businesses alike, says PwC.
Ebooks
Ebooks were cited as an example: say Exclusive Books sells an ebook for R100; included in that R100 is 14% VAT, meaning Exclusives earns R87.72 for the book. A foreign company can afford to offer that same ebook to a South African consumer for R90 as they don’t need to add tax to it at all, leaving the consumer with the option of paying R100 or R90 for the same item.
As South Africans are very price-conscious, it’s a no-brainer: the international company gets the money, and the South African economy gets nothing. The same applies to any good that’s only provided digitally, like games, music and videos that South African consumers can buy over the internet.
This is partly because existing tax legislation has difficulties understanding what, exactly, a digital good or service is, how it’s delivered and who is responsible for it, but also because technologically-driven advances have very quickly changed what people spend their money on and how they pay for it.
Today’s business models “science fiction”
Business models are so advanced today, PwC says, that when our existing tax legislation was drafted it was the dream of science fiction for a business to operate in a country without having a physical presence there.
Today, that’s de rigueur for big names like Apple, Netflix, Spotify and other big tech companies with no local presence, but whose services many South Africans use and pay for via the internet.
To illustrate the complexity of the matter currently facing tax legislators, PwC’s director of tax services, Kyle Mandy, posited the following scenario: a South African could be in Mauritius, on holiday, and decide to buy an app for their smartphone. They’re in Mauritius with a Mauritian IP address, their bank account is in South Africa and the good being supplied is a collection of ones and zeroes from a cloud-based storefront that could be physically located anywhere, from a company with its physical headquarters in the United States.
Determining who, exactly, should get the VAT on that transaction and how should it be collected is a political and legislative nightmare. And therein lies the challenge faced by governments everywhere in the face of the rising digital economy we’re seeing today.
A start
Last year, legislation was introduced in South Africa to introduce a tax on digital goods, but it required that companies who sell such goods to South Africans to get on board with the programme voluntarily, with little to no consequence for non-compliance.
Not surprisingly, few companies have opted in, but a handful of the bigger names have, including Apple, as evidenced by the “This amount includes VAT at 14%” that appears at the bottom of every digital receipt for iTunes purchases.
Not just VAT
It’s not just VAT that governments lose out on as a result of these gaping legislative caverns, it’s corporate tax as well. Today, big tech companies are able to operate in countries where they have no physical presence, generate profits in those regions but pay little to no tax there thanks to their ability to declare their profits in other regions that have more favourable tax legislation.
When corporate tax sits at 28%, which it does in South Africa, and a company makes a lot of money here but they pay little to nothing in tax, that’s a huge loss to the country.
Do No Evil, but funnel money offshore like your life depends on it
UK lawmakers have brought in legislation aimed at getting companies to play fair when it comes to their tax bills.
It’s dubbed the “Google Tax” law, and is based on the UK’s Diverted Profits Tax, which aims to put paid to practices of big multinationals that make billions of pounds in the UK, but which only declare the profits in Ireland, a country with a lower corporate tax rate as Apple, Google and a lot of other big name tech companies have been doing.
The practice is so well-known, it is called the “Double Irish arrangement”, and even has its own Wikipedia entry.
This is but one step towards ensuring multinationals, like the big tech giants, shoulder their corporate tax responsibility fairly.
Down Under gets tough
Australia followed the UK just last week with its own version of the UK’s diverted profit tax law. The difference with the Australian implementation is the imposition of fines for non-compliance that are 100% of the tax amount owing.
Some have called it “an incredibly punitive measure“, but the policy’s proponent, federal treasurer Joe Hockey has defended it, saying “…extending the tax to intangibles and online goods from overseas was an integrity measure and one that would help level the playing field for domestic providers.”
The Australian government also added GST onto books, music, TV shows and movies paid for and downloaded via the internet from foreign suppliers; should its implementation prove successful, we can expect other countries to follow suit.
What’s that mean for me?
While PwC was mum on the exact repercussions such legislative measures would hold for South African consumers, it’s not unfair to assume that should they come to pass, at the very least we can expect to pay what we’re paying now for digital goods, plus an extra 14% on top of it so that our government gets its slice.
Despair not, however: PwC says tax in the digital age is such a complex issue that any agreement on how, exactly, to legislate the necessary changes in South Africa and elsewhere is likely years away, and that to legislate it in isolation, without international backing from other countries, wouldn’t be wise.
The other thing to consider is that the pace of technological change is so fast that by the time legislation is actually passed, chances are technology and business practices will have already changed, rendering the new laws moot before the ink is even dry.
And even if by some miracle those laws pass, nobody is sure yet on how to go about implementing the steps required to ensure compliance, making Australia’s decision to go ahead with its new laws a situation to keep an eye on.
The road ahead
Right now, tax people the world over are grappling with the concept of the digital economy and how to derive tax income from it, because the world is changing, and rapidly, while the tax laws in many countries are still languishing in the 20th century, where they originated.
While the man on the street might lament the future increase in his costs of purchasing music, movies, TV shows and other non-physical services over the internet, PwC says these are changes that must take place if digital companies are to pay their fair share – right now they’re getting a free ride, and local companies which must pay tax on all revenues whether earned through the sale of physical or digital goods, are at a competitive disadvantage.
As that famous man (supposedly) said, “Render unto Caesar the things that are Caesar’s”. That’s no less true now than it was back then, it’s just the determining of the “what” and the “how” that needs to change to catch up to this ever-changing world of ours.
[Image – CC BY-ND 2.0/fosforix]
