New tax rules proposed for e-commerce transactions
In the 2015 Budget Speech presented to the National Assembly on 25 February 2015 the Minister of Finance announced that amendments will be proposed to change the rules for the digital economy in line with the latest guidance issued by the Organisation for Economic Co-operation and Development (“OECD”) in its report on base erosion and profit shifting (“BEPS”).
The changes proposed for South Africa are based on the interim report of the Davis Committee (the “Report”) which submitted that there is limited scope for South African residents to shift profits to offshore tax haven jurisdictions via e-commerce transactions, however, the opposite holds true with respect to e-commerce transactions conducted by non-residents with South African customers.
Non-residents are only subject to tax in SA on income derived from a source in South Africa however, the source rules do not deal specifically with e-commerce transactions. As a result, non-residents can avoid paying tax in South Africa because the source of their income is not in South Africa.
The Report makes the following recommendations in respect of the proposed design of the new direct tax legislation relating to e-commerce transactions:
• new source rules that deal with e-commerce transactions should be enacted to provide that digital goods or services are sourced where consumption takes place, however, these rules must only tax a portion of the profits as the country of residence of the supplier would also have a legitimate claim to tax such profits
• the South African Revenue Service should isolate and focus on foreign multi-nationals and compel them to submit tax returns
• rules should be implemented that require non-residents with South African sourced income to submit income tax returns even if they do not have a PE in South Africa
• to ensure that such non-residents register for tax, a withholding tax system should be implemented where a resident that enters into an e-commerce transaction with a non-resident should withhold tax on payments made to the non-resident
• the legislation should allow for the provisions of the Electronic Communications and Transactions Act to be utilised to detect and identify taxpayers since the main challenge that e-commerce poses relates to identifying the location of taxpayers and their transactions
• a level playing field should be created so that South African companies dealing with digital goods and services are able to compete with big multinationals
The Report also provides considerable recommendations in respect of the design of the indirect tax (i.e. Value-Added Tax) legislation related to e-commerce transactions.
Based on the recommendations in the Report, all non-residents who are involved in e-commerce transactions with South African customers should expect to pay tax in South Africa on these transactions in the future.