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E-Commerce and Tax: Playing Catch-Up

22 September 2016   (0 Comments)
Posted by: Author: Ferdie Schneider
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 Author: Ferdie Schneider (BDO)

As our world becomes increasingly digitalised, tax regulators find themselves in a seemingly never ending chase to regulate the expanding e-commerce frontier.  

The world has undergone an electronic and digitisation revolution over the past 10-20 years, and development in this regard is faster than ever. As the global economy speeds towards digitisation, many traditional industries are being left behind. The Organisation for Economic Cooperation and Development (OECD) has now caught up (well almost) with regard to VAT systems, albeit that many countries have not yet implemented effective measures.

Tax systems continue to struggle to keep up with globalisation. Tax systems originated in an era when reliance was placed on border controls, regulated capital markets and technological constraints to protect the fiscal coffers. These barriers protected tax systems, but as corporations globalised, tax authorities remained constrained by national borders. A major challenge (although by far not the only one) for tax authorities in taxing e-commerce transactions, is to establish the nature of the supply or transaction and the identity of the transacting parties. 

South Africa introduced measures in its VAT system to cater for electronic commerce about two years ago, but they are far from perfect or all-encompassing, and a lot of work still needs to be done in this regard. VAT systems need to be looked at holistically, from an inter-jurisdictional supply perspective to increase certainty for governments and taxpayers. VAT systems have now started to slightly close the gap to tax e-commerce. South Africa’s VAT system has been around for 25 years, and although we have seen many ad hoc amendments, we have not had a real holistic review and revamp, especially with regard to cross border transactions. 

A lack of effective rules in this regard, could of course lead to double; multiple; and non-taxation in a cross-border context. A review of this magnitude would need to deal with the legal provisions relating to the VAT registration of non-resident suppliers; the various interpretational and other issues relating to the inter-jurisdictional VAT rate; the intricacies of imported services (and perhaps learning something from the “reverse charging” applied in other VAT systems); and the intention of the legislator to tax final utilisation or consumption.  

A review of this nature would be incomplete without considering recommendations on introducing a general place of supply rule (which could potentially be linked to residency); specific place of supply rules for electronic, broadcasting, telecommunication, and other intangible difficulty-to-tax services; and the zero rating provisions for these services provided to non-resident suppliers by resident suppliers for services initiated outside South Africa. 

Corporate Income Tax (CIT) systems (and South Africa’s CIT is no exception) have some catching up to do, when compared to the VAT. CIT systems have historically catered for traditional business, either involving goods or services. The era of digitisation makes it difficult for tax systems to keep up in their attempts to identify new intangible services, establish where these services are rendered and consumed, and identify the parties to the transactions. 

Tax systems general apply one of two accepted bases of taxation, namely a residence based tax system; or a source based tax system. A resident of a country is generally taxed on its worldwide income, whereas a non-resident is taxed on income sourced in-country. South Africa taxes local companies and residents on their worldwide income. Dual residence can result in double taxation, which results in worldwide income being taxed in more than one country. Tax residence of an e-commerce enterprise depends on the tax laws of specific countries and on double tax agreements (DTAs). A country may deem an enterprise to be tax resident in that country as a result of incorporation. Other factors such as the enterprise's place of effective management or control, could also play a role. If a company is resident in two countries, this could potentially result in double taxation. DTAs try to manage this. The OECD Model Income Tax Convention provides that a company that is deemed to be a resident in more than one country, will be resident where its place of effective management is. Where effective management takes place is a question of fact, and is often seen to be where the board of directors and management meet to make critical decisions. If the board members are located in different countries, the place of effective management may not be easily identifiable. The company’s residence could be in the country where it has the closest economic relations; or where it primarily carries out its business activities; or where it primarily makes its critical executive decisions.

Tax systems general apply one of two accepted bases of taxation, namely a residence based tax system; or a source based tax system. A resident of a country is generally taxed on its worldwide income, whereas a non-resident is taxed on income sourced in-country. South Africa taxes local companies and residents on their worldwide income. Dual residence can result in double taxation, which results in worldwide income being taxed in more than one country. Tax residence of an e-commerce enterprise depends on the tax laws of specific countries and on double tax agreements (DTAs). A country may deem an enterprise to be tax resident in that country as a result of incorporation. Other factors such as the enterprise's place of effective management or control, could also play a role. If a company is resident in two countries, this could potentially result in double taxation. DTAs try to manage this. The OECD Model Income Tax Convention provides that a company that is deemed to be a resident in more than one country, will be resident where its place of effective management is. Where effective management takes place is a question of fact, and is often seen to be where the board of directors and management meet to make critical decisions. If the board members are located in different countries, the place of effective management may not be easily identifiable. The company’s residence could be in the country where it has the closest economic relations; or where it primarily carries out its business activities; or where it primarily makes its critical executive decisions.

This article first appeared on the September/October 2016 edition on Tax Talk.


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