Evaluating the international taxation of digital services in relation to South Africa

Abstract

Background The digital economy affects nearly all aspects of everyday human life and is becoming more and more entrenched in a wide variety of economic sectors. According to the Davis Tax Committee, this entrenchment has made it increasingly difficult to differentiate the digital economy from traditional economic trade for purposes of taxation.

The digital economy exacerbates certain base erosion and profit shifting tax risks and, as a result of a lack of international consensus to tax the digital economy, taxing authorities worldwide have begun implementing different methods in order to tax the digital economy.

Main purpose of study This study will focus on evaluating methods applied internationally in taxing the digital economy and will aim to examine whether South Africa’s current approach in taxing the digital economy should be adapted to ensure that the most effective mechanism for taxing the digital economy is used.

Method This study will be conducted as qualitative research based on the multi-sited, global research method. It will also contain comparative studies where the taxation method applied by South Africa (in relation to the digital economy) will be compared to the methods applied by other developed countries in order to establish whether South Africa’s taxation is in line with international guidance.

Results It was found that South Africa complies with the OECD VAT guidelines as well as the recommendations made by the Davis Tax Committee in relation to taxing the digital economy.

It was also found that taxing the digital economy both by way of direct and indirect taxing methods could be an effective, temporary solution to address the tax risks posed by the digital economy.

Conclusions Although South Africa’s current VAT legislation should serve as an effective mechanism to tax the digital economy, South Africa could consider adapting and enhancing its legislation to further improve the effectiveness of its VAT legislation by adopting certain taxing mechanisms implemented in the UK.

South Africa should strongly consider implementing a digital services tax that could provide a temporary solution to tax the digital economy by way of a direct tax.