In the good old days, it used to be pretty clear which country could tax you. If you had a widget factory in Ireland, Ireland would tax all your revenues no matter where your customers were. If you had customers in say South Africa, South Africa could only tax you if you had a business presence there. This is the nexus principle. A country can tax you only if your income arises from your links to that country. These days, nobody works with widgets, rather many goods and services are intangible, in whole or in part. We refer to these as digital services, which could be subject to Digital Services Tax (“DST”). Digital services include any electronic services, including streaming of digital content, provision of digital marketplaces, subscription-based media, website hosting, online help-desk services, and online learning.
None of these products require a widget factory or a tangible nexus in the country where customers are. So, who can tax such services and how? It gets more complex by the day and we deal with some key aspects below.
What is digital services tax?
DST refers to the mechanism where a country seeks to apply tax in respect of digital services received in that country. Even if the provider has no physical presence in the country. The tax is thus linked to where the services are consumed rather than where the service provider is based.
This is a fundamental shift and increases the scope for tax which is of course attractive to revenue authorities. As digital services have remained profitable throughout the Covid-19 pandemic.
Tax authorities are noticing this trend and are keen to take advantage – making this a huge global talking point at the moment. We are seeing an increase in countries that are implementing a form of DST. This can apply in many different ways.
So, what’s happening with Digital Services Tax?
Where the value is created is one way to determine who should be taxed . I.e., if the end-user driving the income generation that could be taxed? Possibly though, revenue authorities could also look at a wider scope, that includes any digital exchange of information. There is also the option to look at thresholds and to only tax once revenue earned from digital services exceeds a certain amount. This would trigger more compliance requirements. So far though, the revenue thresholds being implemented range from USD 65 000 (Nigeria) to USD 32 million (the United Kingdom). In contrast to this however, some countries have no threshold. There is also little consistency in the rates charged, and some countries are charging different rates for different services.
VAT on electronic services
Another change is in Value Added Tax (“VAT”), as many countries have added an electronic element into their VAT legislation. But not always in their corporate tax regimes. The VAT applies to similar types of services but is taxed indirectly rather. South Africa is an example of this. Whereby foreign e-commerce enterprises that supply electronic books, music, and other electronic services are required to register as a VAT vendor in South Africa. Where their turnover in South Africa exceeds or an annual threshold of ZAR 50 000.
“Electronic services” are defined in the South African VAT Act to include “any services supplied by means of an electronic agent, electronic communication or the internet for any consideration”. Three types of services will be excluded from this definition:
- educational services supplied by a regulated education authority
- telecommunications services
- services exclusively supplied by group companies to other members of the group
Digital Services Tax developments in Africa
Developments are coming quick and fast and even the African Tax Administration Forum has issued their approach to taxing the digital economy. So it is something that we need to be aware of. Their approach is to target large and profitable digital companies, by setting minimum revenue thresholds and using reasonable DST rates. This idea is that this won’t have a negative impact on the growth of the digital economy in Africa.
Kenya has implemented a DST that applies to income from services provided through the digital marketplace in Kenya. At a rate of 1.5% on the gross transaction value. There is no revenue threshold. The DST will apply to a resident or non-resident who derives income from providing the affected services to a user situated in Kenya. A digital marketplace is defined in Kenyan legislation as a platform that enables the direct interaction between buyers and sellers of goods and services through electronic means.
These changes are quite complex and can affect a wide range of countries and businesses that you may not realise fall into the DST net. If they could impact your business, please contact us to assist.
How can we help?
How you structure your business is a critical question as you expand globally. The right structure will protect your assets, improve your currency position, support your business operations, facilitate future business expansion and changes, and optimise your overall tax rate. Trying to unscramble a sub-optimal structure entered into in haste or without full consideration of relevant facts is complex and expensive, so it’s important to plan upfront.
Structuring an international business is both a science and an art – this is our specialist area of expertise. Regan van Rooy is an international tax and structuring advisory firm focussing on Africa. We have offices in South Africa, Mauritius and Ireland and we can help you with any international tax or structuring query.