Navigating the Digital Economy

Tackling the evolving digital economy with direct tax laws

We are living in a digital age, where individuals and companies can conduct business across borders without moving from their computers.

Not only is the digital economy growing rapidly each day both internationally and locally, it is becoming more challenging as well. It’s not surprising that the digital economy is becoming an “economy” itself.Base erosion and profit shifting (BEPS) activities are not being generated by the digital economy but some of the key features certainly enhance exposure to BEPS risks.

The digital economy has exposed certain countries to BEPS although there has been a lack of tax legislation. In order to address BEPS, the Organization for Economic Cooperation and Development  has developed 15 Action plans with Action 1 : Addressing the tax challenges of the Digital economy which aims to address the ability of a company to have a significant digital presence in one jurisdiction without being liable for tax in that jurisdiction.

With previous attempts to solve the taxation issues of electronic commerce, according to the Permanent Establishment definition, the OCED has stated that within an internet website, both the software and electronic data do not create tangible property and cannot constitute a “place of business”. Action 7: Preventing the Artificial Avoidance of Permanent Establishment Status is one solution to address the tax challenges into Digital economy, another potential solution proposed is to implement changes to the Permanent Establishment definition.

With regulatory and legislative changes expected to be enforced both in South Africa and internationally to address the digital problem. The question arises, would direct taxes ever be the best option to tackle the taxation of these digital transactions or do we have to accept that a transaction based tax, such as VAT or another consumption tax would be the more suitable answer to addressing tax issues in the digital economy?

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