The evaluation of the adequacy of the existing framework for source-based taxation necessitated an evaluation of the digitalisation of the economy and the new business models proliferated therein. The digitalised economy must encompass all digitally enabled economic activities, thereby acknowledging the fundamentality of digital advancements in information and communication. It was noted that a digital economy does not exist separately from the traditional economy, rather the process of digitalisation has permeated throughout the traditional economy. Thus, the terminology of the digitalised economy was adopted.
There are five integral and identifiable features that are key to understanding the digitalisation of the economy. Namely, mobility; the reliance on data and big data; network effects; the emergence of multi-sided business models; the tendency toward monopolies and oligopolies;
and finally volatility. Most prominently, technological affordances have allowed for far greater scale of operations and commercial geographic reach. E-commerce, payment service providers, application stores, online advertising and cloud computing were identified as a non-exhaustive illustrative list of business models that have been proliferated through the digitalisation of the economy.
It is evident that the underlying commercial objectives have remained the same, however, the structure of the businesses and the modalities of value creation have evolved. Therefore, there are further identifiable features of the new digitalised business models. Firstly, digitalisation has enabled cross-jurisdictional scale without mass and greater commercial reach vitiating the prerequisite of physical presence in a foreign jurisdiction. Additionally, reliance on intangible assets means that more successful businesses are able to collect, analyse and utilise large sets of data to produce substantial value within the business model. Finally, the phenomenon of
‘prosumption’ is being realised by businesses as they are able to generate income from the utilisation of user data and user participation.
Thereafter, the resultant challenges to direct taxation were discussed. The primary concern is that the changing manner in which business is conducted allows economic actors to avoid, remove or significantly reduce their tax liability within the existing taxation framework.
Consequently, four areas of concern were uncovered. Firstly, non-resident taxpayers are able
to conduct substantial activities, that are vital to their income-producing structure, without necessarily creating a traditionally acknowledged physical taxable presence in certain jurisdictions.
The second issue is that the characterisation and the determination of the source of the income has been complicated by cross-border and digitalised transactions. The third issue relates to the non-uniform application of transfer pricing rules to attribute revenue to different parts of multinational digitalised business models, where new technologies enable businesses to conduct activities that traverse multiple jurisdictions simultaneously. The final area of contention is the concern that the regulation of data collection for tax purposes is not necessarily congruent with the current technological advancements in respect of data.
Specifically, in regard to the questions of data valuation and whether the collection of data can give rise to a nexus for the purposes of taxation.
Chapter III canvassed the existing South African framework for source-based taxation. South Africa has developed a dual approach to the determination of source. It is submitted that the theoretical justification for taxation on the basis of source resides in the ‘benefit theory’. In terms of this theory a non-resident who is able to derive benefit from the access to and use of a jurisdiction’s infrastructure, population and resources is duly obliged to contribute to the maintenance of that jurisdiction by way of taxation. Accordingly, this provided the normative framework through which to evaluate the adequacy of the existing South African framework for source-based taxation.
Contained in s9 of the ITA are the statutory rules for the determination of source, and where the Act is silent on the income in question, resort is had to the common law principles as contained in the judicial approach. The judicial approach, in light of the impossibility of formulating a universal test for the determination of source, has focused on providing tests, factors and considerations which can be implemented to determine the source of the income in question. The case of Lever Brothers provided the locus classicus of the test for the determination of source as identifying the originating cause of the income and locating that originating cause in a jurisdiction. The issue of multiple sources and apportionment was canvassed with reference to cross-border partnerships, which is the closest approximation to the value chains utilised within the digitalised economy. The courts appear to acknowledge
that the source of income may be located where the business operations are carried out, rather than merely where the business profits are realised.
Thereafter, attention turned to the adequacy of the framework for source-based taxation, in light of the business models discussed in chapter II. As it stands, the domestic framework is inadequate in its application to the digitalised business models in terms of both the statutory and judicial approach.
There is no rule contained in s9 of the ITA pertaining to the determination of source with regards to e-commerce or the digitalised economy. Moreover, the important provisions relating to the source of royalties – given the reliance on intangible assets and intellectual property in the digitalised economy – find limited application in the digitalised economy. This is due to the reliance on the payer principle, which requires the prerequisite of a payment for the determination of source. This approach is incongruent with the realities of the digitalised economy and the benefit theory. Rather, taxing rights should be allocated in terms of where value is created.
Consequently, resort must be had to the judicial approach. Evidently, the judicial approach is in itself inadequate, as the tests relied on by the judiciary have a very limited scope for extension to determine source in the absence of the activities and physical presence of the taxpayer. Simply, the judicial approach is inadequately equipped to deal with the complexities of the digitalised economy, as it was conceived in light of traditional business models.
Furthermore, it is necessary to enact legislation that would provide guidance to the courts to allow for apportionment as between multiple sources. In this way, South Africa would ensure a right to tax on the basis of source where one of the originating causes can be located in South Africa. Without statutory intervention, it is submitted the judicial hesitancy with regard to apportionment will prevail.
Finally, this dissertation evaluated the revenue-sourcing rules proposed at the international level to glean guidance regarding the formulation of a comprehensive South African framework for source-based taxation. The more complex and comprehensive approaches adopted by the OECD and ATAF identifies a revenue sourcing principle for certain types of income derived by digitalised business models. Thereafter, a hierarchal list of indicators is used
to determine the source of the income in question. This approach is advantageous due to its flexibility and its cognisance of the varying modalities of business undertaken by digitalised business models. However, this approach places stress on domestic and international privacy and information regulatory systems. The information necessarily collected for the determination of source of the income in question is both private and personal and its collection must take place in accordance with the laws governing the collection of such data.
The approach adopted by the UN is simpler and is similar to the revenue-sourcing rule proposed by the DTC in that it relies on the payer principle. However, the criticisms regarding the reliance on the payer principle are similarly relevant here. The prerequisite of a payment is incongruent with the nature of the digitalised economy and narrows the scope of the application of such a provision away from allocating taxing rights in accordance with where the value was created.