Therefore, this thesis assesses and examines the adequacy of the existing South African framework for withholding tax in its application to the new digitized business models. Therefore, this paper provides a theoretical understanding of the existing source rules for taxation in the third chapter. Through the prism of the above-mentioned normative framework, this article evaluates the adequacy of the existing sourcing rules in their application to the new business models.
This paper aims to determine the adequacy of withholding tax rules through doctrinal research or the traditional legal research approach.
CHAPTER 2: UNDERSTANDING THE DIGITALISED ECONOMY, THE PROLIFERATION OF NEW BUSINESS
The second key feature is that of the reliance on data within the digitized economy. The digitization of the economy has led to the spread of versatile business models. As referred to earlier, cloud computing plays an important role in the digitization of the economy and the resulting business models.
In essence, the digitization of the economy has enabled the trend of dematerialization of digitized business models.86. DIRECT TAX CONSEQUENCES AND CHALLENGES OF DIGITALIZATION OF THE ECONOMY AND THE EMERGENCE OF NEW BUSINESS MODELS. Finally, this chapter highlighted the challenges for taxation posed by the digitization of the economy and the consequent proliferation of new business models.
CHAPTER 3: THE SOUTH AFRICAN FRAMEWORK FOR TAXATION ON THE BASIS OF SOURCE
The approach consists of the legal approach of determining the source and the codified or legal approach. Accordingly, this thesis constructs a normative framework through the prism of the underlying theoretical justification for source-based taxation. It is thus difficult to discern the exact parameters of what is fair in determining the right to levy a tax.159.
STATUTORY RULES FOR DETERMINATION OF SOURCE CONTAINED IN SECTION 9 OF THE INCOME TAX ACT. Therefore, the source rules regarding royalties are particularly important in determining the source of income derived from various new digitized business models. The court was tasked with determining the source of interest payments made by a South African company on a debt owed to non-resident Lever Brothers.
This point remains essential in the subsequent discussion of the judicial approach to source determination. The issue of determining source is complicated by the fact that there may be several factors that contribute to the accrual or receipt of income. A third academic point of view speaks of the failure of the parties to raise the issue of partition before the courts.
Accordingly, s9 of the Act sets out rules for determining the source of specific listed types of income. Where s9 is silent, they are turned to the courts to determine the source of the income. In addition, this chapter has discussed some of the judicial tests that have been developed to assist in determining the source.
In South Africa and the United States, the courts seem open to accepting that the source of income is not necessarily where the profits of the business are realized by the partnership as a whole.
CHAPTER 4: AN EVALUATION OF THE ADEQUACY OF THE EXISTING SOUTH AFRICAN FRAMEWORK FOR TAXATION
Accordingly, Gutuza identifies the 'use of the taxpayer's capital' and the 'rent of the taxpayer's property' as two situations where physical activity or involvement by the taxpayer is not necessary for the determination of source.268. The judicial approach to source determination is not set up to deal with the complexities of the ever-changing digitized economy, as the fundamental principles are established with reference to traditional business models. THE STATUTORY APPROACH TO THE DETERMINATION OF SOURCE The inadequacy of the domestic approach to the determination of source in light of the digitization of the economy has long been recognized.
Therefore, in respect of digitized business models and e-commerce, the judicial approach must be followed to determine the source of the relevant income. Therefore, a statutory rule for determining the source of royalties that adequately applies to digitized business models is very important. The criticism leveled against the 'payer principle', as included in the statutory determination of the source of royalties, would be a relevant consideration in the construction of a statutory rule as suggested by the DTC.
At the domestic level, there is little scope for extending the judicial approach to situations where there is no physical presence or income-generating activity of the taxpayer. In this way, South Africa would ensure the right to tax at source where one of the originating causes could be in South Africa. Finally, given the absence of a provision in the S9 source taxation rules regarding the determination of the source of income derived from e-commerce or the digital economy, it can be concluded that there is an inadequacy in relation to the statutory approach.
In addition, this chapter reaffirmed the importance of statutory provisions for determining the source of royalties. This chapter specifically addresses the reliance on the payer principle for source determination in the light of new digitized business models.
CHAPTER 5: GUIDANCE FROM THE INTERNATIONAL PROJECT TOWARD ADDRESSING THE CHALLENGES TO
It is clear that the adoption of this approach illustrates the OECD's recognition of the different business modalities adopted by digitized multinational business models. Similar to the approach described by the OECD, the guidance provided by ATAF for the drafting of the Digital Services Tax (DST) provides for the determination of the source of income. In addition, section 5 provides clarity regarding the term "user" for the purposes of the DST legislation.
Importantly, section 7 sets out the determination of the user's location, which will vary depending on the digital services provided. Failing the availability of the geolocation, the user's IP address associated with the device will be decisive.364. The complexity of the OECD's proposed solution under the Unified Pillar approach stands in direct contrast to the approach adopted by the UN.
Despite the apparent advantage of the simplicity of the UN's approach to source determination, its similarity to the DTC's recommended statutory source rule is cause for concern. Therefore, the benefits of the more complex approach adopted by the OECD and ATAF are clear. Allowing for the characterization of the income received, identifying an appropriate procurement principle and then providing a hierarchical list of indicators provides a much more comprehensive approach to determining the source.
It allows flexibility in sourcing and better incorporates the nature of digitized business models. However, the one payment prerequisite and reliance on the payer principle is somewhat outdated and will not adequately account for the modalities of the digitized economy.
CHAPTER 6: CONCLUSION
The second issue is that the characterization and determination of the source of income is complicated by cross-border and digitized transactions. This therefore provided the normative framework through which to assess the appropriateness of South Africa's existing source-based taxation framework. Contained in s9 of the ITA are the statutory rules for determining source, and where the Act is silent on the income in question, the common law principles as contained in the judicial approach must be used.
The judicial approach, in light of the impossibility of formulating a universal test for determining the source, has focused on providing tests, factors and considerations that can be applied to determine the source of the income in question. The Lever Brothers case provided the locus classicus of the test for determining source as identifying the initial cause of income and locating that initial cause in a jurisdiction. Attention was then turned to the suitability of the framework for source-based taxation in light of the business models discussed in chapter II.
There is no rule contained in s9 of the ITA that deals with the determination of source in relation to electronic commerce or the digital economy. This approach is inconsistent with the realities of the digitized economy and the theory of profitability. Simply put, the judicial approach is ill-equipped to deal with the complexities of the digitized economy as conceived in light of traditional business models.
This approach is beneficial because of its flexibility and its knowledge of the different modalities of business undertaken through digitized business models. The information necessarily collected for determining the source of the relevant income is both private and personal and its collection must be done in accordance with the laws governing the collection of such data.
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