Making tax digital

As the world continues to evolve to be more centred on digital services, everything – from the way we purchase and consume media to the way we bank – is affected. But, as the way we buy and sell changes, the implications are deeper than just developing a secure payment gateway.

In fact, the entire way tax works will also need to shift. It's not just tax revenue authorities who are looking at this issue – given that a huge number of transactions worldwide occur within multinational entities, these companies are also taking an active part in the dialogue.

Ultimately, taxation affects almost everyone, so although it's maybe not an exciting subject to many people, it is an important one.



Source and residence

The source and residence concepts have underpinned the legal basis upon which states assert taxing rights. However, the world has borne witness to the rapid spread of globalisation and the current wave of digital technology.

Questions on how taxation should change in the digital era being asked globally and are being led by the Organisation for Economic Cooperation and Development (OECD).

There's no real consensus at the moment about digital taxation. I believe southern African businesses and regulators need to be part of the debate to position their countries as best as possible for a new tax era.

It is also increasingly difficult to pin down where the source of income is, or where a taxpayer is a resident. This ambiguity or vagueness in turn has led to increased compliance risks as aggressive tax avoidance schemes are increasing, thus the complexities of taxing digital services are that traditional tax models generally fall into one of two categories: Residence tax and source taxation.

Residence tax is based on the idea that people and companies should contribute towards the public services provided for them by the country where they live, no matter where their income originates (South Africa being a good example).

Source taxation, on the other hand, is based on the idea that the country where the income is generated is providing that opportunity, and therefore should be able to levy tax (Namibia being good example).

However, it's difficult to use either of these models in relation to digital services because consumers in one country might access a product or service without the supplier of that product or service physically being present in the country.



Taxing digital services

If one thinks about music, previously, we would go to a music shop and buy a cassette or CD, but now the majority of us probably subscribe to a streaming service such as Spotify and iTunes. In the case of purchasing a physical CD/cassette, we were probably paying value-added tax (VAT) - if the seller is a VAT vender - but now we're not paying any tax at all, although we are still purchasing and consuming the product in the country.

This is why some regulators are trying to clamp down on taxing digital services. For example, South Africa's recent regulation on VAT on electronic services, which took effect on 1 April 2019, widens the definition of what is considered an electronic service to include any services supplied by means of an electronic agent, electronic communication or the internet for any consideration.



Making tax digital

Making Tax Digital (MTD) is an initiative that sets out a vision for the end of the paper tax returns and transforming into a digital tax system.

The main goal of MTD is to make tax administration more effective, more efficient and simpler for taxpayers. Implementing the initiative means working closely with accounting software developers to ensure that taxpayers are able to make the switch to digital tax.

The outlined changes apply to a wide range of taxpayers, including most businesses, micro-businesses, self-employed people and landlords, as well as individual taxpayers - and it can also be based on certain taxpayers.

Under MTD, taxpayers will send the tax authorities summaries of their income and expenditure more frequently to enable a more ongoing and accurate projection of tax due to their digital tax accounts.

Digital technology facilitates increased interconnectedness of the globe as a result of faster exchange of information. This has meant greater reliance on international tax law, because domestic tax regimes typically do not evolve at the same pace with global trends.

In some cases, this has resulted in international tax law shaping domestic tax regimes. The dynamic between international and domestic tax is changing rapidly. Domestic tax law, in some cases, is proven to be insufficient to respond to the global realities of industries, business and revenue authorities.

Tax professionals must be adaptive and increasingly internationalist in outlook; moving beyond the silo, narrow provincial perspective when providing advisory or consulting services.



Digital evolution

The digital evolution at tax authorities will make it easier for businesses to pay their taxes since it will be less manual system. The digitisation of the tax environment means being able to file and settle your taxes digitally instead of manually (Namibia being a good example in the successful implementation of the Integrated Tax Administration System [ITAS] under the Namibia Revenue Authority [NamRA] administration).

This will ease pressure on the environment by reducing the consumption of paper and paper products in the process, making both government and business operations more environmentally sound.

Digital technology creates greater opportunities for businesses expanding across the globe as more people are exposed to accessing the business products or services. It also potentially gives rise to schemes of aggressive tax planning to avoid or evade paying taxes.

An increasingly digitalised world means that the lines between where a taxpayer is a resident, and where the dominant source of income is, have become blurry.

The ambiguities and uncertainties that digital technology can create have resulted in jurisdictions witnessing their tax bases being eroded or profits shifted from their states through the use of double tax treaties.



Quick turnaround

The digitisation of tax will lead to a quick turnaround time for tax professionals in reviewing records and accounts, thus the operation of tax administrations will improve, and will spare capacity to allow tax professionals to focus on other relevant tasks within the tax industry (eg making of anti-avoidance provisions of tax loopholes in the legislation, or planning for tax from a business perspective).

Digitisation of tax will also lead to a competitive advantage of IT skills, and will demand tax professionals to undergo massive training for additional skills and create a whole industry of taxation and information technology, which may become a course of studies one day in academia, which will enhance the passion of tax professionals and tax professional aspirants.

Digital technology may minimise the cost of establishing a global presence due to the minimal infrastructure needed, however, the tax cost of operating in multiple jurisdictions may become significant.

Naturally, companies will seek to minimise the tax costs of international investments and trade. In this respect, there may be a temptation to engage in treaty shopping by utilising tax treaty networks to only pay taxes in jurisdictions with the lowest rates. However, this form of tax planning is increasingly coming under scrutiny, and companies now have to meet substantive compliance burdens or risk being on the wrong side of the law and potentially facing fines.



Direct link

MTD will assist tax payers to have a direct link with their tax authorities by only logging onto their systems to know exactly the types of services that they will require from their tax consultants/tax professionals.

The best system must undergo a feasibility study, and must not allow companies to understate their tax liabilities or upgrade systems such as e-filing systems while allowing the tax professional advisors and system gurus to train their clients.

Despite digital technology’s capacity to transcend borders and build bridges, recent years have seen the world increasingly polarised by growing inequality, which has eroded trust between business and civil society as the opportunities spurred on by globalisation and technology seem to only benefit an elite few.

Taxation has come under heavy scrutiny as it begins to feature prominently in public discourse; whether in debates around big corporates avoiding tax, utilising taxation as a way to fairly redistribute income, or to foster development and the provision of social services.

In such an age, it will be incumbent on tax professionals across industries to have a greater social mindfulness and global outlook, an understanding of how the world is tied together through an appreciation of global trends and an adaptive, ethical mind-set in order to advise various industries effectively.

These are the types of issues that are being looked at by the OECD. The final consensus set of outcomes is expected to be finalised.

While it will have a big impact on business, digitalisation can help southern African businesses to enter into new markets and achieve higher levels of growth and development than previously available.

The important thing is to find ways of using digitalisation to work better and smarter. As value chains evolve, companies need to reassess the way they operate to remain competitive in the digital environment.



*Primus 'Prime' Shaapopi is a chartered accountant with an interest in taxation.