School of Accountancy (ETDs)

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    The challenges arising from the digital economy to the South African tax system and possible measures to address them (with a focus on corporate income tax for MNEs)
    (University of the Witwatersrand, Johannesburg, 2024) Datadin, Taruna; Rudd, Reinhard
    The advances in technology and innovation in recent years have resulted in the growth of the digital economy. The digitalisation has changed the way businesses operate. This has resulted in challenges to the international tax system which was set up over a century ago and has compromised the South African corporate income tax base. This research report aims to understand the impact of the digital economy on South Africa’s corporate income tax system and to assess the proposed measures put forward to address the associated challenges. The proposed measures examined in this report are global solutions proposed as well as unilateral measures proposed or implemented by other countries to address the corporate income tax challenges arising from the digital economy. The proposed measures analysed in the report were limited to the OECD’s Two-Pillar Solution, Digital Service Tax and the Digital Permanent Establishment concept. A qualitative research method was used for this research paper. The analysis has been performed through a detailed literature review. Based on the analysis performed, a recommendation was reached in that South Africa should wait to implement the global solution (the OECD’s Two-Pillar solution) to address the challenges arising from the digital economy. It was also found that at this stage, the unilateral measures of the Digital Service Tax and the Digital Permanent Establishment concept are not recommended to be implemented in South Africa.
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    A critical analysis of the pillar one direct tax solutions for businesses in the digital economy
    (University of the Witwatersrand, Johannesburg, 2023) Mthembu, Sibonelo
    Business profit under the existing international tax system is taxed in the state of residence unless the entity has generated the said profit through a permanent establishment in another state. Traditionally, a business had to have a physical presence in the source state to be considered a permanent establishment. (European Parliament, 2019a, p. 17; World Bank, 2021, p. 26). The digitalisation of the economy allows multinational entities to do business with customers worldwide without having a physical presence in those customers' locations. (World Bank, 2021, p. 26), while the current international tax law is depended on the physical presence of the entity in a location, i.e., a permanent establishment (European Parliament, 2019a, p. 16; World Bank, 2021, p. 26). In the digital economy, the concept of a permanent establishment becomes irrelevant (Medus, 2017, p. 15). The OECD acknowledged that businesses with high levels of digitalisation could generate significant profits and engage in national economic life without having a sizable physical presence (OECD, 2015a, pp. 100-102). The European Parliament (2019a, p. 16) reported that due to these gaps in the current international tax system, digital businesses pay an average tax rate of 9%, while traditional businesses pay an average tax rate of 21%. In October 2020, the OECD published the blueprint with the recommendation to address the direct taxation of the digital economy, entitled ‘Tax challenges arising from Digitalisation – Report on Pillar One Blueprint’ (Pillar One). These recommendations will be effective in 2024 once the inclusive framework members have signed the Multilateral Convention (OECD, 2022a, p. 5). In addition to the Pillar One report, the OECD issued a progress report entitled ‘Progress Report on Amount A of Pillar One, Two-Pillar Solution to the Tax Challenges of the Digitalisation of the Economy’ (Progress Report) in July 2021. Lastly, to address the administrative challenges, the OECD, in October 2022, issued the draft administrationprinciples to be followed by the in-scope multinational entities on the report entitled ‘ProgressReport on the Administration and Tax Certainty Aspects of Pillar One’ (the Administration Report). Researchers and tax policymakers have researched the taxation of the digital economy or e-commerce. However, the focus of those studies was to analyse the tax challenges brought about by the digitalisation of the economy and propose solutions that can be adopted to 2 | P a g e address the direct tax challenges brought about by the digitalisation of the economy (European Parliament, 2019). This research report aims to analyse how digital businesses will be taxed using the recommended direct tax solutions from Pillar One. The OECD issued Pillar One to address the current international tax law gaps.
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    Equalising taxing rights in the digitalised economy: an analysis of diverse tax practices implemented globally
    (2019) Forman, Ashleigh
    There are limitations to the application of existing international tax laws as a result of digitalisation as these were formulated based on traditional ‘brick and mortar’ transactions. These laws are not well suited to the realities of the ‘modern way of doing business’ as they do not cater for business models which can generate returns from offering digital services in a jurisdiction without being physically present in that jurisdiction. Ultimately, if left unaddressed, these weaknesses threaten to expose tax authorities to erosion of national tax bases and profit-shifting manipulation (OECD, 2015b). The international tax framework needs to be responsive to the changing nature of global economies in the digital age. The tax framework should be able to accommodate new digital businesses which operate and create value in different ways (Saint-Amans, 2017). As a result, “there is a disconnect between where value is created and where taxes are paid” (European Commission, 2018b). In response to digitalisation, different jurisdictions have hastily imposed their own domestic tax practices to prevent further base erosion and to improve the collection of tax revenue (Petruzzi and Buriak, 2018). The OECD has attempted to address these tax challenges but has failed to provide clear guidance on taxing rights, as well as on how the profits should be allocated (Medus, 2017). The objective of this report is to summarise the tax practices implemented by the United Kingdom, the European Union, Italy and India in responding to the digitalisation of the economy. The aim will be met through a correspondence analysis between the different tax solutions implemented or proposed by these jurisdictions, and the problems identified in taxing the digital economy.
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    A critical analysis of the international direct tax solutions for businesses in the digital economy
    (2019) Peres, Monique Helena Alfonso
    Taxes are not paid where value is created when it comes to the digital economy. Current international tax laws were written before the digital economy started. The digital economy has changed our lives and how business is done. Value is created in different ways by digital businesses compared to traditional businesses. Digital businesses can do business in any jurisdiction in the world without a physical presence. The permanent establishment concept is still based on physical presence which is irrelevant to digital businesses. The permanent establishment concept and its irrelevance to the digital economy will be discussed in the report. Foreign digital businesses use the physical presence required by the permanent establishment concept in their tax planning to reduce their tax liability. The questions that will be answered in the report are how and where value is created and where should digital businesses pay direct taxes such as income tax, amongst other taxes. The purpose of this report is to critically analyse how digital businesses should be directly taxed when they have a significant digital presence with little or no physical presence in a jurisdiction. The report will critically analyse the direct tax solutions that have been proposed to tax businesses in the digital economy.