Commission flags ‘tax exploits’ by companies operating in South Africa

Global platforms such as Google and Apple have the benefit of being able to exploit tax competition and tax havens to reduce their overall tax burden, says South Africa’s Competition Commission.

The regulator published the findings of its Online Platforms Market Inquiry on Wednesday (14 July) which raises numerous concerns about these international companies and the controlling power they have in the South African market.

“For example, Apple’s SEC 10k filing of its annual financial results indicates it pays an effective tax rate of only 13.3% on profits, with Google paying a rate of 16.2%,” the commission said.

“One concern with the tax arrangements of global digital companies is that the country where the income is sourced are denied the tax payments where global platforms use domicile arrangements to pay in another jurisdiction typically at a lower rate.”

The commission’s inquiry, which scrutinised the financial statements of these companies, found that limited revenue is declared domestically. Often the only revenue reflected is a notional amount from head office to cover domestically incurred costs at a small margin to comply with transfer pricing requirements – where it is payment for a service.

An unfair advantage?

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The regulator said it is concerned about the potential competitive advantages that these arrangements have on platform competition between global platforms and domestic ones.

“For instance, in the travel & accommodation platform category, is the largest platform and has historically benefitted from an Innovation Box Tax break from the Dutch Authorities – which accounted for $230 million in 2021. In addition, Booking Holdings is subject to a US federal tax rate of 21% according to its SEC 10k filing. In contrast, profitable domestic platforms pay a 28% corporate tax rate.

“From a shareholder return perspective, this means that can make a lower margin on its operations relative to domestic platforms and still meet the same shareholder expectations. Technically this means they can go deeper on customer acquisition, such as bidding on Google Adwords on a lower return-on-investment basis or get more expansive on platform-sponsored discounts,” the commission said.

A VAT concern

The recognition of income outside of South Africa’s jurisdiction also implies that Value-Added Tax (VAT) is not raised on sales, such as advertising from Google or commissions from global platforms, the commission said.

“The inquiry’s current understanding is that this practice may not influence competition. This is because a domiciled business user or platform that must pay VAT on the final customer sale, offsets from this any VAT payments on inputs – such as advertising or commissions.

“Therefore, if a domestic platform charges VAT for commission it will simply be offset against the final settlement with SARS. If a global platform fails to raise VAT, then there is just less to offset.”

The commission said it will continue to assess this issue going forward.

Read: Amazon unlikely to ‘displace’ Takealot in South Africa: commission

Artmotion S.Africa

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