Commission notes ‘tax exploits’ of companies operating in South Africa

The advantage of global platforms such as Google and Apple is that they can use tax competition and tax havens to reduce their overall tax burden, the South African Competition Commission notes.

On Wednesday (July 14), the regulator released the results of its study of the online platform market, which raises numerous concerns about these international companies and their controlling power in the South African market.

“For example, Apple’s SEC 10k report on its annual financial results indicates that the effective tax rate is only 13.3% of profits, while Google’s is 16.2%,” the commission said in a statement.

“One of the problems with the tax arrangements of global digital companies is that the country from which the income is received is denied tax payments when global platforms use domicile arrangements to pay in another jurisdiction, usually at a lower rate. “.

An investigation by a commission that examined the financial statements of these companies showed that limited income is declared domestically. Often, the only income recorded is a notional amount from the head office to cover internal costs, with little margin to meet transfer pricing requirements when it comes to service fees.


Unfair advantage?

The regulator said it was concerned about the potential competitive advantages these arrangements have in relation to platform competition between global and local platforms.

“For example, in the category of travel and accommodation platforms, Booking.com is the largest platform and has historically benefited from the Innovation Box tax credits from the Dutch authorities, which amounted to $230 million in 2021. to the US federal tax rate of 21% under its SEC 10k registration. In contrast, profitable domestic platforms pay corporate tax at a rate of 28%.

“In terms of shareholder returns, this means that Booking.com can earn lower margins on its operations compared to local platforms and still meet the same shareholder expectations. Technically, this means they can go deeper into customer acquisition, such as bidding on Google Adwords based on a lower ROI, or getting broader platform-sponsored discounts,” the commission said in a statement.


The problem with VAT

The commission said that recognizing income outside South Africa’s jurisdiction also means no value-added tax (VAT) is charged on sales such as ads from Google or commissions from global platforms.

“The current understanding of the investigation is that this practice cannot affect competition. This is because the registered business user or platform that is required to pay VAT on the sale to the end buyer will offset any VAT payments on inputs such as advertising or commissions.

“Therefore, if the local platform charges VAT for the commission, it will simply be credited against the final settlement with SARS. If the global platform fails to raise VAT, there will be less compensation.”

The Commission stated that it would continue to evaluate this issue in the future.


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