October 2020 / Focus Africa

On 30 September 2020, the African Tax Administration Forum (ATAF) released its Suggested Approach to Drafting Digital Services Tax Legislation (suggested DST Legislation) that proposes a rate between 1% and 3% on gross annual digital services revenue earned by a company or multinational enterprise (MNE) in a country.

The suggested DST Legislation proposes standard text that can be adopted by ATAF member countries in their domestic laws in order to tax highly digitalized businesses operating in those countries.

The activities within the scope of DST are digital services derived, directly or indirectly, by a company or an MNE group in a given country. These include, among other services:

• online advertising services;
• data services;
• online marketplace or intermediation platform services;
• facilitation of rental or use of real property located in a country;
• vehicle hire services;
• digital content services, online gaming services and cloud computing; and
• any other digital services.

The suggested DST Legislation proposes formulas for allocating income from the services above to a particular country. Broadly, DST will be levied on the portion of revenue that relates to the participation of users in a given country, and it will apply to the gross revenues.

The suggested DST Legislation also details how countries can determine the users of the services above since the number of users is the basis upon which a company or MNE's global revenues arising from digital services will be apportioned to a given country.

Countries have an option to make provisions regarding the offset of the DST for corporation tax purposes in the case of a permanent establishment if certain conditions are met.

Being careful not to affect growth of online businesses in Africa, the suggested DST Legislation proposes that countries set a "de minimis" or safe harbour rule that will remove smaller companies from the ambit of DST. This is mainly because DST is charged on gross annual revenues which, if not addressed, may have adverse effects on businesses with very low profit margins, or on loss-making businesses.

The DST returns will be filed annually by a responsible member or an appointed local representative of the company or MNE. A responsible member may be a member of the MNE group that is tax resident or operates in a country through a permanent establishment; or a member of the MNE group that is registered for VAT in the country. The suggested DST Legislation also suggests other ways of determining a responsible member should no member of the MNE meet the conditions above.

In a statement by the ATAF, it was highlighted that no consensus has been reached globally by the OECD Inclusive Framework on how to deal with the tax challenges arising from the digitalization of the economy. In the interim, African countries need a solution so that revenue is not lost especially during this time of the COVID-19 pandemic where businesses have opted to transact more through online platforms.

To date, a few African countries have enacted laws aimed at taxing the digital economy. Kenya, through its Finance Act 2020, implemented a DST at a rate of 1.5% and is expected to take effect on 1 January 2021. Nigeria will also tax non-resident companies that have significant economic presence (this is created mainly through digital transactions) in Nigeria and earn revenue above NGN 25 million in aggregate in a given year of income.

In conclusion, African countries really need to look into taxing income arising from digital services in order to curb revenue that is being lost annually due to the traditional taxing rules that are based on physical presence of non-residents in a given jurisdiction in order to be liable to tax.

The Secretary General of the African Continental Free Trade Area (AfCFTA) has announced that trade through the AfCFTA will commence on 1 January 2021. It was initially scheduled to commence on 1 July 2020, but was postponed due to the COVID-19 pandemic with the main focus of the secretariat of the AfCFTA being the fight against the pandemic. The key focus of the AfCFTA, in the meantime, continues to be the fight against the COVID-19 pandemic. The Secretary General stated that a short-term tool has been devised by the Heads of States to launch trade corridors to enable easy access and transit of essential goods or germ-killing products, such as soaps and disinfectants, that will help combat the pandemic. The African Ministers of Trade are exploring the possibility of reducing customs duties in order to make these essential goods more available and affordable. The announcement was made at the official handing over and commissioning of the AfCFTA secretariat building in Ghana on 17 August 2020. An official statement was released by the Directorate of Information and Communication of the African Union on 9 September 2020.

The Uganda Revenue Authority (URA) has restricted the warehousing of imported rice and sugar, other than sugar for industrial use, with effect from 1 October 2020. Customs clearance of these items will be permitted upon payment of taxes at the first port of entry under the Single Customs Territory (SCT) arrangement.

This is a move to ensure that Ugandans are protected from the consumption of expired sugar and to protect local sugar manufacturers from unfair competition arising from dumping, diversion of sugar in transit and tax evasion.

This is in line with the Tax Appeals Tribunal's (TAT) decision in the case of R1 Distributors Limited and 11 other companies against the URA. The TAT ruled that the URA's public notice of 17 October 2019 listing products which should not be eligible for customs warehousing was lawful.

In the same light, the tribunal also ordered that items such as wines and spirits (except in duty free shops), building materials, motorcycle tyres and tubes, garments of all kind, footwear of all kinds, dentifrices, used motor vehicles of 14 years old from the date of manufacture which were not part of the dispute but were in the notice should not to be warehoused.

The communication was made through public notice published on 1 October 2020 on the URA's website.

The 183-day threshold requirement for the foreign tax remuneration exemption has been reduced to 117 days. In terms of the current provisions of section 10(1)(o)(ii) of the Income Tax Act (ITA), individuals who spent more than 183 days working outside South Africa would have qualified for exemption in respect of their remuneration earned while working outside South Africa. However, due to travel bans during the COVID-19 pandemic, these individuals could not travel in order to work outside South Africa, and therefore could not qualify for the above exemption.

The National Treasury indicated in its response document to Parliament that it had introduced changes to section 10(1)(o)(ii) of the ITA in order to take into account the lockdown period during the COVID-19 pandemic. In terms of the proposed changes that have been made in the 2020 draft Taxation Laws Amendment Bill, 66 days that commenced on 27 March 2020 and ended on 31 May 2020, when South Africa operated under COVID-19 alert level 5 and 4 restrictions, should be subtracted from the 183-day threshold rule used to determine the eligibility for exemption of foreign remuneration.

In order to qualify for this exemption, the number of days that a person spent working outside South Africa will be reduced to more than 117 days (i.e. from more than 183 days) in any 12-month period, for years of assessment ending from 29 February 2020 to 28 February 2021.