The International Fiscal Association (IFA) has warned that remote workers—so-called ‘digital nomads’—and high-net-worth individuals with investments in different tax jurisdictions should expect increasing scrutiny from tax authorities.
According to Professor Jennifer Roeleveld, international taxation expert and President of IFA South Africa, countries across the globe are seeing an erosion of their tax base as these two categories of taxpayers embrace digital-first economies.
This, in turn, is triggering a response from governments.
“Tax authorities are intensifying their focus on establishing the nexus between an individual or entity and their jurisdiction, giving them the right to tax,” she said.
The work-from-anywhere trend advanced by the Covid-19 pandemic in 2020 has led to many countries introducing digital nomad visas, enabling employees to conduct business in other countries without registering for tax.
South Africa is no exception, having introduced a remote work visa in May this year.
However, Roeleveld said the move to remote work has created loopholes and triggered unprecedented tax compliance complexities for employers, employees, and tax authorities.
On 20 May 2024, the amended Immigration Regulations were published for comment. The Regulations include the long-awaited publication of the “Digital Nomad Visa”.
The digital nomad visa seeks to offer foreign workers more opportunities to work in South Africa while avoiding the travails of permanent employment. The visa would apply if the foreign national intends to work remotely in South Africa for a foreign employer or derives a foreign source of income remotely.
To qualify for a digital nomad visa, a foreign national must prove that they earn at least the equivalent of R1 million annually.
However, tax experts have flagged issues with the proposals, including the fact that the department tabling the changes (Home Affairs) has no mandate to change tax laws (that is National Treasury’s domain) and that many provisions contradict current laws.
Regardless, Roeleveld noted that the digital economy is not going away and is only getting bigger, opening many more doors for tax authorities to step in.
Joint research by the International Finance Corporation and Google, published in 2020, estimates that Africa’s digital economy will likely grow to US$180 billion by 2025, accounting for 5.2% of the continent’s gross domestic product (GDP).
Roeleveld said this growth potential incentivises African countries, including South Africa, to amend tax regimes to claim their share of taxes.
“African countries are also grappling with an influx of highly digitalised multinational shopping platforms and service providers that do not set up a physical presence, thereby avoiding taxes,” she said.
“Current income tax regimes were not structured for a digital global economy, and tax authorities are therefore struggling to apply tax at source of income effectively,” she adds.
This recently came to a head in South Africa where, shopping platforms like Shein and Temu were accused of circumventing appropriate tax levels by exploiting loopholes in the country’s tax laws.
The South African Revenue Service (SARS) has since moved to close these loopholes, and is looking to restructure the tax laws to account for these kinds of players in the market.
Roeleveld said that other countries and regions are also moving to do the same.
Frustrated with their income tax regimes unable to provide for effective taxation at source of income for a digital economy, the African Tax Administrators Forum (ATAF) has designed a first-of-its-kind model digital service tax.
More than 20 African countries have already introduced some form of regulation to tax the digital economy.
Roeleveld said that the international nexus rules and tensions between different approaches to source taxation of business activity will become a key point of discussion going forward.
