One of the less fun jobs of running a website like htxt.africa is the regular ritual of sitting down to do the books and fill in the tax returns that are the bane of most small businesses.
Whenever I do, I’m struck by something odd.
If one of our writers uses a taxi, or stays in a hotel, or takes a domestic flight, we are able to claim back the 14% VAT included in the overall price and offset it against the VAT we are obliged to charge our customers (who, for the most part, are advertisers. I’ll come back to this later).
If they take an Uber, use AirBnB or if we pay for Facebook ads (as we sometimes do), we can’t offset the VAT expense, because whatever taxes are added to the bill are being applied in Ireland, The Netherlands or Luxembourg.
That’s because – as everyone is talking about this morning – big, multinational tech companies almost universally use the model of running their sales departments from a low-tax regime in Europe.
As was revealed yesterday, Apple has historically paid just 0.5% corporate tax on its vast profits (it’s the richest company in the world, lest we forget) because of an arrangement it has with Ireland.
Apple is not alone. And yesterday’s judgement by the European Commission that it underpaid corporate tax by R210 000 000 000 over the course of ten years should be a wake up call to the South African government and business community to demand fairness here too. Indeed, it’s an issue which – I believe – plagues all African countries.
No more heroes. Please
All the great, heroic, disruptive companies like Google, Facebook, Uber, AirBnB et al all use the same model for trading in Africa and the Middle East. They have a small – very small – sales and PR team based in the region. This team effectively operates at a loss – we’ll never know for sure as reporting is far from transparent – claiming back staff, travel and building costs against sales, which are none.
They don’t technically sell anything, because all sales are handled from one of those low tax regimes in Europe. You might speak to a Facebook rep who advises you on how to create a cool video ad and get more likes, but the actual transaction is pushed through a business unit in Ireland.
This means two things. First, any revenue generated that does gets taxed gets taxed overseas – we don’t see a penny. Second, it means that local services are automatically competing at a disadvantage – a local taxi firm has to charge 14% VAT, pay 28% corporate tax and Skills Development Levy (SDL) for their employees. Uber doesn’t. The same applies to the hotel industry vis a vis AirBnB.
My personal stake in this fight is around online advertising: we’re in competition with Facebook and Google for local advertising spend, but at the same time our relative costs around tax are much higher. True, they have the advantage of global scale and a wider audience, but how do we achieve scale when we don’t have the freedom to invest our pre-tax profits in the same way they do?
The fact is we can’t. That’s one of the main reasons successful software and videogames companies created here soon start to look at options for headquartering themselves overseas.
After all, if you can’t beat them…
The surreal relationship with tax
Now South Africa – and I assume our neighbours – has an uncomfortable relationship with tax. There’s nothing unusual about that, all citizens and businesses around the world hate paying tax, but it keeps students learning and the roads in good repair and it covers the cost of the cops who try to keep some sort of order.
But when corruption is visibly endemic (as opposed to being more hidden in the so-called ‘developed’ world) most people here seem to be especially sore about filling government coffers.
Tax rates, I think, aren’t especially high compared to the rest of the world. As a business there are a few things that are different – the Skills Development Levy and compliance with B-BEEE codes – but these aren’t especially onerous in the greater scheme of things. In the case of B-BEEE, I should add, that I believe it’s flawed but still very necessary.
Nevertheless many people I speak to – especially in the white middle class – feel tax here is unfair, especially because society is so wretchedly unequal. They feel – understandably, if unjustifiably – that cost of meeting SARS’ ever more stringent targets, and the revenue services has a record-breaking income tax haul every year – is carried by a relatively tiny number of people.
You would have thought that more of them would feel like I do. I don’t begrudge someone living on a fifty rand or less a day an excuse from paying tax: I do get angry that firms which make billions from undermining local entrepreneurs then get to appear holier-than-thou because they spend some of their ill-gotten gains on “free” and “innovative” services like balloons or drones or shitty training services on their own revenue generating platforms. They should pay their fair share up front, frankly.
Instead, we have the bizarre situation where when government does suggest taxing software products from overseas, there’s a public outcry. My only gripe is that there’s not many incentives to try and compete with multinational tech giants – entrepreneurs here don’t get much, if anything, in the way of tax breaks while trying to build a company that will employ local people.
There’s not much point confronting any of these firms politely, trust me, I’ve tried. Ask and you’ll get the same answer Apple gave to the media yesterday. Wherever we operate, we operate within the law. It’s a mantra that they genuinely believe makes the issue go away.
Hopefully, the laws – which were designed for the transport and sale of physical goods and local services – are catching up with the intangible assets of those firms which are abusing the system and impoverishing us all.