Businesses are increasingly using online platforms to trade, which lets them connect with more people regardless of location. However, earning income always raises tax questions. Generally, income tax is applied based on where the taxpayer resides (residence-based) or where the income was generated (source-based). This article will clarify these two concepts for online business owners.
E-commerce has created quite a few obstacles in the taxation thereof, as these transactions appear to be resident-less as they occur on the internet. Potential taxpayers are also able to hide their identities, which may frustrate taxpaying institutions. E-commerce transactions commonly occur across multiple territories/countries, which makes determining the country eligible to tax quite frustrating. As well as the source of the income generating transaction may be unknown, and companies may appear to be resident-less. However, South African law determines the residence of a company as the place of effective management of the said company.
The two systems of taxation are defined quite simply as residence-based taxation, based upon the taxpayer’s place of residence and source-based taxation, based upon the place at which the income generation occurred. In South Africa, taxation follows a residence-based system. This means that those residing in South Africa are taxed on worldwide income, and that being a non-citizen who merely resides in South Africa, but trades via an online platform, is not precluded from taxation. However, non-residents are not safe from taxation either; should a non-resident generate income from a South African based source, they will be taxed thereon.
Taxation is a complex process, and with the globalisation of the workforce and income generating mechanisms, cross jurisdictional taxation may occur. Due to this, many countries have adopted international double taxation agreements, which enable participating countries to avoid international double taxation. The legal system of a government and the taxation agreements between countries determine how a taxpayer would be taxed. Some countries have put in place national laws to avoid double taxation, while others rely on international double taxation agreements. As international double taxation agreements between various countries differ, there is no set rule governing taxation between all countries and taxation is dealt with on a case by case basis. Taxation and the legal implications thereof can be complex and overwhelming.
Should you require any assistance with setting up your online business or understanding the legal implications of the taxation thereof, contact us and we will gladly assist.
Saeedah Salie
saeedah@bbplaw.attorney
Associate
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