Electronic Commerce: Challenging the Income Tax Base?

• Jurisdiction: South Africa
• Citation: (2005) 17 SA Merc LJ 305
• Author: Annet Wanyana Oguttu
• Pages: 305-322
• Published date: 16 August 2019
• Date: 16 August 2019

Electronic Commerce: Challenging

the Income Tax Base?

ANNET WANYANA OGUTTU*

BEATRIX VAN DER MERWE**

University of South Africa

1 Introduction

Increasing population growth and political and economic instabilities often

force governments to levy high taxes to meet the costs of providing new and

improved infrastructures. This frequently results in increased tax burdens

which, in turn, lead to the exploitation of means to avoid taxes. Taxpayers

often try to avoid a country’s jurisdiction to tax by diverting income to low-tax

jurisdictions (tax havens) where it will be subject to no or minimum taxation.1

This may be achieved by exploiting the differences between tax rates, legal

concepts, standards of administration, reporting and enforcement, governments’

attitudes towards the liberty and privacy of taxpayers, and the conf‌i dentiality

of business and f‌i nancial transactions.2 This trend is normally referred to as

‘offshore tax avoidance’ and is of major concern to tax authorities since it

results in the depletion of the tax base of the country from which investments

are diverted. Several factors have encouraged offshore tax avoidance. These

include the current trend towards a global economy that has broken down

economic barriers between countries and has encouraged international trade,

riding on a wave of telecommunication development that allows businesses to

reach world markets easily and cheaply. Important to the present discussion

is the development of what has become known as electronic commerce

(‘e-commerce’).

e-Commerce is a term used to describe the wide array of commercial

activities carried out by electronic means that enable trade without the conf‌i nes

* LLB (Makerere University, Uganda) LLM (Unisa). Lecturer in the Department of Mercantile Law,

School of Law, University of South Africa.

** BA LLB (Stel) LLM (Unisa). Associate Professor in the Department of Mercantile Law, School of

Law, University of South Africa.

1 Tax avoidance refers to the use of legal methods of arranging one’s affairs to pay less tax such

as identifying loopholes and exploiting them within legal parameters. This may be contrasted with

tax evasion which is illegal and usually involves the non-disclosure of income, the rendering of false

returns, and the claiming of unwarranted deductions. See Vern Krishna Tax Avoidance: The General

Anti-Avoidance Rule (1990) at 9; The Committee on Fiscal Affairs of the Organisation for Economic

Co-operation and Development (‘OECD’) Issues in International Taxation No 1. International Tax

Avoidance and Evasion: Four Related Studies (1987) at 1; David Meyerowitz Meyerowitz on Income

Tax (2004-2005) in par 29.1; Alwyn de Koker Silke on South African Income Tax vol 3 (2004) in par

19.1; United Nations (‘UN’) International Cooperation in Tax Matters: Guidelines for International

Cooperation against the Evasion and Avoidance of Taxes (with Specif‌i c Reference to Taxes on Income,

Prof‌i ts, Capital and Capital Gains) (1984) at 11.

2 UN op cit note 1 at 11; Brian J Arnold & Michael McIntyre International Tax Primer 2 ed (2002)

at 9.

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(2005) 17 SA Merc LJ 305

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306 (2005) 17 SA Merc LJ

of geographical boundaries.3 Technology enables the transmission of voice,

data, images and video information to take place in cyberspace (sometimes

called the ‘information highway’) by making use of the Internet.4 This has

resulted in a brand-new route for the exchange of goods and services and

the accessing of offshore facilities that has not yet fully been examined or

regulated.5 e-Commerce may thus change the distribution of taxable activities

and may consequently alter the balance of taxing authority.6 It is feared that

e-commerce will lead to the erosion of the tax base due to the ease with which

the jurisdictional requirements may be manipulated.

The objective of this paper is to determine whether e-commerce provides

opportunities for offshore tax avoidance by challenging South Africa’s

jurisdiction to tax income and also, in conclusion, to consider the enforcement

challenges presented by trade conducted over the Internet.

2 The Jurisdiction to Tax

Before any country can levy a tax on income, a connection or tax nexus must

be established between itself and that income. The two main connecting factors

underlying the taxation of income are the source and the residence principles of

taxation. Under the source principle, persons are taxed on income that originates

within the territorial jurisdiction or geographical conf‌i nes of the country, despite

the taxpayer’s country of residence.7 Under the residence principle of taxation,

residents are taxed on their world-wide income regardless of the source of such

income.8 Most jurisdictions, including our own, have adopted a combination

(hybrid system) of these two principles.9 It has been suggested that e-commerce

challenges these jurisdictional principles, governed, as they are, by national

sovereignty and having been developed in the days of ‘brick and mortar’ where

physical presence in a jurisdiction was necessary to enforce tax laws and where

cross-border transactions involved mostly tangible products.10

We will now examine whether this assertion is true in respect of South

Africa’s jurisdiction to tax income.

3 Richard L Doernberg, Luc Hinnekens, Walter Hellerstein & Jinyan Li Electronic Commerce and

Multijurisdictional Taxation (2001) at 2; South African Revenue Service (‘SARS’) Discussion Document

Electronic Commerce and South African Taxation (Mar 2000) at 5; Department of Communications

Green Paper on e-Commerce. Making it Your Business (Nov 2000) at 9; Richard A Westin International

Taxation of Electronic Commerce (2000) at 2.

4 The Internet is described by Lilian Edwards & Charlotte Waelde Law and the Internet: Regulating

Cyberspace (1997) at 12 as ‘a network of computers that allows people to communicate with other people

from all over the world’. It is also described as the world-wide network of networks that employ the

‘transmission control protocol’ or ‘internet protocol’ and share a common address space: see Reinhardt

Buys & Francis Cronjé Cyber Law: The Law of the Internet in South Africa 2 ed (2004) at 232.

5 Clive Sher ‘Taxation of E-commerce’ (2000) 39 Income Tax Reporter 172.

6 Doernberg et al op cit note 3 at 3.

7 Meyerowitz op cit note 1 in par 7.1.

8 Ibid.

9 Julian Ware & Paul Roper Offshore Insight (2001) at 107; Edwards & Waelde op cit note 4 at 171;

Hammond Suddards E-commerce: A Guide to the Law of Electronic Business (1999) at 259; Lynette

Olivier ‘Residence Based Taxation’ 2000 Tydskrif vir die Suid Afrikaanse Reg 20; Milton Grundy The

World of International Tax Planning (1984) at 3.

10 Suddards op cit note 9 at 255; Westin op cit note 3 at 2; see also the Green Paper on e-Commerce

op cit note 3 at 22.

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