The great digital tax robbery - why SA must defy the US and tax Big Tech

Every time you click an ad on Instagram, buy a subscription on Netflix, or boost a post on LinkedIn, money leaves South Africa. It flows invisibly through fibre-optic cables, settling in low-tax jurisdictions in the Caribbean.

This is not news. What is news, however, is that SA is currently standing at a fiscal crossroads, deciding whether to wait politely for permission to tax these profits or to take what is owed.

Digital tax could raise R3,5-billion annually

For more than a decade, the global tax system has been playing catch-up with the digital economy. The rules we use were written for a brick-and-mortar world a century ago – an era of steamships and telegraphs. Back then, you couldn’t just beam a service across a border; you had to physically lay a wire and build a receiving station on the country’s soil to do business.

The tax rules reflected this reality: a company had to have a factory, a branch, or a “permanent establishment” in a country before that country could tax its profits. In the digital age, this physical requirement is obsolete.

The delay in modernising these rules is costing us dearly. While we wait for the US Congress and European parliaments to agree on a global consensus (the so-called “Pillar One” solution), the digital economy is accelerating. The rise of AI and automated services means the disconnect between where value is created (by our data and eyeballs) and where it is taxed is growing wider.

The Davis Tax Committee warned us in 2018 that ring-fencing the digital economy is difficult. But the alternative – doing nothing – is fiscally irresponsible.

South Africa faces a budget deficit that refuses to close, yet we are leaving billions on the table. A digital services tax of just 3% could conservatively raise upwards of R3.5-billion annually.

To put that into perspective, that is enough to fund the construction of three new district hospitals every year, simply by asking Silicon Valley to pay a small toll on its extraction of South African wealth.

Instead, we keep squeezing the local tax base until it squeaks. Personal income tax is maxed out; corporate tax rates are under pressure to remain competitive. Yet, we leave the “super-profits” of the digital giants largely untouched by corporate tax because we are afraid to upset the diplomatic apple cart.

US double standards should not be allowed to stand

This brings us to the elephant in the room: the stunning hypocrisy of the current US trade policy. Under the Trump administration, the United States has embraced tariffs with renewed vigour.

They argue, quite loudly, that American markets should not be open to foreign goods that undercut local industries. They slap tariffs on steel, aluminium and vehicles, claiming the sovereign right to protect their economic borders and collect revenue on imports.

Yet, when other countries dare to suggest implementing some form of digital services tax on the revenue of US tech giants at a mere 1% to 3%, Washington cries foul. They label it “discriminatory”. They launch trade investigations. They threaten “retaliatory measures” and trade wars.

The US trade representative has previously launched formal investigations into more than a dozen nations for similar policies, going so far as to slap punitive tariffs on French goods to protect its tech giants from fair taxation.

Evidently, the only commodity that the US currently exports more aggressively than software is its double standards.

When the US taxes foreign goods entering its borders, it’s called “patriotism”, or “protecting the economy”. When other countries dare to tax foreign digital services entering its borders, it’s called “extortion”.

A digital services tax is, in economic terms, a digital tariff. It is a charge for access to our market, our citizens’ infrastructure, and our citizens’ data.

The US demands the right to tax physical imports but denies the rest of the world the right to tax digital imports. It is a colonial mindset dressed up in the language of free trade: “What’s yours is negotiable; what’s ours is untouchable.”

The ‘polluter pays’ principle

But there is a darker, more urgent reason why South Africa must impose this tax; one that goes beyond mere revenue.

We need to start viewing Big Tech platforms not just as service providers, but as systemic risks with the capacity to generate massive social costs.

In South Africa, we have the Carbon Tax Act. We recognise that while heavy industry is necessary for the economy, it produces greenhouse gases that harm the environment. We do not ban the industry; instead, we impose a tax on its emissions. We also impose environmental levies on plastic bags. The principle is simple: if your commercial activity creates a mess, you contribute to the cost of cleaning it up.

Big Tech is no different. They extract our most valuable resource – our attention and data – and in return they pump “digital smog” into our society, such as algorithmically amplified misinformation.

Take the example of bots on platforms like X (formerly Twitter). These automated accounts swarm to promote fake news or divisive rhetoric. The platform’s algorithm, designed to prioritise “engagement” above truth, sees this artificial activity and amplifies it, pushing the toxicity into the feeds of millions of real South Africans.

The result? We see it in our schools, where cyberbullying fuels a mental health crisis. We see it in our democracy, destabilised by polarised echo chambers. We see it in public health, where vaccine disinformation spreads faster than the virus itself.

Currently, the cost of cleaning up this mess falls on the South African taxpayer. We pay for public mental healthcare; we pay for cybercrime units; we pay for the educational campaigns to counter fake news. Meanwhile, the platforms that host and amplify this chaos expatriate their profits tax free.

A digital services tax could then also be viewed as a digital environmental levy, appropriately compensating society for the ever-increasing digital smog that Big Tech leaves behind.

The VAT distraction and the ‘pass-through threat’

Critics and lobbyists love to deploy two shields to protect Silicon Valley profits.

First, they will claim that South Africa already taxes the digital economy via VAT. Second, they will warn that any new tax will simply be passed on to the consumer.

Both arguments are sleights of hand. The VAT regime, effective as it is, is a tax on us. When you pay for a streaming service or cloud storage, the VAT comes out of your pocket; the tech giant merely collects it for the SA Revenue Serivce.

It is a tax on South African consumption, not Silicon Valley extraction.

The “pass-through threat” – that companies will simply hike prices to cover a digital services tax – is equally cynical. It relies on the assumption that these companies are untouchable monopolies with no fear of competition. In a healthy market, companies absorb regulatory costs to stay competitive; they don’t just bill the customer. If they do, they are inviting anti-trust intervention.

But the solution lies in how we design the tax.

To prevent this from becoming a line-item on your invoice, South Africa must implement the digital services tax not as a transaction levy, but as an aggregate liability.

It should not be a 3% charge on every ad click or download. Instead, it should be calculated retrospectively on total annual revenue – a “licence to operate” fee.

Just as a physical retailer doesn’t add a “rent surcharge” or “corporate tax fee” to every loaf of bread they sell, digital giants should treat this tax as a cost of doing business in our market. By severing the direct link between the specific transaction and the tax liability, we make it a tax on the corporation’s bottom line, not a surcharge on the South African citizen.

Other African countries already pushing ahead

The African Tax Administration Forum (ATAF) has already drafted a “Suggested Approach to Drafting Digital Services Tax Legislation”.

It is a blueprint for African nations to go it alone. It suggests a simple tax on gross revenue derived from digital services provided to users in the country.

Crucially, this legislation comes with a safety mechanism to protect our own innovation sector. The ATAF blueprint recommends a strict “de minimis” threshold, meaning the tax would only apply to companies with significant global revenues.

This ensures the tax is ring-fenced to target the foreign behemoths. The local app developer in Cape Town or the startup in Jozi is exempt. We are not trying to tax the “little guys”, we are trying to tax the giants who use their size to crush the little guy.

Countries like Kenya and Nigeria have already walked this path, introducing their own digital taxes despite US threats. They realised that waiting for a global consensus that relies on US approval is a fool’s game.

South Africa must now do the same. We need to modernise our definition of “source”.

If you have a digital economic presence in South Africa, which is to say that if you rely on our legal system, our internet infrastructure, and – perhaps most importantly – our citizens to generate a profit, then you should have a taxable presence here.

The era of the “free ride” for the digital economy must end. We cannot continue to tax the local corner shop on its profits while the vast cloud empires – operating right in our faces – pay nothing. DM

Lance Collop is a Chartered Tax Adviser and the founder of Collop Tax Collective, which specialises in solving complex business problems through tax strategy.