DETERMINING “PERMANENT ESTABLISHMENT” IN THE DIGITAL ECONOMY EPOCH: A CASE FOR SOUTH AFRICA

This contribution analyses the concept of a “permanent establishment” in South Africa in light of the digital economy, and intends to inspire law reform. The analysis critically analyses the meaning of “permanent establishment” as found in sections 1 and 9 of the South African Income Tax Act and in double-tax treaties concluded between South Africa and other countries. The article analyses whether the South African permanent establishment is sufficiently robust to deal with a virtual permanent establishment. The analysis found that the South African concept of a permanent establishment falls short of capturing permanent establishments created through digital means as a result of digital transformation. This is because the current permanent establishment definition requires that the entity be physically present in the market country for tax purposes. In the digital age, foreign entities require no physical presence to transact in a market country. Foreign entities transact with customers all over the world on a remote basis. While this may be good for trade purposes, it is argued that this seriously erodes the tax bases of market countries (including South Africa) since these foreign entities circumvent paying taxes in market countries where substantial economic activity occurs. The inability to impose a tax on a virtual permanent establishment arguably deprives market countries of substantial revenues. In light of this gap, the article provides instructive proposals on how South Africa could effect the necessary legislative reforms to impose effective taxes on virtual permanent establishments.