Megan Langton, tax attorney (left) and Micaela Paschini, team lead of Tax Legal at Tax Consulting. (Graphic by Nicola Mawson, with images sourced from Tax Consulting and LinkedIn)
The buzz around Starlink’s potential entry into South African orbit has been focused on broad-based black economic empowerment (B-BBEE) but is also now raising questions about how government deals with taxing digital services.
This comes ahead of the National Budget to be presented on 25 February and as the South African Revenue Service (SARS) proceeds with its modernisation project to streamline a system that hasn’t been upgraded in more than a decade.
Writing for Tax Consulting, Micaela Paschini, team lead of Tax Legal at the company, and tax attorney Megan Langton point out that, in an environment where government expenditure continues to grow and revenue remains constrained, value-added tax (VAT) is “one of the state’s most dependable tools” to collect tax.
VAT is designed to follow consumption, which creates a challenge for government in that “consumption no longer looks the way it once did” because “South Africans are increasingly consuming value in ways that do not fit neatly into traditional tax models”.
Paschini and Langton explain that South Africans are spending more and more on services that are delivered digitally, paid for electronically, and supplied by companies with no physical footprint in the country.
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“Software, platforms, subscriptions, remote tools and digital services are no longer niche expenses. They are embedded in daily life and business operations.”
This evolving economy creates the question for National Treasury as to whether the VAT system is fully capturing this modern consumption base.
VAT on electronic services is not a new concern for tax authorities. “Over the past 12 years, South Africa has introduced three legislative amendments aimed squarely at improving VAT collection from foreign suppliers of electronic services,” the authors state.
Definitions were broadened, registration requirements expanded, and the net was cast wider to ensure VAT followed the end consumer enjoying the service in South Africa – regardless of where the supplier is based, say Paschini and Langton.
“On paper, this framework is robust. In practice, applying it to a fast-moving, borderless digital economy is, however, anything but simple.”
This is precisely why the question of whether VAT is leaking through the digital cracks keeps resurfacing. “Unlike traditional vendors, many foreign digital service providers operate beyond the daily visibility of local regulators. The result is not necessarily deliberate avoidance, but structural gaps that can lead to missed revenue,” they say.
The authors point to Starlink as an example. The Independent Communications Authority of South Africa (ICASA) has stated that the satellite internet service, operated by SpaceX and founded by South African-born Elon Musk, does not hold a licence to operate in the country as it does not comply with current B-BBEE requirements.
Yet ICASA has noted that this has not stopped South Africans from accessing the internet service provider. Starlink can already be accessed locally via global or regional roaming subscriptions, with some local companies offering it from neighbouring Mozambique, it pointed out.
SARS is modernising its systems to improve compliance and close the VAT gap, which means collecting more of the tax already legally due rather than increasing VAT itself.
The decades-old system currently in place has become the focus of the tax office’s efforts to streamline online services and make compliance easier for taxpayers and businesses. The initiative stems from a discussion paper outlining a high-level vision to modernise the system and enhance its digital capabilities.
SARS has released a discussion paper on its bid to modernise the VAT system. (Source: SARS)
In a phased approach, SARS will introduce a digital ecosystem built on e-invoicing, an interoperability framework connecting the tax office’s systems with vendor accounting programmes, and e-reporting to provide more timely data access and compliance.
SARS has not officially confirmed an implementation deadline, but indications are that full modernisation could be reached by 2028. The tax office is expected to release a consultation paper soon, laying out more detailed scope and inviting further stakeholder collaboration.
Ahead of the National Budget, the VAT conversation is less about whether rates can rise, and more about whether the tax system is aligned with modern consumption patterns, Paschini and Langton say.
