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Google tax debate hots up

Cape Town - The new VAT measures that will be applicable to imported “electronic services” in SA are unlikely to result in an increased income tax liability for offshore service providers like Google, according to Cor Kraamwinkel, associate director of PricewaterhouseCoopers (PwC).

"Although a foreign company may be registered as a VAT vendor in SA, this does not necessarily result in that foreign company having a taxable presence or permanent establishment in SA for corporate income tax purposes," said Kraamwinkel.

Derek Abdinor, responsible for digital publishing at Times Media, told Fin24 Google has advanced the internet immeasurably and in the same way local publishers are trying to grow "our market as we tell our unique South African stories".

"We compete with Google as a publisher who offers significant low rates due to their scale, which they are able to do partly as a result of not having the tax burden," said Abdinor.

They added their voice to the lively debate among local digital publishers, who have to battle to compete for online advertising revenue with international giants like Google.

"This allows many foreign companies to avoid South African corporate income tax liability by relying on relief offered in terms of a double taxation agreement between the foreign country and South Africa,” said Kraamwinkel.

While the local digital publishers have to pay tax to the South African Revenue Service (Sars) on their revenue or profits, Google, for instance, currently transacts through an off-shore entity based in Ireland, thereby avoiding paying local taxes.
 
Google has a dominant position in the SA online market and some estimates put its current online advertising revenue from South Africa at between R800m and R1bn.

Admiration and caution

"I admire Google as a technology entity and for the innovations it has created. As a search engine, it has literally saved the web. However as a business entity I have grave reservations about how it is operating in this country and others outside the US," Matthew Buckland of Creative Spark Interactive told Fin24.

"The search engine attracts huge amounts of advertising revenue from agencies and companies, yet there are questions about how much it actually invests back in the country by way of tax contribution and infrastructure."

Buckland said Google, for example, only has a small satellite office in Bryanston with just 30 people.

"It uses imported technology and there are questions about whether it pays its fair share of tax like other local companies. This has led to accusations that Google has a parasitic relationship with countries outside the US," said Buckland.

"That means that, while the company extracts and repatriates profits, its local investments (in the form of infrastructure and tax) are disproportionate."

He said the occasional investments it makes here (for example: Umbono, Woza, Jasper Solar project) really pale into insignificance in terms of the revenue Google makes annually, and the taxes that could be derived from it.

Using roads taxpayers have paid for

"Google cars, which produce Streetview for Google Maps, drive on roads funded by tax payers like you, me and other companies in this country," said Buckland.

"Local media companies pay tax, and invest in local infrastructure, and staff – yet many find themselves in a position where their advertising business model is being eroded by companies like Google and Facebook."

Buckland sees nothing wrong with competition, but objects to unfair competition.

"Google’s superior technology and model deserves to prosper, but there is everything wrong with unfair competition. For example, Google attracts ten times the advertising revenue than that of an independent media company, yet it employs one fifth of the people."

He said South African media companies, in particular, are being hit by a double whammy: Not only are they seeing erosion of their advertising base as a result of competition from Google, but they are paying local taxes and investing in infrastructure in a much more significant way than their competition.

"It is true that media companies derive revenue from Google’s Adsense programmes, but the truth is that these revenues are just a fraction of most media companies' direct advertising revenues," said Buckland.

Local government should investigate

"My view, is that the local government should investigate this and consider a special import duty or tax on foreign companies that attract local advertising, like Google and Facebook."

He said this would level the playing field and protect local media.

"The local media performs a vital function in this country. Google is an important player in this market and every market, but we need to make sure the playing field is an even one," he said.

Google and other larger internet companies like Amazon and Facebook have been under pressure worldwide to pay a more equitable share of tax.

Countries ranging from France, the UK, Australia and Italy have questioned the tax practices of the large Silicon Valley firms.

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