Abstract
In the South African tax system, a person (natural or juristic) will only be directly subject to tax if there is a nexus or a connecting factor between such person and South Africa or such person’s income and South Africa. A person will have a nexus to South Africa if he is a resident of South Africa or if his income was derived from a source within South Africa. This nexus test is based on an element of ‘physical presence’, which requires the person to be physically present in South Africa or the activities that generated his income to physically occur in South Africa. However, the emergence of the digital economy created a loophole to this nexus test since now businesses can conduct business activities online without being physically present in the country. As such, the South African tax system is unable to tax these digital businesses despite them deriving economic benefits from within its jurisdiction. Since this tax challenge of the digital economy is a global challenge, the OECD, in an attempt to find a global solution, proposed but yet to be finalised a Two-Pillar Solution, namely Pillar One and Pillar Two, which South Africa opted to wait for to be finalised. Pillar One proposes the introduction of a new nexus test for market jurisdictions of the digital economy, while Pillar Two proposes a global minimum tax at a rate of 15 per cent regardless of where digital businesses operate. Therefore, this study aims to investigate which Pillar will be an ideal solution for South Africa should these Pillars be finalised. Through the use of desktop study, this study concludes that Pillar Two will be an ideal solution for South Africa since it has a broad scope and will allow South Africa to continue using its already existing tax laws and set its own tax rate, provided that the minimum tax rate is 15 per cent. However, due to the OECD’s delay in finalising these Pillars and the uncertainty as to when they will be finalised, this study recommends that South Africa should consider implementing alternative measures to directly tax the digital economy and protect its tax base while waiting for global solutions to be finalised.