SOUTH AFRICA’S VAT CHANGES: THE IMPACT ON E-COMMERCE
The buying and selling of services over the internet has become ubiquitous. This article provides an update on the efforts of the South African Revenue Service (‘SARS’) and National Treasury (‘Treasury’) to bring foreign e-commerce suppliers on to a level tax playing field, by requiring them to register under the Value Added Tax Act 1991 (‘the VAT Act’).
In South Africa, it is usually the case that an entity selling goods or services will (i) be charged VAT (normally at a standard rate of 14%) on its inputs by its suppliers, (ii) charge VAT on its outputs to its customers, and (iii) will have to register with SARS in order to claim back the tax paid in step (i) and pay over the tax collected in step (ii). This system has functioned fairly smoothly, until recently. Technological advances have meant that many goods and services – music, films, books, gambling, education, and so on – are now easily consumable over the internet, from suppliers based anywhere in the world.
The VAT Act requires anybody conducting an enterprise in South Africa to register as a so-called ‘VAT vendor.’ In the past, typical e-commerce transactions were taxed in terms of a ‘reverse charge mechanism,’ where the onus was on the consumer to pay VAT on imported e-commerce goods and services. This system has been practically unenforceable and compliance levels were low. Local e-commerce suppliers have been unable to compete with their foreign counterparts, because they are forced to incorporate a 14% premium into their prices, to account for VAT.
To address these issues, the VAT Act was amended (by the Tax Laws Amendment Act 2013) to oblige suppliers of ‘electronic services’(a) to South African residents, or (b) where payment for such services originates from a South African bank, to register as VAT vendors. On 30 January 2014, the Minister of Finance published draft regulations clarifying what exactly constitutes‘electronic services.’
These regulations will be open for public comment, until 20 February 2014. The regulations list electronic services as including educational services, games and gambling, information system services, internet-based auction service facilities, maintenance services (in relation to, for example, a website or blog), subscription services (for example, online newspapers and magazines) and the supply of e-books, films and music.Read further