The VAT consequences on online transactions in South Africa

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Agenda• Stats on ecommerce• Background information on how VAT was introduced• Definition of ecommerce• SA VAT Legislation• Supply, place of supply• VAT registration• Current Position• Davis Tax Committee Recommendations

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Some experts are of the view that local e-commerce sales are set to top R9 billion in 2016.

Total number of online shoppers in SA at the end of 2014 amounted to 3.225 million.

Introduction

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Introduction

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Background information• In September 1991, South Africa replaced its General Sales Tax (also

known as GST) with a consumption-type value added tax (VAT) • The South African VAT system resembles the New Zealand model , as

the South African VAT Act was based on the principles of the New Zealand GST system. South Africa, however, did not include place of supply rules in its VAT legislation when VAT was introduced in 1991.

• The difference between VAT and the previous General Sales Tax in South Africa is that the latter is levied against a consumer and not against an intermediate stage entity, whereas with VAT, everyone along the value chain pays VAT. Moreover, VAT is the value that is added to goods and services on consumption

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Definition of e-commerce• Definition of e-commerce: it is difficult to define e-commerce transactions in one

definition or model, as there are so many different components to it and all the models included different e-commerce types, activities and capabilities.

• OECD defines ecommerce as “An electronic transaction is the sale or purchase of goods or services, whether between businesses, households, individuals, governments, and other public or private organisations, conducted over computer mediated networks. The goods and services are ordered over those networks, but the payment and the ultimate delivery of the good or service may be conducted on or off-line” generally as commercial transactions that take place over or in electronic networks, where two parties (in the context of business-to-business (B2B), business-to government (B2G) or business-to-consumer (B2C)) trade in tangible or intangible products online.

• E-commerce can be defined as use of the internet to conduct one aspect of a commercial transaction and can include transactions where all aspects of the exchange occurred over the internet.

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SA VAT Legislation• Under the current VAT legislation, South Africans are liable for VAT on

imported ecommerce transactions. Digital products, which are not intended to be used for the making of taxable supplies in South Africa, acquired from a foreign supplier, who is not a VAT registered supplier in South Africa, will be subject to VAT in South Africa under the current VAT legislation. (7(1)(c) of the VAT Act)

• The recipient of the service or digital product is obliged to account for the VAT on the transaction by paying the VAT to SARS within 30 days of receiving the invoice from the supplier or paying for the product or service. SARS is therefore reliant on the honesty of the taxpayer to declare and remit the VAT.

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In practise• In practice, the foreign supplier must complete a

VAT registration application form VAT 101, which must be submitted together with certain required documentation.

• The application form and documents can be submitted via electronic mail to SARS for processing. The foreign supplier is not required to open a South African bank account, and the appointment of South African resident representative vendor is also not required.

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VAT 101 FORM

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Supply of goods or services• Although the VAT Act does not provide for variable

VAT rates for the supply of different types of services, the place of supply of services and electronic services differ .

• As a result, uncertainty exists as to the treatment of services that are capable of being delivered electronically but that are not specifically provided for in the Regulations. For example, there is no clear distinction between telecommunication services and electronic services. Some overlap is possible.

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Place of supply • Foreign businesses that supply “electronic services” are

required to register and account for VAT in South Africa if their taxable turnover exceeds a specified registration threshold.

• a foreign supplier of e-commerce services to a recipient that is resident to South Africa, or where payment originates from a bank registered in South Africa, must register as VAT vendor under the VAT Act. However, this would only be the case where the taxable supplies, that is the supply of electronic services to South African residents, exceeds the annual threshold of R50 000.

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Is the supply made in the course or furtherance of an enterprise?• In the case of imported services in terms of the use and-

consumption principle, the recipient vendor of imported services has to account only for VAT on the imported services that are not applied by the recipient in the course and furtherance of an enterprise.

• However, some of the items listed in the Regulations are generally utilised by businesses in the making of taxable supplies. As a result, confusion arises as to whether the duty to levy VAT on B2B transactions for the services so listed would be shifted to the business recipient resident in South Africa when that business makes further taxable supplies.

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VAT Registration• The South African VAT registration system does not

provide for a simplified registration process for suppliers of cross-border intangibles. Vendors must, amongst other requirements, have a fixed establishment with a physical presence in the Republic. The current vendor registration regime is inconsistent with the simplified registration proposal.

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Current position: SA Businesses v International Companies• Most VAT systems, including that of South Africa, are based

on the principle of consumption. Consequently, the person who consumes the goods and services is the person who ultimately carries the burden of paying the tax due on them.

• Thus VAT is levied on goods and services that are utilised and consumed within the borders of the Republic, irrespective of the taxpayer’s residence status.

• International companies such as those mentioned above do not usually have a tax presence in South Africa and therefore cannot be taxed due to our current legislation.

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Davis Tax Committee Recommendations• SA needs to categorize supplies that fall under electronic services and follow what Canada

and the EU have done. Furthermore an interpretation note or guide could be useful in this regard. But if an exhaustive list is compiled by the requisite drafters of the law, the list should be subject to review constantly.

• It is recommended that the administrative burden on foreign suppliers of electronic services, who do not otherwise have a presence in South Africa but who satisfy the compulsory requirements to register for VAT, need to be reviewed and reconsidered to ensure that the amendments addressing electronically supplied services are effectively and efficiently imposed and enforced. The administrative burden imposed on foreign suppliers of electronic services should minimise the administrative costs for both the taxpayer and SARS as far as possible.

• There are concerns that the VAT amendments with respect to e-commerce do not comply with the principle of neutrality which requires that taxation should seek to be neutral and equitable between forms of commerce. Business decisions should be motivated by economic rather than tax considerations. Taxpayers in similar situations, carrying out similar transactions, should be subject to similar levels of taxation.

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CONCLUSION• As seen above many online services are supplied from

outside South Africa, serious consideration needs to be given to updating the current tax regime to ensure it remains relevant in the digital age and the rapidly developing online market place.

• The broadening of the current legislation to include software services as proposed by the Finance Minister in 2015 represents a step to protect the South African tax base and to ensure that local businesses and foreign suppliers are being treated equally.

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