Changing face of e-commerce, VAT
New regulations come into effect on October 1.
It is no secret tax systems around the world are struggling to keep pace with the digitisation of commerce and South Africa too, after an initially proactive stance towards taxing e-commerce, is starting to fall behind in this “new frontier for VAT”.
As part of its review of the SA tax system and relying on international best practice, the Davis Tax Committee (DTC) VAT Report made recommendations to the minister of finance on VAT and e-commerce transactions.
These include: (i) that supplies qualifying as electronically supplied services should be categorised; (ii) that a distinction be made between supplies made between businesses (B2B) and business-to-consumer (B2C) supplies, with only the latter subject to the e-commerce rules; (iii) that the invoice basis of accounting for VAT be the default position; and (iv) that the VAT registration threshold for foreign electronic suppliers (as defined) be the same as the compulsory VAT registration threshold. This is a taxable turnover of R1 million in any 12-month period.
The DTC recommended more flexible legislation to ensure South African VAT legislation regulating e-commerce stays relevant. Contrary to the DTC recommendations and to exploit the relatively low VAT policy gap in SA, the VAT base for the supply of electronic services by foreign businesses to consumers is set to be broadened.
The draft regulations accompanying this announcement state that “electronic services” will be defined as: “any services to be supplied by means of an electronic agent, electronic communication or the internet for any consideration” subject to certain exclusions for educational services provided by a person regulated by an educational authority in the export country and telecommunication services.
Anti-virus software, online advertising, broadcasting, online gaming, cloud computing, online consulting, online software supplies and training services will all now fall within the definition of electronic services.
Practically, the draft regulations target all foreign businesses that supply electronic services to SA businesses for inclusion in the VAT net.
Intermediaries facilitating the supply of electronic services and responsible for issuing invoices and collecting payments will be deemed to be the supplier for VAT purposes.
National Treasury and the SA Revenue Saervice (Sars) have adopted a rigid approach to regulate a fluid issue.
Failing to distinguish between B2B and and B2C supplies is a step away from the international harmonisation of taxing e-commerce transactions and may create enforcement problems on cross-border transactions.
It makes no sense to impose VAT on B2B transactions where the relevant jurisdiction has a reverse charge mechanism.
The approach adopted by Treasury and Sars is in stark contrast with the recommendations of the DTC. The regulations come into effect on October 1, 2018.
Wesley Grimm is a candidate attorney and Des Kruger a tax consultant at Webber Wentzel