Tax systems around the world are struggling to keep pace with the digitisation of commerce. Where tax systems could previously rely on technological constraints to protect the fiscus, they must now be adaptive to changes in the e-commerce landscape. After an initially proactive stance towards taxing e-commerce, South Africa may now be falling behind. This article highlights recent developments in taxing the fluid e-commerce landscape and encourages further incremental legislative reform in South Africa regarding value-added tax (VAT) being charged on e-commerce transactions.
VAT, being a tax charged on the supply of goods and services, and its application to e-commerce has given rise to a variety of compliance challenges for governments as the digital environment, per definition, transcends traditional jurisdictional boundaries.
The taxation of electronic services in South Africa was implemented on 1 June 2014, ahead of many other countries. The rules impose a liability on the supply of "electronic services" by any supplier from a place in an "export country" (any country other than South Africa) where at least two of the following factors are present:
- the recipient is a South African resident;
- payment for such electronic services originates from a registered bank; and/or
- the recipient of the supply has a business, residential or postal address in South Africa.
Certain qualifying “electronic services" were prescribed by the Minister of Finance, by regulation, in the Government Gazette on 28 March 2014. Simply stated, the VAT rules compel foreign merchants to register as South African VAT vendors and to account for VAT, among other things, where the foreign merchant provides electronic services to South African consumers or receives payment for such electronic services from a South African bank and the revenue exceeds ZAR 50 000 a year. This compulsory registration is significantly less than the registration threshold of ZAR 1 million that applies in relation to all other types of supplies. A foreign merchant who supplies "electronic services" and who has registered as a vendor in South Africa is required to account for VAT at the standard VAT rate of 14% on all the defined "electronic services" provided by the foreign merchant to South African customers. The rules in relation to taxation of electronic services were initially well-received by business and it thus important to ensure that the VAT rules regarding e-commerce remain relevant and true to South Africa's VAT principles.
As part of its comprehensive review of the South African tax system, the Davis Tax Committee (DTC) made certain recommendations in relation to VAT and e-commerce transactions in its Interim Report on VAT, released on 7 July 2015 (DTC VAT Report). These include, among other things, the following:
- that supplies between group companies be excluded from the ambit of the VAT rules;
- that the invoice basis of accounting for VAT be the default position; and
- that no distinction be made between supplies made between businesses, so-called business-to-business (B2B) and business-to-consumer (B2C) supplies and no concessions be granted by manipulating the list of qualifying electronic services. In considering the VAT e-commerce regulations in a broad manner, the DTC recommends that more flexible legislation is required to ensure South African VAT e-commerce legislation stays relevant.
In the spirit of adopting flexible and relevant legislation, the European Commission published its legislative proposals to drastically change the VAT rules for online sales of goods and services in Europe over the period from 2018 to 2021. From 2018, businesses within the European Union selling cross-border electronic services, not exceeding an annual turnover of EUR10 000 can opt to apply the rules of their home country. Another enhancement applies to small enterprises selling online services with an annual turnover below EUR100 000. These companies will only have to collect one piece of evidence to demonstrate the location of the customer as opposed to the current two pieces of evidence required. In 2021 the different thresholds that exist for (VAT exempt) imports of goods for private consumers in the European Union and for sale to consumers across European Union borders will be abolished to eliminate perceived unfair competition and simplify tax administration.
Returning to South Africa, the escalating problems of deteriorating revenue collection and further downward revisions to economic growth projections have significantly eroded government's fiscal position. Tax revenue, as described in the Medium Term Budget Policy Statement, is projected to fall short of the 2017 Budget estimate by ZAR 50.8 billion, the largest under-collection since the 2009 recession. Fortunately, South Africa has a relatively low VAT policy gap owing to the relatively straight-forward and simple VAT policy structure in place. To ensure that this position is maintained, it is imperative that South Africa's e-commerce legislation keep pace with recent developments and takes head of the recommendations in the DTC VAT Report.
The proposal contained in the 2015 Budget that software be included in the list of electronic services in the Regulations would also assist with broadening, strengthening and consolidating the VAT e-commerce base and will ensure that South Africa's e-commerce legislation remains current thereby enabling the fiscus to realise the maximum potential tax revenue possible from e-commerce transactions ending in South Africa.
Written By Chetan Vanmali, Partner and Wesley Grimm, Candidate Attorney at Webber Wentzel