Global internet companies that supply e-books, apps, music and other digital services in South Africa have become liable to register as value-added tax vendors in South Africa from June 1.
The implementation of the new regulations follows an announcement by former finance minister Pravin Gordhan in last year’s Budget and comes against the backdrop of international efforts to close tax leakages in the digital economy.
Foreign suppliers of electronic services are now required to register for VAT in South Africa where the supplies of such services are made to residents of South Africa or payment is made from a South African bank account and the value of these supplies has exceeded R50 000. This will likely affect large internet groups such as eBay, Apple, Amazon and Google.
In the past South African individuals who bought electronic services from overseas were required to declare these purchases to the South African Revenue Service (Sars) and pay the VAT themselves, but because consumers were largely unaware of such requirements and it was difficult to police, the VAT generally went unpaid.
Gerard Soverall, head of indirect tax for PwC Gauteng, says the change is an effort to level the playing field between local and international suppliers.
Up until June 1 foreign suppliers were able to sell electronic services to South African consumers without VAT being paid. However if the same item was bought from a local supplier it was subject to South African VAT.
“So our local suppliers were disadvantaged,” he says.
Soverall says there is a global trend towards ensuring that these types of supplies are taxed, especially where it is sold cross-border.
“What we are finding is that globally tax administrators are unhappy about the amount of tax they believe is being lost through internet type services.”
He says it is almost impossible to track and therefore local and international revenue authorities and national treasuries are working together to see how they can stop the leakage.
While the actual loss to the local fiscus is largely unknown, Soverall estimates that it could amount to millions.
Kyle Mandy, director and head of national tax technical at PwC, says with the growing digital economy the potential revenue loss is growing exponentially.
But the implementation of the new regulations has not been without criticism and challenges.
Charles de Wet, PwC head of indirect tax for Africa, says the international guidelines on VAT were published by the Organisation for Economic Co-operation and Development (OECD) earlier this year. One of the points is that domestic and international businesses should be treated the same.
“In this particular space we haven’t got it right at all because the threshold for a local business to register is R1 million whereas the threshold for a foreign business that supplies electronic services is R50 000. There is substantial difference as far as that is concerned.”
Soverall says one of the anomalies in terms of the administration of the new regulations in South Africa is that no distinction is made between Business-to-Business (B2B) and Business-to-Consumer (B2C) transactions.
He says the pure technical view is that there shouldn’t be a distinction in taxation just because of the different status of the consumer. However, he believes it is an issue of “pragmatism”.
Many large B2B suppliers of electronic services are now being forced to register as VAT vendors in South Africa. This is despite the fact that there was already a provision in the law that allowed for the supply to be taxed.
Soverall says there is also a concern that Sars is not really in a position to effectively police the regulations as most of the suppliers are situated overseas.
Moreover, there are still some uncertainties around the exact definition of the services that are included, he says.
There is a need to level the playing field and to simplify the system, but the current approach is leading to lots of difficulties for clients, he says.
De Wet says under the previous provisions Sars was only at risk of losing revenue where electronic services were sold to individuals, as consumers did not declare their purchases but the new regulations also introduce a risk of a “missing trader”.
In such instance the foreign company would register for VAT in South Africa, charge VAT but not pay it to Sars. If this happens the revenue authority would be worse off than it was before June 1 as the local business would have claimed the input VAT, but Sars would not have recovered the output VAT from the foreign business. In the previous dispensation it would have recovered the tax through the imported services provision.
However, a new agreement on compliance and cooperation that was signed by various revenue authorities could make it easier to police such issues.