The proposed tightening of the VAT net on digital goods could lead to a price increase for consumers and an administrative burden for the foreign suppliers of such goods. Foreign businesses and providers of digital goods in South Africa will be required to register as VAT vendors, according to proposals contained in the 2013 national budget review.
The imposition of an obligation for a foreign supplier to register for VAT is likely to affect the pockets of private individuals more than foreign suppliers. The new proposals are in line with international trends, such as regulations adopted by the European Union requiring such suppliers to register for VAT in the country where the consumer resides. It may also be a reaction to the recent furore in Europe over some well-known businesses not paying their so-called ‘fair share’ of national taxes.
Digital content is a unique type of content usually known as an electronically supplied service (ESS). Any type of content that can be downloaded from the Internet, such as games, mobile applications, videos, MP3s and e-books, is considered ESS.
If a US-based company sells goods to private individuals in South Africa, such as CDs, the business will not have to register for VAT, as the individual is usually the importer of record when the goods are shipped. However, should the company sell a digital version of the CD to the consumer, in future, the business will have to register for VAT and be liable for the tax.
This is because digitised music content is considered to be ESS, so VAT should be collected where the service is used and enjoyed — that is, in South Africa. Traditionally, VAT has been very difficult to collect on such activities and so the South African Revenue Service (Sars) has decided to force VAT registration on the foreign suppliers in order to ensure this tax is collected.
The number of companies in the digital space is expected to expand significantly in the coming years as access to online markets grows. According to the Organisation for Economic Co-operation and Development (OECD), tax administrations worldwide are losing billions of dollars through unreported electronic sales and income hidden through sophisticated techniques used to evade tax.
In a South African case it is reported that the wholesalers had expatriated a sum equivalent to €22m out of the country. The European Commission recently ordered Amazon to close a VAT loophole on the sale of its British e-books. A number of countries are also in the process of implementing legislation in an attempt to tackle such abuse.
The proposals have major compliance implications for foreign suppliers of digital products. Not only will foreign suppliers be required to register for VAT, but as vendors they will also have to administer the collection of such tax, and deliver the money to Sars.
Traditionally this has been extremely difficult to police because of the ambiguity in the VAT law, the lack of resources within SARS and the proliferation of digital suppliers. Currently, South African residents are required to account for VAT on such purchases using a specific form. There is widespread noncompliance with this requirement.
Because the difficulty in policing this requirement is unlikely to ease, this new approach is more likely to affect the well-known global brands. Such suppliers are easier to detect. However, it will be more difficult to monitor smaller companies. The Internet is borderless and is very difficult to police with national legislation.
Such a general and wide taxing scheme could have an adverse effect on the growth of e-commerce and business in South Africa. If the tax authorities are unable to pull suppliers into the tax net, the consumer could end up with a hefty bill. Sars may enforce more rigorously the VAT charge to the consumer on imported services for every digital product purchased, he explains.
Furthermore, the costs and administrative burden of registration and on-going compliance will have to be considered for each foreign supplier. The change in the law could also affect foreign suppliers of software and data. However, this may be an unintended consequence. No doubt, foreign suppliers who do not comply with the proposed law may also be presented with hefty fines and penalties for noncompliance.
- Gerard Soverall is head of indirect tax at PwC in Gauteng