South African Internet users purchasing goods, especially virtual services and content, from international suppliers are hurting the fiscus and making local businesses less competitive. That’s the view of a tax specialist at auditing firm Deloitte, who says VAT is seldom levied on these purchases.
VAT is generally not being accounted for when consumers download movies, music, games, software, books and other products from foreign suppliers, which Deloitte argues raises concerns that consumers are “willingly or unwittingly ignoring statutory requirements”.
Anne Bardopoulos, manager in the tax service department at Deloitte, says another consideration is that government does not have the resources to police what she calls a “significant loss of tax revenue”.
The crux of the matter is the lack of “place of supply” rules, which results in “uncertainty as to whether a foreign supplier is required to register and collect VAT from South African residents, especially when e-commerce transactions are involved”, Bardopoulos says.
It does not matter whether a foreign supplier disputes its obligation to register for VAT in South Africa, as the tax can still be collected in terms of the “reverse charge mechanism”, in terms of which the consumer pays the VAT, she says.
Although the effect of VAT not being paid on international purchases is difficult to measure, Bardopoulos says it is “undoubtedly substantial”.
“The impact also has to be considered as foreign merchants, often with larger markets and other supply benefits, are often cheaper. Add an additional 14% price advantage and the competitive edge over South African suppliers of similar products increases markedly.”
Finance minister Pravin Gordhan in February proposed that foreign businesses selling e-books, music and other digital goods and services should be required to register as VAT vendors “in line with regulations which have been adopted by the European Union and other tax jurisdictions”.
However, Bardopoulos says the draft amendments to proposed legislation assign a broad definition to e-commerce, which could be problematic because it could create uncertainty regarding which services should be considered as e-commerce.
The draft amendments propose that foreign e-commerce suppliers should not be subject to a threshold on taxable revenue — currently set at R1m in any 12-month period — and therefore would need to register if conducting any business with South African residents, Bardopoulos explains, even if for only a nominal amount.
However, she says the issue of enforcing this proposed legislation and its wide reach have not been addressed in the draft bill.
The threshold will still apply to local online retailers, who will have a greater advantage than foreign suppliers where their supplies do not exceed the threshold. These companies will not be required to register and levy VAT.
“The proposed amendments will introduce a ‘place of supply’ rule … by stipulating that supplies will be taxable in South Africa if the consumer is a resident of South Africa or payment is effected from a South African bank account,” she says. “The practicality of requiring the foreign supplier to determine if the consumer is a South African resident will need to be addressed.”
Other potential pitfalls of the draft legislation include whether foreign suppliers will have to comply with issuing a valid abridged South African tax invoice; the need for sellers to make it clear on their websites whether or not they include VAT; and whether foreign suppliers registering for VAT in South Africa will have to operate a South African bank account, appoint a local VAT representative, or ensure that required documentation is “open for inspection” by the South African Revenue Service.
“Regardless of these and other issues that have to be resolved, the proposed amendments represent a move in the right direction to reduce the loss of tax revenue arising from digital media supplies,” Bardopolous says. — (c) 2013 NewsCentral Media
