The move by national treasury and the South African Revenue Service (Sars) to force foreign suppliers of downloadable digital goods and services to register to pay value-added tax (VAT) in South Africa makes complete sense, but some administrative issues must still be cleared up.
That’s the view of tax expert Anne Bardopoulos of Deloitte, who says treasury’s move to enforce the collection of VAT on foreign suppliers of intangible digital goods such as music, e-books and software, is the right one and brings South Africa in line with many other tax jurisdictions around the world.
Imposing VAT on foreign suppliers of digital goods is expected to raise hundreds of millions of rand per year, if not more, for the national fiscus.
“This shouldn’t be viewed as a new tax,” Bardopoulos says. “It’s just changing the way we enforce and collect it and it’s important for South Africa to move in line with the rest of the world.”
The new rules, introduced through an amendment to the VAT Act, are set to come into force on 1 April this year. “It will be a tight deadline as there are still quite a lot of administrative issues that haven’t yet been addressed,” she says, adding that the date is unlikely to change.
A major issue that must still be tackled is a requirement that suppliers quote their prices inclusive of VAT. When someone buys a product at their local retail store, the retailer is required by law to advertise the price with 14% VAT included; the tax cannot be added at the point of sale. For international online stores, this is more difficult to do because their shop fronts are advertising products and services not only to South Africans but to consumers worldwide.
“They could in theory use your [Internet protocol] address [to determine your location], but some countries have privacy protection laws, and they’d be required to install systems to determine [prices]at the point of browsing instead of at the time of check-out,” Bardopolous says. “Hopefully, there will be a further amendment to the VAT Act to deal with provisions for foreign e-commerce suppliers and how they may advertise their prices.”
With the changes to the VAT Act, the onus has shifted from consumers to suppliers to impose VAT and hand this over to Sars. Bardopolous says this makes sense as it’s easier for the authorities to deal with a thousand suppliers than trying to recover taxes from millions of consumers who either deliberately avoid paying the tax on digital downloads or who couldn’t be bothered to waste their time declaring this to Sars. The onus is now on suppliers to determine if they are subject to VAT.
Bardopolous expects larger online players — Apple, Amazon, Microsoft and so on — to comply with the rules. For one thing, they won’t want the reputational damage of being seen to be tax evaders.
Consumers may also not be able to get around the tax by switching to other countries’ online stores, such as Apple’s Kenyan store, for example. “The Kenyan store is in theory supposed to know who they are supplying to and should be registered for VAT and apply 14% VAT on sales to South African consumers.”
She says the only way South Africans may be able to avoid the tax is if they have foreign address and foreign bank account. Few people have both.
But enforcing the new VAT rules on smaller suppliers won’t be nearly as easy. Suppliers that sell less than R50 000 worth of goods to South Africans consumers each month do not have to register as VAT vendors. However, Bardopolous admits this amount is tiny, especially when converted into hard currencies such as the US dollar or the British pound.
Is the threshold practical? “It’s being questioned and was raised when proposals were released,” she says. “At first, South Africa didn’t want a threshold, but submissions to treasury said that thresholds should apply. Even the R50 000 is being debated — is it realistic? For smaller suppliers of digital products, it will be difficult to enforce.” — (c) 2014 NewsCentral Media