The present law has no place of supply rules and therefore some difficulties arise when considering whether or not to register a nonresident for VAT.For example, if a non resident distributor of goods sells to recipients who are residents of South Africa, is the non resident carrying on an enterprise(wholly or partly) in the Republic?
The definition of "enterprise” in Section 1 of the Act includes "any activity which is carried on continuously or regularly by any person in or partly in the Republic in the course or furtherance of which goods or services are supplied to any other person for a consideration”.In terms of this definition where a person supplies goods or services continuously or regularly in South Africa or partly in South Africa for a consideration, it will be regarded as carrying on an enterprise.
The real issue is that the distributor is not either "in”, whereupon VAT registration would be necessary, or "out”, where it would not be necessary because of the "partly” requirement.The ongoing activity has to be conducted ‘in or partly in” in South Africa.Unlike other VAT systems (notably New Zealand and Australia), the South African VAT system is not restricted to supplies of goods in or deemed to be in South Africa.
This means that potentially supplies made anywhere could attract VAT if the supply is made in the course of an enterprise conducted at least partially in South Africa.Where a person with no real connection to South Africa transacts with persons in South Africa, it is often unclear whether the nature and scale of the activities in South Africa constitute the carrying on of an ‘enterprise’ in or partly in South Africa.
Where the supply is of goods
The mere export of goods from outside South Africa to customers in South Africa would not generally constitute the carrying on of an enterprise in or partly in South Africa.The reason for this is that there are no activities of the supplier of the goods in South Africa.The risk of an enterprise being conducted in South Africa becomes greater the more activities are performed in South Africa which will mean that the partly test is met.
Therefore, to minimise the nature and scale of activities in South Africa, it is important to ensure that the contract for the sale of the goods is finalised while the goods are outside South Africa.SARS has indicated in the past that a foreign person leasing goods to a person in South Africa, who receives a regular rental, will be obliged to register since SARS believes they are carrying on an enterprise in South Africa.
Equally, if a person grants a trade mark or other intellectual property in South Africa and receives regular royalty payments, SARS believes that the person is carrying on an enterprise and should register for VAT.
Where the supply is of services
The position becomes even more difficult when there are imported services involved.Technology is moving very quickly and so the purchase of software over the internet from a non resident has become an issue because the VAT consequences must be considered.Software is generally considered to be services rather than goods because it is the granting of the right to use something.
The VAT Act deals with imported services which are defined as:"a of that is made by a who is resident or carries on business outside the to a who is a to the extent that such services are utilized or consumed in the Republic otherwise than for the purpose of making taxable supplies;”
Therefore the sale of software from a non resident to a resident over the internet will be defined as an imported service if the person in South Africa is purchasing the software for private use.The liability rests with the importer to pay the VAT to SARS.Clearly this is not a practical solution and almost impossible for SARS to police.In most other countries this type of rule only applies to registered vendors.
The VAT legislation in South Africa is based on the New Zealand legislation.New Zealand has place of supply rules.The general rule is that goods and services are deemed to be supplied in New Zealand if the supplier is resident in New Zealand and deemed to be supplied outside New Zealand if the supplier is not resident in New Zealand.
If the goods, however, are in New Zealand at the time of supply or the services are physically performed by a person in New Zealand at the time the services are performed, they are treated as being supplied in New Zealand.
New Zealand amended its law in 2003 to change the rules in relation to telecommunication services.New Zealand’s rules are that if the person who controls commencement of the telecommunication services, in other words who pays or contracts for the supply, is resident in New Zealand, the supply will be considered to be in New Zealand and subject to GST.These rules, however, need to be read in the context of the definition of the term‘telecommunication services’.The content of the telecommunication service is specifically excluded.Therefore the purchase of software would be excluded.
The South African position going forward
The South African government has stated that consideration will be given to the current work of The Organisation for Economic Co-Operation and Development ("OECD”) concerning the VAT treatment of internationally traded services.These principles need to be read in the context of the existing South African law, the global acceptability of the guidelines and the compliance issues arising if they are to be
useful in determining what South Africa should do next.
The general principle contained in the guidelines in relation to business to private consumer transactions which are cross border supplies capable of remote delivery from a remote location is that the place of consumption is key to determining the place that VAT should be charged ( paragraph 5).In other words the usual residence of the private recipient should determine where the consideration for supply of services should be taxed.
This is very different from the present rules in the European Union where for supplies between members of the EU it is the place of establishment of the business that is critical.It should be noted that these guidelines were issued in February 2006 and we are unaware of any country in the European Union which has adopted them.
In Paragraph 17 of the OECD guidelines, it states that ‘countries should ensure that the potential compliance burden is minimised.’The South African Government needs to balance leakage from the VAT base with a practical solution.The wholesale requirement for offshore providers to register for VAT in South Africa with the attendant requirement for bank accounts and people on the ground to file the returns needs to be balanced with consideration of the amount of VAT to be collected and the harm that is being done to South African suppliers who have to charge VAT.
Perhaps it would be most sensible to remove that difficult word "partly” from the definition of enterprise and address telecommunication services separately.
Source: By Andra Glyn-Jones (TaxTALK)