E-services and Looming VAT Dragons
28 May 2013
Posted by: Author: Carmen Moss Holdstock
Source: Carmen Moss Holdstock (Cliffe Dekker Hofmeyr)
It was proposed in the 2013 budget speech that foreign businesses that supply digital goods and services be required to register as vendors in South Africa.
This line of thinking follows the current trend adopted by the European Union (EU) requiring such suppliers to register for Value-added Tax (VAT) in the country where the consumer resides. E-commerce changes things of fundamental importance from a direct and indirect tax perspective. It allows a foreign vendor who essentially has no physical presence to sell into another territory and bypass the payment of any local taxes that may have been imposed on a source basis, for example, the purchase of e-books or music by a consumer, with no collection mechanism, as opposed to the delivery of physical goods that must go through customs. The tax issues associated with e-commerce, specifically cross-border activities on the internet, remain for the most part unresolved.
Tax compliance relies on geographical boundaries and in cyber space these boundaries are non existent and cannot readily be defined. It has become much easier for a business operating as a manufacturer or financial service supplier to establish a direct relationship with a customer in another country, without the need for a physical presence in that country. The intermediaries in the supply chain between the manufacturer and the customer, such as a local agent, distributor, wholesaler or retailer, or even the
manufacturer’s own sales organisation or warehousing facilities may disappear.
The issue that arises for governments is the inability to tax these activities as they no longer occur in their countries. While the effective date of the proposed amendment to the Value-added Tax Act, No 89 of 1991 (VAT Act) remains unclear, it is interesting to see that the EU has adopted Council Regulation 282/2011 (EU VAT Rules), which will be implemented on 1 January 2015, and which effectively changes the rules governing the place of supply of services relating to non-established taxable persons supplying telecommunications, broadcasting or electronic services to non taxable persons. The EU VAT Rules state that all telecommunications, broadcasting and electronic services are to be taxed in the member state in which the customer is established or has his permanent address or usual residence (member state) regardless of where the taxable person supplying these services is established.
To facilitate the compliance with fiscal obligations where such services are supplied to non taxable persons, a special scheme called the union scheme has been put in place for taxable persons established in the community, but not in the member state where the services are supplied. The objective is that this should enable non-established taxable persons to designate a member state of identification as a single point of electronic contact for VAT identification and declaration. In terms of the EU VAT Rules, the EU located supplier will be required to register for the union scheme in the country in which it is located or resides. The effect of this registration means that the EU located supplier will have to determine the rate of VAT it is required to levy on the supplies made to its EU customers on the basis of where their EU consumers are located or reside in the 28 member states, as each member state has a different rate for the levying of VAT.
It is appreciated that the VAT regime in the EU applies different rules and more notably that South Africa does not have various member states imposing different rates of VAT in each member state. However, van Eeden in Tax Planning International makes the fundamental point that notwithstanding the effective date of the proposed amendment to the VAT Act, essentially the question remains how the South African Revenue Service intends implementing a stricter regime on VAT registration requirements and the proposed mechanisms for VAT collection. We await the draft tax legislation with heightened anticipation.