VAT Registration of Foreign Business
15 July 2013
Posted by: Author: Carmen Moss Holdstock
Author: Carmen Moss Holdstock (Cliffe Dekker Hofmeyr)
The draft Taxation Laws Amendment Bill 2013 (TLAB) was released for public comment on 5 July 2013. Among other things, the TLAB proposes that, in order to curtail foreign businesses that supply goods and services in 'cyber space' from escaping the VAT net, all foreign businesses supplying digital goods and services will be required to register as VAT vendors in South Africa.
This line of thinking follows the current trend adopted by the European Union, which requires such suppliers to register for VAT in the country where the consumer resides. The question of whether non-residents need to register as vendors in South Africa has been the subject matter of much debate over the years. Generally, a person would not be regarded as carrying on a business or other activity in a country unless that person either has a physical presence in that country or the person provides goods or performs services in that country personally or through an agent.
The proposed amendment in the TLAB considers the place of supply rules and the impact of these rules on imported services.
In terms of the proposal, new place of supply rules will be introduced, in terms of which the actual or deemed location of the supplier will determine whether a foreign supplier would need to charge VAT on the supply made. The introduction of place of supply rules is in line with current OECD principles. In terms of these rules, foreign suppliers will be required to charge VAT on supplies made to South African customers by using a customer proxy. It is proposed, in order to determine the proxy of the customer location, that either the payment from a South African bank or the residency of the customer will be used. Apparently other proxies such as place of performance, the customer IP address and the customer's billing address on the invoice were rejected as alternative means of determining a customer's location. Further, the proposal contemplates a compulsory VAT registration category which applies to all foreign suppliers of e-commerce services to South African customers and a special compulsory category in terms of which no monetary thresholds are applicable.
The other practical issue the proposal deals with is placing reliance on the reverse charge mechanism for imported services, however this was deemed impractical as a result of lack of compliance on the part of the customer.
As a safeguard measure, all foreign suppliers of e-commerce can only claim VAT refunds to the extent that cash payments exceed total outputs.
The proposed amendment will be applicable in respect of all supplies made on or after 1 January 2014.