VAT Registration of Foreign e-commerce Suppliers
21 November 2013
Posted by: Author: Ferdie Schneider
Author: Ferdie Schneider (KPMG)
National Treasury released a tax bill in October 2013, following the Budget Speech in February and draft tax legislation on 4 July 2013, proposing changes to the VAT Act to require VAT registration of certain local and foreign suppliers of electronic services where consumption takes place in South Africa. In terms of the tax bill, local and foreign suppliers of electronic services will be required to register for VAT purposes where the services are supplied from a place in an export country and where a SA resident receives these services. A proxy will also pull local and foreign suppliers of electronic services into the SA VAT net where payment is made through a SA bank. The tax bill makes registration compulsory when the threshold of R50 000 taxable supplies in a consecutive twelve month period is reached. The tax bill also provides for suppliers of electronic services to account for VAT on the payments basis as opposed to the invoice basis.
In terms of the VAT Act, a price which is silent on VAT is deemed to include VAT at 14% (the standard rate). Should a foreign e-commerce service provider required to register for VAT not adjust its pricing to cater for the VAT, this would mean that it would have to calculate and fund the VAT from profits. In order not to impact profits, a VAT unregistered supplier of electronic services would have to ensure that its prices are increased by 14% which would generally place its prices on equal footing (presumably) to those of VAT registered counterparts.
A VAT unregistered supplier of electronic services would also have to change its systems to effect price adjustments resulting from the imposition of 14% VAT; calculate VAT at 14% by applying the tax fraction (14/114) to the VAT inclusive price or add 14% to the value; post the VAT calculated per transaction to a VAT output tax account; identify SA resident customers and payments made through SA bank accounts; and effect source documentation changes (see below). VAT unregistered suppliers of electronic services will face various compliance challenges, including system changes (see above) to cater for these changes, although once-off they could be costly; source documentation changes would also be once-off.
Tax Invoices would need to contain (a) the words "tax invoice” in a prominent place; (b) the name, address and VAT registration number of the supplier; (c) an individual serialized number and the date on which the tax invoice is issued; (d) a description of the services supplied; and (e) either the value of the supply, tax charged and the consideration for the supply or where the tax is calculated by applying the tax fraction (14/114) to the consideration, the consideration for the supply and either the tax charged or a statement that it includes a charge in respect of the tax and the rate at which the tax was charged; marketing presentations (online and other) may also require change as prices are deemed to include VAT at 14%; VAT registration which will be a once-off cost and depending on whether SARS streamlines the VAT registration process can be a fairly expensive and time consuming exercise; VAT filing costs will be a continuous cost and the frequency of filing will depend on whether SARS will create a special category or period within which these suppliers would need to file; and, in the case of a foreign electronic services provider, appointing a VAT representative in SA who needs to be a natural person would be a low but a continuous cost.
Following the release of the draft legislation for comment, National Treasury invited key role-players to workshop the draft legislation. Parliament’s Standing Committee on Finance (SCOF) then heard submissions on the draft legislation. The SCOF considered various comments of the workshop, including the following. The definition of e-commerce services (the previous naming convention) was considered to be too wide and ambiguous as a number of services supplied by foreign service providers would be caught (business- to-business (B2B) and business-to-customer (B2C) transactions), which may not have been intended. Uncertainty also existed with regard to what does the placing of an order entail and when does delivery of a service take place? It was proposed that e-commerce services should be changed to electronically supplied services to align it with international norms.
The SCOF accepted the recommendation to replace the word "e-commerce services” with "electronically supplied services”, although the tax bill now adopted the term "electronic services”. To attenuate uncertainty and provide more clarity, the types of electronically supplied services that would be subject to VAT would be listed in a regulation that will be issued by the Minister of Finance. The list of services should be in keeping with international norms and would most probably include supply of images, text and information and making available of databases; supply of music, films and games, including games of chance and gambling games, and of political, cultural, artistic, sporting, scientific and entertainment broadcasts and events, and supply of distance teaching. It was also proposed that the legislation should not apply to B2Bs as these transactions are catered for under the current reverse charge provisions for imported services. In addition it was proposed that the legislation should not be limited to e-commerce services supplied by non-residents as this could lead to VAT leakage if residents can provide e-commerce services from abroad. The SCOF partially accepted this proposal and accepted that the non-resident requirement should be deleted. The SCOF viewed that a distinction between B2B and B2C will increase compliance for the foreign supplier and could increase fraud (by B2C). The tax bill gave effect to the SCOF’s considerations.
It was also proposed that a monetary VAT registration threshold be introduced. The SCOF accepted that a VAT registration threshold of R50 000 in a period of 12 months should be accepted. The tax bill confirmed the R50 000 threshold. It was also proposed that the effective date of 1 January 2014 be brought forward to 1 November 2013 (or 1 December 2013). The SCOF did not accept this proposal as the implementation of the proposal has to follow the legislative approval process which will not be finalised before the suggested date and the date of implementation has to take account of SARS’ administration system readiness. SARS indicated that 1 January 2014 may not be feasible and 1 April 2014 was proposed as the implementation date. The SCOF accepted that the implementation date will be delayed until 1 April 2014 to allow for SARS system readiness. The tax bill confirmed the effective date to be 1 April 2014. The envisaged changes will broaden the VAT base, address inefficiencies in the reverse charge (imported services) mechanism, and place foreign suppliers and their local counterparts on equal footing.
This article was first published in TaxTalk magazine - November/ December