South Africa’s VAT changes: The impact on e-commerce
13 March 2014
Posted by: Author: Bowman Gilfillan
Author: Bowman Gilfillan
The buying and selling of services over
the internet has become ubiquitous. This article provides an update on the
efforts of the South African Revenue Service (‘SARS’) and National Treasury
(‘Treasury’) to bring foreign e-commerce suppliers on to a level tax playing
field, by requiring them to register under the Value-Added Tax Act 1991 (‘the
In South Africa, it is
usually the case that an entity selling goods or services will (i) be charged
VAT (normally at a standard rate of 14%) on its inputs by its suppliers, (ii)
charge VAT on its outputs to its customers, and (iii) will have to register
with SARS in order to claim back the tax paid in step (i) and pay over the tax
collected in step (ii).
This system has functioned fairly smoothly,
until recently. Technological advances have meant that many goods and services
– music, films, books, gambling, education, and so on – are now easily
consumable over the internet, from suppliers based anywhere in the world.
The VAT Act requires anybody conducting an
enterprise in South Africa to register as a so-called ‘VAT vendor.’ In the
past, typical e-commerce transactions were taxed in terms of a ‘reverse charge
mechanism,’ where the onus was on the consumer to pay VAT on imported
e-commerce goods and services. This system has been practically unenforceable
and compliance levels were low. Local e-commerce suppliers have been unable to
compete with their foreign counterparts, because they are forced to incorporate
a 14% premium into their prices, to account for VAT.
To address these issues, the VAT Act was
amended (by the Tax Laws Amendment Act 2013) to oblige suppliers of ‘electronic
services’ (a) to South African residents, or (b) where payment for such
services originates from a South African bank, to register as VAT vendors.
30 January 2014, the Minister of Finance published draft regulations clarifying
what exactly constitutes ‘electronic services.’ These regulations will be open
for public comment, until 20 February 2014.
The regulations list
electronic services as including educational services, games and gambling,
information system services, internet-based auction service facilities,
maintenance services (in relation to, for example, a website or blog),
subscription services (for example, online newspapers and magazines) and the
supply of e-books, films and music.
One can expect that
electronic service providers such as Amazon or Kalahari.com could be required
to charge VAT on e-books and other electronic publications they sell to
numerous South Africans on a daily basis. Such services have become commonplace
in many South Africans’ day to day lives and the charging of VAT thereon seems
to be the logical progression. Other such items that could be subject to VAT in
respect of online purchases include: audio clips, for example ‘iTunes’; the
streaming of live performances; music videos; and television series.
All of these items, amongst others, have been specifically listed in the
However, the regulations go further and have
included a wide variety of services that one would not ordinarily expect to be
charged VAT. For example, the supply of any internet-based or multiplayer
role-playing game has been specifically included, which could see your average
South African indirectly paying VAT on a virtual sword purchased during the
course of a multiplayer role-playing online game.
Furthermore, VAT could be charged on the
numerous upgrades for games or other options available on Facebook and other
social networking services. The regulations have gone as far as to specifically
include, inter alia: home-made videos, jingles, desktop images,
ringtones and screensavers as electronic services that could be subject to VAT.
The legislation would apply to foreign
suppliers of electronic services, as well. Initially the SARS and the Treasury
had proposed a monetary threshold of zero for foreign e-commerce suppliers.
This was far too onerous a threshold, and the threshold has been increased: a
foreign e-commerce supplier will be liable to register under the VAT Act at the
end of any month in which the total value of its supplies of electronic
services exceeds R50 000 (approx. 3,291 Euros as of 10.2.14).
There will also be no
distinction between business-to-business and business-to-consumer suppliers, to
guard against regulatory arbitrage (for example, private consumers may
masquerade as businesses to avoid VAT) and to mitigate the compliance burden
already placed on foreign e-commerce suppliers. These amendments will become
effective from 1 April 2014.
It is worth re-iterating that these amendments
do not technically create a new revenue stream for the fiscus – the
transactions targeted have always been subject to VAT, but the reverse charge
mechanism rendered the proper collection thereof practically impossible. While
they may be a bitter pill for foreign e-commerce suppliers to swallow, the
introduction of these changes is certainly not surprising and brings South
Africa’s VAT regime up to speed with the burgeoning digital economy.
This article first appeared on bowman.co.za.