Proposals to amend contentious tax legislation to include electronic services and products supplied by international companies to South African consumers are under way.
The changes will not only bring South Africa into line with international practices, but will also help to preserve the competitive edge enjoyed by local e-commerce suppliers, says professional services firm Deloitte.
The action taken in Parliament during September, says Dr Anne Bardopoulos, VAT Manager at Deloitte, has seen the definition of this trading as 'electronic commerce services' being aligned with international best practice.
The proposed amendments for the legislation were first introduced following the 2013 Budget Tax proposal that e-commerce supplies by foreigners should fall within the SA VAT net. The Draft Taxation Laws Amendment Bill 2013 mooted the introduction of new provisions to address this issue.
"It was proposed in the amendments that foreign e-commerce suppliers should register for VAT in SA to the extent that supplies are made to SA residents, or to the extent that payments originating from South African banks are made for placed orders that are received electronically. The foreign suppliers would have to register for VAT in SA regardless of the value of supplies made in a 12-month period and no VAT registration threshold would apply.
"The proposed definition for e-commerce supplies was broad. No guidance was offered on the types of supplies that would qualify as electronically supplied services. This would undoubtedly have created uncertainty as to which services should be considered electronically supplied and, therefore, be subject to the new VAT provisions," says Bardopoulos.
This was in contradiction of the Organisation for Economic Co-ordination and Development (OECD) principles of neutrality and fairness.
"Although South Africa is not a member of the OECD, it has an 'enhanced engagement' programme with the OECD and a working relationship with the body.
"Therefore, the introduction of new local VAT provisions should not have contradicted the OECD principles. These state that 'taxpayers in similar situations carrying out similar transactions should be subject to similar levels of taxation' and that 'specific rules applicable to foreign businesses should not result in a disguised form of discrimination'.
"The introduction of a new provision whereby foreign e-commerce suppliers would have had to register for VAT in SA, regardless of threshold, would, effectively, have been discriminatory. South African e-commerce suppliers would have still been subject to the VAT registration thresholds of R50 000 and R1 million in a 12-month period, representing the voluntary and compulsory registration thresholds, respectively."
Commentary to the National Treasury addressed these issues and recommended the phrase 'electronically supplied services' should apply in South Africa so the country was aligned with other VAT jurisdictions, including the European Union.
National Treasury presented some proposed changes to the Draft Amendments to Parliament in September. Subsequently, the proposed definition will be amended to 'electronically supplied services'.
To provide further clarity, the types of electronically supplied services subject to VAT will now be prescribed in a regulation made by the Minister and will be 'in keeping with international trends'. The request for the introduction of a VAT threshold similar to the registration threshold requirements that apply to SA resident e-commerce suppliers was partially accepted, whereby "a R50 000 compulsory threshold is mooted for foreign suppliers of electronic services...".
"If it is Treasury's intention to comply with international trends, the services included as a minimum should include Web site hosting, data warehousing, software supplies and updates, the provision of images, text, music, films and games, gambling games, and subscriptions to databases and Web sites," says Bardopoulos.
The introduction of the low registration threshold will protect local small e-commerce suppliers by giving them a competitive advantage over small foreign e-commerce suppliers. However, it is also likely that most local e-commerce suppliers will fall within the VAT net and thereby not gain an unfair advantage over foreign e-commerce suppliers.
"It is also probable that the effective date of the new e-commerce VAT provisions will be extended to 1 April 2014, to allow SARS to make the necessary system changes.
"The extension will allow foreign e-commerce suppliers further time to make the necessary adjustments to their systems, as well as register for VAT where required," says Bardopoulos.
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