A new European Union (EU) tax law could pose a significant challenge for South African businesses providing digitally downloaded services to private individuals living in the EU.
From next week, companies anywhere in the world that provide digitally downloaded services to individuals in the EU will have to register and charge value-added tax (VAT).
PricewaterhouseCoopers (PwC) says companies affected by the new EU VAT legislation include those providing radio and television broadcasting services solely broadcast over the Internet; electronically supplied services such as Web hosting; software updates; electronic images or text, music, films, games and Webcasting of events; and distance teaching of an automated nature.
Anne Jenkinson, SA indirect taxes partner at PwC, says the effect on local companies depends on the extent to which they have individual customers in the EU who pay to download services.
She says the legislation was drawn up in response to complaints from European IT companies.
Until now the EU required only businesses in its member countries to charge VAT. However, European consumers will no longer be able to order services from non-EU countries to avoid paying VAT.
This new ruling will cause major challenges for businesses that have to adapt their systems to meet the requirements.
Anne Jenkinson, SA indirect taxes partner, PricewaterhouseCoopers
"Companies, mainly US companies, were marketing services in Europe and, because they didn`t have to register, didn`t have to charge VAT. So people were buying their services because they were cheaper.
"So the complaints were really about fair competition."
She says many South African companies, especially smaller ones, may not be aware of the issue.
According to Jenkinson, companies not established in the EU may register in one country rather than in all EU countries where they have customers. Companies established in the EU can charge VAT at the rate specified by the country in which they are established.
However, while she cautions that businesses have an extremely short timescale to put their systems in place before the 1 July deadline, Jenkinson says it appears that not much thought has yet been put into policing, although this may be worked out more thoroughly later.
There are indications that penalties and interest charges may be levied in some way.
PwC has set up a Web site dedicated to the issue to help companies understand the new system and calculate the likely impact of EU VAT on their revenues. The UK`s customs and excise site also deals with the matter.
"This new ruling will cause major challenges for businesses that have to adapt their systems to meet the requirements," Jenkinson says.
"We hope that the Web site will help in enabling them to understand the issues they need to be addressing now in planning for compliance with the new arrangements."
She says PwC is recommending that any South African businesses that sell goods or services to global customers via the Internet urgently review their position to establish the extent of their tax liability in the EU.
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