The draft Taxation Laws Amendment Bill for 2013, released for public comment in early July 2013, has proposed an interesting new rule applicable to foreign suppliers of e-commerce products. Presently foreign suppliers of e-books, e-music, e-movies or e-software programmes that transact over the internet with their South African customers are not required to register as vendors for value-added tax (“Vat”) purposes. South African Vat legislation does not cater for place of supply rules in order to determine which jurisdiction has taxing rights in respect of supplies made by foreign suppliers to South African customers.
The acquisition of any e-products by any person in South Africa from a foreign supplier is currently classified as an imported service in terms of the Value-Added Tax Act (89 of 1991 (“Vat Act”)). Most e-commerce customers are unaware of their obligation to account to the South African Revenue Service (“SARS”) for Vat at the standard rate of 14% in respect of their purchases of e-products from foreign suppliers. This is known as the reverse Vat charge and requires the customer to conduct a self-assessment for Vat. The compliance history in respect of Vat self-assessments is relatively low regarding e-commerce transactions. The self-assessment mechanism is administratively burdensome and impractical from a SARS enforcement perspective. The other major concern regarding e-commerce transactions is that local suppliers of the same products are at a disadvantage as their prices include Vat at the standard rate whilst foreign suppliers pricing excludes any Vat.
The place of supply rule imposes the Vat liability on the actual or deemed location of the supplier to determine whether a foreign supplier must charge Vat on a supply. It has been proposed in accordance with the Organisation for Economic Co-operation and Development principles that place of supply rules be introduced for e-commerce transactions. Under the proposed draft rules the foreign supplier will be required to register as a South African Vat vendor once it makes supplies of e-commerce services to South African customers. Often the customer location is unknown to the supplier and it is proposed that a proxy for customer location will be used. The proposed proxy for customer location will be payment from a South African bank account or customer residence in South Africa. The reverse charge mechanism for imported services will be retained and will be applied in conjunction with the place of supply rules for e-commerce transactions. Foreign suppliers will be entitled to Vat refunds if the cash payments exceed total outputs.
The draft amendments applicable to foreign suppliers is proposed to become effective from 1 January 2014 and all foreign suppliers of e-commerce services to South African customers will have a compulsory obligation to register as a South African Vat vendor from that date.