South Africa: Government wants to levy VAT on foreign e-commerce firms

 

31 January 2014

The government is seeking public comment on how it can levy value added tax (VAT) on foreign companies that sell digital music, e-books and similar services in the local market but do not necessarily have a presence in South Africa. This is according to a notice issued by the Treasury on Thursday. Finance Minister Pravin Gordhan had also mentioned the issue in his 2013-14 budget speech. The Treasury said the call for public comment was being made against the backdrop of international and local efforts to bring cross-border e-commerce (specifically the digital economy) into the VAT regime.

“The current application of VAT on imports does not lend itself to the effective enforcement on imported services or e-commerce where no border posts (or parcel delivery agents, such as the Post Office) can perform the function as collecting agents, as is the case with physical goods,” it said. 

 

The Treasury also said that because such foreign companies were not VAT-registered, South African consumers bought imported digital products without paying VAT. That put local suppliers of digital services at a competitive disadvantage and resulted in a loss of revenue for the fiscus. It said the VAT legislation was amended to bring the digital economy more comprehensively into the tax net and provided for the minister to issue regulations prescribing imported services that would be covered by the new electronic services definition in the VAT Act.

These services would include the supply of e-books, digital music and films, software, images, games and games of chance, information system services, internet-based auction services, maintenance services and educational services, among others. The biggest digital retailers of music, books and films in South Africa are US-based Amazon and Apple’s iTunes service. However, while Amazon has some research and development and a call centre in South Africa, Apple has no physical presence as its computers are sold through a third party. Local e-commerce companies were unfazed by the news on Thursday. Takealot.com CEO Kim Reid said most local e-commerce firms did not compete in the digital services space, but rather in the delivery of physical goods.

“On all those physical goods VAT is paid already,” he said.

Project Isizwe CEO Alan Knott-Craig Jnr agreed, saying consumers would be little affected.

“The issue of taxing the digital services companies comes out of the US and the European Union, areas that do not have a uniform code for the various kinds of sales tax,” he said. “This creates an arbitrage advantage for Amazon and iTunes, but that doesn’t exist in South Africa as VAT is applied uniformly.”

 

Electronic regulatory affairs lawyer Dominic Cull said it would be interesting to see how the Treasury planned to force a company with no physical presence to pay VAT.

“According to current VAT regulations, one needs to have physical address and a local bank account with at least R50,000 worth of invoiced payments in it,” he said.

A Google South Africa spokesperson said:

“We are analysing the draft regulation and will ensure that our business continues to comply with South African law if any changes come into effect.”

Source: Business Day Live