South Africa to Apply VAT to Electronic Services, April 2014
- Jan 23, 2014 | Gail Cole
Last fall, South African Minister of Finance, Pravin Gordhan, introduced the Taxation Laws Amendment Bill to Parliament. One of the proposed amendments seeks to apply South Africa’s value added tax to “electronic services” supplied “’by a person from a place in an export country’ to a recipient that is a resident of the Republic, or where any payment to that person in respect of such electronic services originates from a bank registered or authorized in terms of the Bank Act, 1990 (Act No. 94 of 1990).” Electronic services are defined in the bill as “those electronic services prescribed by the Minister by regulation in terms of this Act.”
Take a deep breath.
Current taxation of electronic services
Foreign businesses that sell ecommerce services to customers in South African are not required under current law to register as South African vendors. In other words, foreign vendors of electronic books, electronic music, electronic games and so forth are not required to collect and remit South Africa’s value added tax (VAT) on their sales. South African vendors of electronic music, games, books, etc, are required to apply the VAT to these transactions.
Motivation for change
The Organisation for Economic Co-ordination and Development (OECD) promotes the view that “’taxpayers in similar situations carrying out similar transactions should be subject to similar levels of taxation’ and… ‘specific rules applicable to foreign businesses should not result in a disguised form of discrimination.’” South Africa is attempting to fulfill this concept with respect to electronic services.
According to OECD, “Revenue authorities have an important role to play in realising the full potential of ecommerce. Their twin objectives are to provide a fiscal environment within which ecommerce can flourish while also ensuring that ecommerce does not undermine the ability of government to raise the revenues required to finance public services for their citizens.” Its framework for taxation centers on: “neutrality, efficiency, certainty, simplicity, effectiveness, fairness and flexibility.”
Future taxation of electronic services
The South African Minister of Finance has not yet prescribed by regulation precisely which electronic services will be subject to the VAT. Dr. Anne Bardopoulos, VAT Manager at Deloitte, says that to comply with international trends, South Africa would tax “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.” The minister’s regulations will be revealed in due time.
Certain thresholds will apply. Foreign suppliers will be required to register for VAT “at the end of any month where the total value of taxable supplies made by that person has exceeded R 50 000” (Section 178(1)(b)(1A). This is purposely less than the existing R1 million threshold for other taxable supplies, “to level the playing field between local and foreign suppliers of electronic services.”
South Africa is on track to apply value added tax to certain electronic services beginning April 1, 2014, the same day Japan will begin taxing foreign online content.
Does your company sell globally? How do you handle VAT?