Fwd: Upcoming legislation: VAT on international/foreign e-Commerce (starting 1 Jan 2014)

Just for Calvin's refresher my email relating to his email today with
subject line "Digital products taxed in SA from April: Treasury"


---------- Forwarded message ----------
From: Hendrik Visage <[email protected]>
Date: Wed, Jul 10, 2013 at 11:23 PM
Subject: Upcoming legislation: VAT on international/foreign e-Commerce
(starting 1 Jan 2014)
To:


Goodday (sorry for cross-posting but I believe there might be a need
from the IT people to take notice and lobby about this)

I got a bit of chill as I read the following draft legislation
publicized by the Treasury on SARS website, comments by public to be
done on or before 5 August 2013.

 Exec Summary: I read this that if you buy from or pay to a foreign
supplier/provider  for anything via the internet/electronically , the
foreign *supplier/provider* MUST register for VAT in South Africa.

 Yes, the "spirit" of the law is to tax electronic music, books and
videos, but the wording (as quoted below) implies that anything that
you pay for from your RSA bank account or when you are a RSA resident,
will necessitate the foreign supplier to register for tax in the first
month of the first transaction.

Read: Voip, DNS, SSL certs, bandwidth, hosting, software
subscriptions, Android/BlackBerry/IOS apps (and those with in-game
buying), etc. will need those foreign suppliers of those
products/services to register to SARS for VAT.

The problem I see here is that South Africans will be left again back
in the sanction days as nobody will then do business with RSA
residents or bank accounts, as they would not want/need to register to
SARS to pay 14% VAT on services provided to us.

 Though again I'll state that the spirit of this law might sound good,
the wording is a serious concern for me. Anybody out there that have
more legal expertise available that have read these that can comment
better than I could?

Hendrik

http://www.sars.gov.za/Legal/Preparation-of-Legislation/Pages/Draft-Documents-for-Public-Comment.aspx

Direct PDFs:
http://tinyurl.com/kppx8ao -
http://www.sars.gov.za/AllDocs/LegalDoclib/Drafts/LAPD-LPrep-Draft-2013-28%20-%20Draft%20Taxation%20Laws%20Amendment%20Bill%202013.pdf
http://tinyurl.com/mhwtlnw -
http://www.sars.gov.za/AllDocs/LegalDoclib/Drafts/LAPD-LPrep-Draft-2013-29%20-%20Draft%20EM%20on%20the%20draft%20TLAB%204%20July%202013.pdf

National Treasury released the following draft documents with their
Media Statement on 4 July 2013 for public comment

Draft Taxation Laws Amendment Bill, 2013

Draft Taxation Laws Amendment Bill, 2013
Draft Explanatory Memorandum on the Draft Taxation Laws Amendment Bill, 2013
Draft Clause-by-Clause Explanation of the Taxation Laws Amendment Bill, 2013


Let me quote the chilling parts:

From the draft amendment bill (P166):
(d) by the insertion in subsection (1) after the definition of
“dwelling” of the following definition:
“‘e-commerce services’ means the supply of any services where the
placing of an order and delivery of those services is made
electronically;”;

(e) by the addition in subsection (1) to paragraph (b)of the
definition of ‘enterprise’ of the following subparagraph after
subparagraph (v):
“(vi) the supply of e-commerce services by a person that is not a
resident of the Republic—
  (aa) to a recipient that is a resident of the Republic; or
  (bb) where one or more payments to that person originates from a
bank registered in terms of the Banks Act, 1994 (Act No. 94 of 1994);”

From the explanatory notes (P95 pdf, P92 numbered):


6.7. REGISTRATION OF E-COMMERCE SUPPLIERS

[Applicable Value-Added Tax Act provision: Section 15(2)(a)(viii);
section 20(5B); and section 23(1A); Paragraph (b)(vi) of the
definition of “enterprise” and “e-commerce services” in section 1]

I. Background

A. General – Place of supply

Under current law, foreign suppliers of e-commerce (e.g. electronic
books, music and programs) are not compelled to register as a VAT
vendor. These foreign suppliers of e-commerce wholly transact over the
internet with their customers. As a result, these foreign suppliers do
not have any physical presence in South Africa despite the existence
of multiple South African customers.

On a related note, the VAT Act does not contain any place of supply
rules to determine which jurisdiction (South Africa or another
country) has taxing rights in respect of e-commerce transactions. This
lack of a specific rule for place of supply means that a foreign
supplier’s liability to register for VAT requires an interpretative
exercise with no clear answers.

The generic rule to determine which jurisdiction has taxing rights is
usually based on customer location. This generic rule appears
appropriate in the case of foreign suppliers of e-commerce to

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DRAFT

South African business customers. The foreign supplier should be
subject to VAT at a zero rate in the foreign home country (based on
the destination principle), and the recipient should be subject to VAT
on imported services based on the reverse charge mechanism (see
below).

B. Imported services

As stated above, customers that purchase services (e.g. e-books,
e-music and e-movies) from a foreign supplier for final consumption
must account for VAT on imported services via the reverse charge
mechanism. Owing to the self-assessment nature of this mechanism,
these customers must declare the VAT on imported services. The foreign
supplier does not charge VAT for the services rendered because the
foreign supplier is not registered for VAT.

II. Reasons for change

Placing reliance on the reverse charge mechanism for imported services
as a means of enforcing VAT is impractical. Customer compliance with
the reverse charge mechanism is low, especially in the case of
e-commerce. This lack of compliance can be attributable to two causes:
(i) some customers do not comply based on sheer ignorance, while (ii)
other customers do not comply because they perceive the tax to be
wholly voluntary as a practical matter (e.g. enforcement is
impossible).

This lack of compliance has left local e-commerce suppliers
(especially e-book providers) in an uncompetitive position vis-à-vis
foreign suppliers of e-books. Foreign suppliers benefit because these
suppliers are not required to charge VAT on their sales to South
African customers (due to their wholly foreign location), and
customers simply don’t pay the VAT. Meanwhile, local e-book suppliers
are subject to VAT like any other vendor. The net result is a near 14
per cent competitive advantage for foreign suppliers.

III. Proposal

As previously mentioned, the determination of place of supply for VAT
purposes (i.e. the actual or deemed location of the supplier) is
important to determine whether a foreign supplier must charge VAT on a
supply. In line with OECD principles, it is proposed that place of
supply rules be introduced in terms of e-commerce to bolster the
current imported services reverse-charge mechanism. Under these new
rules, foreign suppliers will be required to register as a VAT vendor
because these suppliers provide supplies to South African customers.
In view of the fact that customer location is often unknown in the
case of e-commerce, a proxy for customer location will be used. It was
decided that either of the following will serve as a proxy for
customer location: (i) payment from a South African bank, or (ii)
customer residency in South Africa. Other proxies were also considered
but rejected:

Place of performance: Unlike physical services, it is impossible to
determine the place of performance of an electronic service.

Customer IP address: Internet Protocol (IP) address depends on where
the Internet Service Provider (ISP) is located and does not provide
any indication of the exact location of the person with that IP
address. Customers can also mask their IP addresses (someone in one
country can show that they are located in another country). ISPs may
also buy bandwidth from other ISPs based on traffic volumes, which
means that the location/country can change.

93

DRAFT

3. Customer’s billing address: Customers can easily manipulate their
billing address details to avoid the tax.

It should be noted that the reverse-charge mechanism will remain as
backstop to the new place of supply rules. In order to further
safeguard the system against fraud, foreign suppliers of e- commerce
will be entitled to VAT refunds only to the extent cash payments
exceed total outputs.

All foreign suppliers of e-commerce services to South African
customers will fall into the compulsory VAT registration category – a
special compulsory category will be created with no monetary
thresholds being applicable. Further, these vendors will be allowed to
register for VAT on the payments basis in order to streamline
compliance.

IV.Effective date

The proposed amendment applies in respect of supplies of e-commerce
services on or after 1 January 2014.

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