Globally, governments have taken steps to ensure that consumption taxes on cross-border transactions, including electronic services to private consumers, are paid in the country where the services are consumed.
The decision to introduce legislation to tax cross-border transactions arises in the wake of growing concern from governments worldwide on the increasing volume of cross-border services on which no consumption tax is paid, in particular products bought by consumers online outside their home jurisdiction.
Charles de Wet, head of indirect tax for PwC Africa, says: “The effective implementation of collecting consumption taxes, such as Value-Added Tax (VAT) on digital sales will assist jurisdictions to protect their revenue base and level the playing field between domestic and foreign suppliers.”
The taxation of electronic services in South Africa is relatively recent, with regulations having been implemented on 1 June 2014, ahead of other countries, which are only now expanding the scope of their legislation. “It is expected that the regulations governing electronic services will be broadened this year to ensure that the legislation evolves with the technology and transactions it seeks to tax,” adds de Wet.
South Africa has three simplistic conditions of which two need to be met to determine whether a foreign enterprise is required to register for and charge VAT in South Africa. This is subject to the services falling within the definition of ‘electronic services’ as set out in the regulations.
The regulations set out a limited list of qualifying electronic services which includes services such as the supply of e-books, audio-visual content, music, games and certain subscription services, but which excludes growing service industries in the electronic services space (e.g. online advertising).
In Asian markets, such as South Korea and Japan, efforts have been made to reconsider the VAT treatment of transactions by businesses established outside of those countries. Interestingly, non-Japanese business-to-consumer (B2C) sellers of electronic services in Japan may be exempt from registering for VAT in Japan where sales to Japanese customers do not exceed the registration threshold of JPY 10-million (approximately $82 000). This threshold is in stark contrast to the South African model, which has received criticism for casting a wide net with a low registration threshold of only $3 150.
Currently, the South African legislation and regulations do not distinguish between business-to-business (B2B) and B2C transactions while it is largely understood that the intention of the legislature was to exclude B2B type transactions. South Korea has been involved in ongoing discussions regarding whether and to what extent, new rules implemented in that country would apply to B2B transactions. South Korea plans to insert provisions into its legislation stating that if electronic services are supplied to a South Korean entity for business purposes these should not be subject to the new VAT rules. It has long been debated whether South Africa’s existing legislation should also be amended to include such a distinction.
For many consumers who relish internet shopping in a “tax-free” environment, these changes bring additional costs which seek to incentivise consumerism in-country. “With Ghana, Australia and New Zealand just being a few of the other countries in readiness to implement their versions of the electronic services provisions, South Africans can expect even more regulation in this area as others try to make up lost ground on the digital economy front. It is time for South Africa to take the next step to further expand the scope of this legislation,” comments de Wet.
