VAT charged on foreign Internet purchases

But questions have already been raised as to how the Treasury plans to enforce this.

"The challenge is how are we going to pick up all those suppliers and how it is going to be enforced if the suppliers do not register for VAT. How are the foreign suppliers going to know that there has been legislative changes in SA and they have to register for VAT?" asked Sizwe, Ntsaluba, Gobodo tax services head, Zweli Mabhoza.

Under the current law, foreign e-commerce suppliers have a 14% competitive advantage over their local counterparts, who are subject to VAT.

SA's VAT Act does not have a specific place-of-supply rule in terms of e-commerce. The general rule that should apply is that the foreign supplier is subjected to VAT at a zero rate in their own country and the recipient of the services or goods should be subjected to VAT on the "reverse charge mechanism", meaning the recipient must calculate, report and pay the VAT in the country where the services or goods are consumed.

But Mabhoza said few people are aware that they are obliged to pay VAT when they engage in e-commerce transactions and even if people are aware, they seem to think it is a "voluntary tax" and that they do not have to declare anything.

"The proposed change is in line with international trends to tighten the tax net to ensure companies pay their fair share of tax in the country where their goods are consumed or used," the Treasury said.

Taxes must be implemented

Deputy director-general for tax and financial sector policy at the Treasury, Ismail Momoniat, said the tax net in terms of e-commerce is not tight enough.

"It might take us a bit of time (to get suppliers to register for VAT) but this is just a start. We cannot give up before we even start," he said.

Tax authorities are co-operating in terms of information exchange, especially with regard to indirect taxes. The tax has to follow the consumption, and if the service or product is consumed or used in SA, the tax must be paid in SA.

The Treasury said that because customer location is often unknown in e-commerce transactions, two proxies - payment from a South African bank, or customer residency in SA - would be used.

According to the explanatory memorandum, other proxies were considered but rejected. These included place of performance, the customer's IP address and the customer's billing address.

Mabhoza said some service providers who could be described as "dodgy", are certainly not going to register for VAT in SA. He added that there were complications when it came to registering for VAT in SA - local taxpayers have complained about frustrations and long delays with the registration process.

"I think tax authorities have a mountain to climb," Mabhoza said. The obligation on recipients of e-commerce goods and services in SA to pay VAT has not been removed from legislation and remains as a backstop to the new place-of-supply rule.

Carmen Moss-Holdstock, associate tax director at Cliffe Dekker Hofmeyr, said compliance in this regard (recipients of the service declaring and paying the tax) was low and it was impractical to rely on it alone.

As a measure to combat fraud and corruption, all foreign e-commerce suppliers can only claim VAT refunds to the extent that cash payments for VAT exceed total sales.

Source: Business Day via I-Net Bridge