By Wesley Grimm and Des Kruger

It is no secret that tax systems around the world are struggling to keep pace with the digitisation of commerce and South Africa too, after an initially pro-active stance towards taxing e-commerce, was arguably starting to fall behind in this "new frontier for VAT".

In this article we address the existing position of VAT and e-commerce in South Africa, the recommendations made by the Davis Tax Committee (DTC) in its Final Report on VAT (DTC VAT Report) and then turn to National Treasury and SARS' all-encompassing proposed revisions to taxing e-commerce.

The taxation of electronic services in South Africa was originally implemented on 1 June 2014, ahead of many other countries. The rules impose a liability on the supply of "electronic services" by any supplier from a place in an "export country" (any country other than South Africa) where at least two of the following factors are present: (i) the recipient is a South African resident, (ii) payment for such electronic services originates from a registered South African bank; and/or (iii) the recipient of the supply has a business, residential or postal address in South Africa.

Certain categories of “electronic services" are currently still prescribed by regulation. Simply stated, the VAT rules compel foreign merchants to register as South African VAT vendors and to account for VAT, inter alia, where the foreign merchant provides electronic services to South African consumers or receives payment for such electronic services from a South African bank and the revenue exceeds ZAR 50,000 a year. This registration threshold is significantly less than the registration threshold of ZAR 1 million that applies in relation to all other types of supplies.

As part of its review of the South African tax system and relying on international best practice, the DTC in the DTC VAT Report made certain recommendations to the Minister of Finance in relation to VAT and e-commerce transactions. These include: (i) that supplies qualifying as electronically supplied services should be categorised and elaborated upon in a guide or interpretation note; (ii) that a distinction should be made between supplies made between businesses, so-called business-to-business (B2B) and business-to-consumer supplies (B2C), with only the latter being subject to the e-commerce rules; (iii) that the invoice basis of accounting for VAT be the default position; and (iv) that the VAT registration threshold for foreign electronic suppliers (as defined) be made the same as the compulsory VAT registration threshold i.e. a taxable turnover of ZAR 1 million in any 12 month period. In considering the VAT e-commerce regulations in a broad manner, the DTC recommended that more flexible legislation is required to ensure South African VAT legislation regulating e-commerce stays relevant.

Contrary to the DTC recommendations and seemingly in an attempt to exploit the relatively low VAT policy gap in South Africa, the Minister of Finance announced in the Budget Speech 2018 that the VAT base for the supply of electronic services by foreign businesses to South African consumers would be broadened. The prosaic draft regulations accompanying this announcement state that "electronic services" will be defined as: "…any services to be supplied by means of an electronic agent, electronic communication or the internet for any consideration…" subject to certain exclusions for educational services provided by a person regulated by an educational authority in the export country and telecommunication services.  That is to say that anti-virus software, online advertising, broadcasting, online gaming, cloud computing, online consulting, online software supplies and training services will all now fall within the definition of electronic services.

Practically, the draft regulations target all foreign businesses that supply electronic services to South African businesses for inclusion in the VAT net. Intermediaries facilitating the supply of electronic services and responsible for issuing invoices and collecting payments are also affected and will be deemed to be the supplier for VAT purposes. The usual penalties and interest will apply where such businesses are liable and yet fail to register for VAT timeously.

In this regard, it appears that National Treasury and SARS have adopted a rigid approach to regulate a fluid issue. In particular, the failure to distinguish between B2B and B2C supplies is a step away from the international harmonisation of taxing e-commerce transactions and may potentially create enforcement problems for SARS on cross-border transactions in future. As noted in many reports relating to the taxation of cross-border supplies of electronic services, it makes no sense to impose VAT on B2B transactions where the relevant jurisdiction has a reverse charge mechanism ("imported service" in SA VAT parlance), as any VAT imposed on B2B transactions where the recipient would not be entitled to a full input deduction would be caught by the reverse charge mechanism. It is also concerning to note that the approach adopted by National Treasury and SARS stands in stark contrast with the recommendations made by the DTC.

We await the final draft of the regulations, with interest.

The proposed effective date of the regulations is 1 October 2018.