Globally, governments have taken steps to ensure that consumption taxes on crossborder transactions, including electronic services to private consumers, are paid in the country where the services are consumed.
According to a report released on Thursday by advisory firm PwC, the decision to introduce legislation to tax crossborder transactions arose in the wake of growing concern from governments worldwide over the rising volume of crossborder services, on which no consumption tax was paid.
“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,” said PwC head of indirect tax Charles de Wet.
The taxation of electronic services in South Africa was implemented in June 2014, ahead of other countries, which were only now expanding the scope of their legislation.
“It is expected that the regulations governing electronic services will be broadened this year to ensure the legislation evolves with the technology and transactions it seeks to tax,” added De Wet.
South Africa had three simplistic conditions of which two needed to be met to determine whether a foreign enterprise was required to register for and charge VAT in South Africa.
The regulations set out a limited list of qualifying electronic services which included services such as the supply of e-books, audio-visual content, music, games and certain subscription services, but which excluded growing service industries in the electronic services space.
In Asian markets, such as South Korea and Japan, efforts had been made to reconsider the VAT treatment of transactions by businesses established outside of those countries.
Currently, the South African legislation and regulations did not distinguish between business-to-business (B2B) transactions, while it was largely understood that the intention of the legislature was to exclude B2B type transactions.
South Korea had been involved in ongoing discussions regarding whether, and to what extent, new rules implemented in that country would apply to B2B transactions.
South Korea planned to insert provisions into its legislation stating that if electronic
services were supplied to a South Korean entity for business purposes these should not be subject to the new VAT rules.
It had 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 brought additional costs, which sought 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,” said De Wet.