Alternatives to the enforceability of VAT on imported
digital purchases in South Africa
H Lubbe
25800736
Mini dissertation submitted in partial fulfillment of the
requirements for the degree Magister Commercii in South African
and International Taxation at the Potchefstroom Campus of the
North-West University
Supervisor:
Ms Corrie Meiring
ACKNOWLEDGEMENTS
I would like to thank my Creator as I would not have been able to finalise this document without the guidance, perseverance and strength provided by Him. I would also like to thank my two beautiful children for being who they are and for the time afforded to me to do my research, writing and finalising my studies. I would lastly like to thank my parents for the sacrifices they made and the support they provided to enable me to further my studies.
ABSTRACT
TITLE: Alternatives to the enforceability of the VAT on imported digital purchases in South Africa.
KEYWORDS: Foreign Suppliers, Value Added Tax, Consumption taxes, digital services, e-commerce, e-tailing, cross border transactions, IS Audit.
Since the introduction of the Internet and the platform it created for cross-border trade, the effective enforcement and administration of consumption taxes relating to imported digital services has been an international topic of discussion and research. South Africa amended the VAT Act in 2013 in order to make provision for and clear some uncertainties relating to VAT on imported digital services.
In this study, the South African VAT Act was compared to the New Zealand GST Act as well as the recommendations made by the OECD and it is submitted that the amended South African VAT Act is in general in line with the GST Act of New Zealand and the OECD recommendations with some exceptions. It could be submitted that the VAT application relating to digital services is in essence the same as traditional transactions with specific challenges due to the nature and characteristics of the digital environment.
Global legislation relating the privacy of consumers worldwide as well as identification of jurisdiction of consumers of digital services remain a global challenge which adversely affects the current application of the VAT Act as well as the administration of VAT relating to imported digital services.
It is submitted that the use of audit as an enforcement tool for VAT on imported digital services might be regarded as ineffective at present due to challenges experienced by foreign suppliers and tax authorities to identify jurisdiction of consumers.
It is submitted that the current application of “country-based” VAT legislation should be investigated further together with other possible solutions that take into consideration cyberspace legislation in order to possibly find a more practicable and enforceable solution to international trade with e-commerce as platform.
OPSOMMING
TITEL: Alternatiewe tot die afdwingbaarheid van BTW op ingevoerde digitale aankope in Suid-Afrika.
SLEUTELWOORDE: Buitelandse verskaffers, Belasting op Toegevoegde Waarde, Gebruikersbelasting, digitale dienste, e-handel, inter-grens transaksies, Inligtingstelsel oudit.
Die effektiewe afdwingbaarheid en administrasie van verbruikersbelasting op ingevoerde digitale dienste is een van die top onderwerpe van bespreking en navorsing deur belastingaarders wêreldwyd sedert die bekendstelling van die Internet en die platform wat daardeur geskep is vir internasionale handel. Suid-Afrika se BTW-wet is in 2013 gewysig om voorsiening te maak vir BTW op ingevoerde digitale dienste asook om onsekerhede uit te skakel ten opsigte van BTW op e-handel transakies.
Die veranderinge in die Suid-Afrikaanse BTW-wet is vergelyk met die verbruikers belastingwet in Nieu-Seeland sowel as met die aanbevelings wat deur die OECD gemaak is. Die aangepaste BTW-wet in Suid-Afrika is oor die algemeen in lyn met die gebruikers belastingwetgewing in Nieu-Seeland en met die OECD se aanbevelings met sekere uitsonderings. Dit kan voorgelê word dat die BTW toepassing ten opsigte van digitale dienste in kern dieselfde is as tradisionele transaksies met spesifieke uitdagings as gevolg van die aard en karaktereienskappe van die digitale omgewing.
Internasionale wetgewing ten opsigte van die beskerming van die privaatheid van gebruikers wêreldwyd sowel as die identifisering van die jurisdiksie van die gebruikers van digitale dien ste bly egter ‘n internasionale uitdaging wat die huidige toepassing van die BTW-wet sowel as die administrasie van BTW op ingevoerde digitale dienste bemoeilik.
Daar kan aangevoer word dat die gebruik van oudit as ‘n afdwingbaarheidsmeganisme van BTW op ingevoerde digitale dienste tans as oneffektief geag mag word as gevolg van uitdagings ondervind deur buitelandse verskaffers sowel as belastingaarders om die jurisdiksie van gebruikers te identifiseer.
Daar word aangevoer dat die huidige toepassing van “grens-gebonde” BTW wetggewing verder ondersoek sal moet word saam met ander moontlike oplossings wat ook algemene wetgewing ten opsigte van kuberruimte in ag neem om sodoende ‘n moontlike alternatiewe oplossing te
TABLE OF CONTENTS
ACKNOWLEDGEMENTS ... I ABSTRACT ... II OPSOMMING... III LIST OF ABBREVIATIONS ... 1 CHAPTER 1 ... 3INTRODUCTION AND OVERVIEW ... 3
1.1 INTRODUCTION ... 3
1.1.1 Background to the research area ... 3
1.1.2 Literature review of the research area ... 5
1.1.3 Motivation of topic actuality ... 6
1.2 RESEARCH QUESTION ... 7 1.3 OBJECTIVES ... 8 1.3.1 Main Objective ... 8 1.3.2 Secondary Objective ... 8 1.4 RESEARCH DESIGN ... 10 1.5 OVERVIEW ... 11 1.5.1 Chapter 1 ... 11 1.5.2 Chapter 2 ... 11 1.5.3 Chapter 3 ... 12 1.5.4 Chapter 4 ... 12 1.5.5 Chapter 5 ... 12
CHAPTER 2 ... 13
IMPORTED E-COMMERCE SERVICES: A COMPARISON OF SA VAT LEGISLATION VS. NEW ZEALAND GST AND ALIGNMENT TO OECD RECOMMENDATIONS... 13
2.1 INTRODUCTION ... 13
2.2 WHAT IS E-COMMERCE? ... 15
2.2.1 Definition of e-commerce ... 15
2.2.2 Business-to-Business vs. Business-to-Consumer ... 18
2.3 VAT IMPLICATIONS OF E-COMMERCE: SOUTH AFRICA VS. NEW ZEALAND AND ALIGNMENT TO OECD RECOMMENDATIONS ... 19
2.3.1 VAT implications of e-commerce: International Tax Policy OECD ... 19
2.3.1.1 Neutrality ... 20
2.3.1.2 Efficiency ... 20
2.3.1.3 Certainty and simplicity ... 20
2.3.1.4 Effectiveness and fairness ... 20
2.3.1.5 Flexibility ... 20
2.3.1.6 Core elements of the Taxation Framework Conditions applicable to e-commerce ... 21
2.3.1.7 Specific recommendations relating to B2C transactions ... 22
2.3.2 Vat implications of e-commerce: A South African perspective ... 23
2.3.2.1 The Act ... 23
2.3.2.2 VAT registration ... 23
2.3.2.3 Enterprise ... 25
2.3.2.6 Concluding remarks: SA VAT implications for foreign suppliers of imported digital
music ... 29
2.3.3 VAT implications of e-commerce: New Zealand perspective ... 30
2.3.3.1 The Act ... 30
2.3.3.2 GST registration requirements ... 30
2.3.3.3 Classification of digital services: delivery of goods and/or services ... 31
2.3.3.4 Supply of imported services subject to GST ... 32
2.3.3.5 Concluding remarks: NZ VAT implications of imported digital music ... 32
2.3.4 Comparison: South Africa vs. New Zealand VAT on e-commerce services ... 33
2.4 CONCLUSION ... 34
CHAPTER 3 ... 36
THE IDENTIFICATION OF ENFORCEMENT JURISDICTION AND THE EVALUATION OF COLLECTION METHODS RELATING TO CONSUMPTION TAX ON IMPORTED DIGITAL SERVICES ... 36
3.1 INTRODUCTION ... 36
3.2 CONSUMPTION TAX AND E-COMMERCE... 37
3.2.1 What is consumption? ... 37
3.3 JURISDICTION OF TAX CONSUMPTION ... 38
3.3.1 Substantive Jurisdiction ... 38
3.3.2 Enforcement Jurisdiction ... 39
3.3.3 Destination and origin as justifications for taxing consumption ... 39
3.3.3.1 Implementing the destination principle ... 39
3.3.3.3 Identifying the destination of a supply ... 40
3.2.4 South Africa’s jurisdiction to impose VAT on e-commerce services ... 42
3.4 TECHNOLOGY AND IDENTIFICATION OF CONSUMER JURISDICTION ... 43
3.4.1 Self-declaration ... 43
3.4.2 Credit card address and/or number ... 43
3.4.3 Digital certificates ... 44
3.4.4 IP numbers and self-declaration ... 45
3.4.5 Geo-identification ... 47
3.4.6 Guidelines and recommendations relating to electronic payment systems ... 48
3.5 CONSUMPTION TAX COLLECTION METHODS ... 49
3.5.1 Self-assessment ... 51
3.5.2 Registration ... 52
3.5.3 Tax at source and transfer ... 54
3.5.4 Trusted third party (TTP) or clearinghouse ... 56
3.5.5 Analysis of collection models ... 57
3.6 EVALUATION OF FORCED VAT REGISTRATION OF FOREIGN SUPPLIERS AS A COLLECTION METHOD: SOUTH AFRICA ... 60
3.6.1 Comments relating to forced registration of foreign suppliers in South Africa ... 62
3.6.2 Practicality and enforceability of the current legislation ... 65
3.7 NEED FOR NEW OR ADDITIONAL TAX LAWS? ... 66
CHAPTER 4 ... 71
THE AUDIT OF THE VAT LIABILITY RELATING TO E-COMMERCE SERVICES ... 71
4.1 INTRODUCTION ... 71
4.2 WHY AUDIT? ... 72
4.3 BASIC AUDIT TERMS AND DEFINITIONS ... 74
4.4 E-COMMERCE AND TAX AUDIT - SPECIFIC CONSIDERATIONS ... 78
4.4.1 Utilisation of IS audits by tax administrations ... 78
4.4.2 IS-audit approach ... 80
4.4.3 Legal framework ... 83
4.4.4 Matters relating to storage, access and format of electronic data ... 84
4.4.5 Practical considerations relating to e-commerce transactions ... 85
4.5 AUDIT OBJECTIVES AND EVALUATION PROCESS ... 86
4.5.1 Audit objectives ... 86
4.5.2 Internal Control evaluation ... 87
4.5.3 System Integrity Audit (SIA) ... 88
4.6 AUDIT TRAILS AVAILABLE IN E-COMMERCE ... 90
4.7 AUDIT AS A METHOD OF ENFORCEMENT OF THE VAT ACT ON FOREIGN SUPPLIERS ... 94
4.7.1 Audit of compliance of VAT returns of foreign suppliers of digital services ... 95
4.7.2 Audit as enforcement tool where foreign suppliers of digital music did not register for VAT or did not submit a VAT return... 96
CHAPTER 5 ... 99
CONCLUSION ... 99
5.1 INTRODUCTION ... 99
5.2 IMPORTED E-COMMERCE SERVICES AND THE SOUTH AFRICAN VAT IMPLICATIONS COMPARED TO NEW ZEALAND GST LEGISLATION AND OECD RECOMMENDATIONS ... 100
5.2.1 What is e-commerce? ... 100
5.2.2 The South African VAT implications of imported digital services and how it compares to the New Zealand GST Act and the OECD recommendations. ... 100
5.3 THE IDENTIFICATION OF ENFORCEMENT JURISDICTION AND THE EVALUATION OF COLLECTION METHODS RELATING TO CONSUMPTION TAX ON IMPORTED DIGITAL SERVICES ... 102
5.3.1 Jurisdiction and identification of jurisdiction ... 102
5.3.2 Collection methods ... 103
5.3.3 Forced VAT registration: South Africa ... 104
5.3.4 New or additional tax laws?... 105
5.4 THE AUDIT OF IMPORTED E-COMMERCE SERVICES FROM A TAX AUTHORITY PERSPECTIVE... 106
5.4.1 E-commerce and audit approach, audit objectives and the evaluation process ... 106
5.4.2 Audit as an enforcement tool for collection of VAT on digital purchases? ... 107
5.5 LIMITATIONS EXPERIENCED DURING THE STUDY ... 108
5.6 RECOMMENDED FURTHER STUDY OR RESEARCH ... 108
LIST OF TABLES
Table 1: Definition of electronic transactions ... 16
Table 2: Proxies used in VAT place of taxation rules ... 41
Table 3: Exceptions to the use of IP addresses to identify jurisdiction ... 46
Table 4: Analysis of collection methods ... 58
Table 5: Taxes covered by utilising IS-audit ... 79
Table 6: Comparison of data integrity concerns: Paper trail vs. e-commerce environment ... 81
Table 7: Audit assertions ... 86
LIST OF FIGURES
Figure 1: Evolution of e-business... 14
Figure 2: Shared technological elements ... 50
Figure 3: Self-assessment collection method ... 51
Figure 4: Registration collection method. ... 52
Figure 5: Tax at source and transfer collection method ... 54
Figure 6: Third party or clearing house collection method ... 56
Figure 7: Major phases of an audit ... 74
LIST OF ABBREVIATIONS
AOL America Online
B2B Business-to-Business B2C Business-to-Consumer
EU European Union
e-commerce Electronic commerce
FTA Federation of Tax Administrators GDP Gross domestic product
GCR General Control Review GST Goods and Services Taxes
IAPC International Auditing Practice Statement IFAC International Federation of Accountants IP Internet Protocol
IS Audit Information Systems Audit
IFPI International Federation of the Phonographic Industry ISA International Standards on Auditing
IOTA Intra-European Organisation of Tax Administrations IIN International Innovation Network
NAO National Audit Office
NRF National Revenue Fund
NZ New Zealand
OECD Organisation for Economic Cooperation and Development
SA South Africa
SMEs Small, medium entities SIA Systems Integrations Audit SARS South African Revenue Services
TAG Task advisory group
VAT Value Added Taxes
CHAPTER 1
INTRODUCTION AND OVERVIEW 1.1 INTRODUCTION
1.1.1 Background to the research area
The introduction of Value-Added Tax (VAT) and Goods and Services Taxes (GST) was one of the most important developments in taxation over the last half-century. Less than 10 countries collected consumption taxes in the late 1960s and it has now been implemented in approximately 136 countries. The consumption taxes in these countries typically account for one-fifth of the total tax revenue (OECD, 2006a:(ii)). At the same time as VAT was introduced across the world, the Internet was introduced for commercial purposes and became the first step in the evolution of e-commerce. In essence the internet and e-commerce brought the world to our doorstep and enabled millions of users to share thoughts, socialise with each other, play online games, gamble online, do marketing and trade online (Mohapatra, 2013:3).
The introduction of e-commerce proved that a physical presence in a specific country is not a requirement for trade or the delivery of services to customers worldwide. Businesses around the world can thus presently deliver services to customers in any place in the world without having a physical presence in the specific country where the customer is situated (Westberg, 2002:4-17). Although this phenomenon opened doors of opportunity to all businesses and consumers world-wide, it also introduced some specific challenges to tax authorities around the world as most tax laws are based on principles of source and residence. These principles assumed that physical country borders, amongst others, regulate residence and source of a specific country (Westberg, 2002:92).
Since the introduction of e-commerce, an extensive amount of research was done regarding the taxability and possible solutions in order to protect governments’ eroding tax bases. The enforceability of the relevant tax legislation as well as the identification of possible VAT transactions, however, still seems to be a challenge around the world (Belheim, Brown, Erneholm & Jundt, 2014:8-11).
E-commerce is defined by Cockfield et al. as “the use of computer networks to facilitate transactions involving the production, distribution, sale and delivery of goods and services in the marketplace” (Cockfield et al., Hellerstein, Miller & Waezeggers, 2013:4-5).
A specific element of e-commerce, which is especially difficult to administer, is the import of electronic services into a country. Electronic services can consist of a broad range of services which include software downloaded via the Internet up to consulting or teaching services. The services are usually delivered directly to the consumer without any intervention of a tax authority (Belheim et al., 2014:76-77). In comparison to the import of services, the taxation on the import of goods via e-commerce is more easily controlled and regulated by the tax authorities due to the fact that goods have a physical nature and must go through customs or border lines which in turn are regulated by tax authorities (Ernst&Young, 2013:1). Upon collection of these goods by the consumer, he/she is liable for the relevant taxation and the latter is usually collected on behalf of the tax authorities (South Africa, 2013a:59).
E-commerce can generally further be divided into two categories namely Business-to-Business (B2B) transactions and Business-to-Customer Transactions (B2C). There are various different definitions to define these two categories but the following describe them in general. B2B transactions mainly refer to one organisation transacting with another organisation by using the Internet (Botha, Bothma & Geldenhuys, 2011:407-408). B2C is also referred to as e-tailing and relates to the marketing and selling of products and services to individual customers via the internet (Botha et al, 2012:129).
The South African VAT Act was amended by the Taxation Laws Amendment Act, 2013 (31 of 2013) in order to ensure that the suppliers of electronic services to residents of South Africa are registered for VAT purposes in South Africa (South Africa, 2013). According to a recent e-commerce report published by Effective Measure (2014:9), 27.1% South Africans purchase goods and services from USA-based sites and 14.46% of South Africans purchase from European-based sites. It is thus clear that South African tax authorities will have to introduce legislative measures to regulate and administer the VAT on these transactions in order to be in a position to collect the applicable taxes.
1.1.2 Literature review of the research area
South Africa has experienced an average growth of 33% in the use of e-commerce from 2006 to 2011 (Goldstuck, 2012:4). Due to this growth, government has re-examined the current VAT legislation in order to avoid erosion in the country’s tax base. Actions taken to date by the SA government include the amendment of the VAT Act and actions taken by the Davis Tax Committee and interim reports issued by this committee (South Africa, 2013; South Africa, 2014b).
On the international playing field, extensive research was done up to the present on the topic of VAT and e-commerce. Possible solutions to these challenges were provided while research continues in order to find the perfect solution to the challenges related to VAT on e-commerce services. Numerous reports were issued to date by the OECD relating to e-commerce and tax which include a report on taxation and electronic commerce, discussion papers relating to permanent establishments when involved in e-commerce, consumption tax aspects, technical aspects and considerations when administrating and auditing e-commerce (Cockfield et al.,
2013:3-8).
Various statistics furthermore seem to emerge relating to the use of the internet and the utilisation of e-commerce in South Africa which will be a welcome contribution to South African researchers and relevant committees who are working on a solution in order to protect our tax base from eroding (Effective Measure, 2014; Goldstruck, 2012).
South Africa’s VAT system was changed from a General Sales Tax (GST) system to a consumption-type VAT system in 1991. VAT is thus levied where the goods and services are consumed (SARS, 2012). The administrative and enforcement challenges with e-commerce services arise, amongst others, with the identification of the location of the consumer (Johnston & Pienaar, 2013:76) and the identity of the consumer (Van der Merwe, 2003:371-387). If the latter is not available, it almost becomes impossible to impose VAT on the consumer and enforce the VAT Act consistently.
Another aspect regarding commerce that poses a challenge concerns the audit of e-commerce transactions. Before the introduction of e-e-commerce, a paper trail was available for audit purposes and financial transactions could easily be followed through from the initiation stage up to the delivery of the product or service and receipt of payment for goods and services. Due to the fact that e-commerce is a paperless financial environment, the traditional audit methods cannot be applied by tax authorities when conducting compliance audits and alternative methods have to be considered (Ogutta & Van der Merwe, 2005:321).
1.1.3 Motivation of topic actuality
VAT in South Africa accounted for 26.4% of the total revenue collected by the South African Revenue Services in the 2013/14 fiscal year (South Africa, 2014a:8). Goldstuck (2013:4) is of the opinion that due to the emergence of e-commerce, the expectation is that e-commerce in South Africa will grow exponentially over the next few years with a possible effect that the South African government might not be able to collect all VAT due to the administrative challenges associated with e-commerce services and the practical enforceability of the current VAT legislation.
According to Brown et al. (2014:11) various challenges arise when supplying e-commerce services due to the fact that VAT is a consumer tax and is payable in the country of consumption. E-commerce, however, presents difficulties relating to the identification and location of customers, which is critical in identifying the place of taxation of the supply for VAT purposes.
The rapid growth of the utilisation of e-commerce has thus raised various concerns regarding the negative effect it could have on different countries’ tax bases. McLure (2003:5) states that there is no uniformity of VAT legislation applicable to various countries and that it is expected that non-resident vendors might not be compliant with the diverse VAT laws of more than 100 countries worldwide.
Although South Africa has made slight amendments to its VAT Act in 2013 in order to make provision for e-commerce transactions, major challenges still include the identification of the customers’ location and the identification of these consumers/customers. One of the challenges of e-commerce is the anonymity of the customers. Customers are thus not obliged to provide personal details to ensure the success of a transaction and/or a customer could provide false information (Westberg, 2012:24).
Another important challenge that emerged with the implementation of e-commerce is the audit approach for the audit of e-commerce transactions. Previously financial transactions were substantiated by hard-copy documents, which might include orders, invoices, delivery notes etc. E-commerce, is however, paperless and tax authorities will have to consider alternative methods of auditing the tax compliance of vendors making use of e-commerce (Ogutto et al, 2005:4).
1.2 RESEARCH QUESTION
The VAT Act was amended in order to make provision for e-commerce services imported into South Africa by South-African residents. The practical enforceability of the amendments, however, will remain a challenge due to the following main problems:
Foreign suppliers are required to register for VAT voluntarily. Most foreign suppliers do not have sufficient knowledge of the South African VAT legislation, which reduces the probability of voluntary registration exponentially.
It is difficult to identify imported e-commerce services due to technicalities such as location and identification of the client receiving the services.
The current audit approach of the tax authorities does not necessarily make provision for the audit of e-commerce transactions.
The following research questions will therefore be addressed in this dissertation:
What are the current South African VAT implications relating to imported digital purchases and what possible solutions might be available in order to address the problem of the enforceability of the VAT by addressing audit as well as the collection challenges currently faced relating to VAT on these transactions?
1.3 OBJECTIVES 1.3.1 Main Objective
The main objectives of this research are to determine what the current VAT legislation is relating to imported digital services and to address the enforceability of the VAT Act by considering how tax authorities can administer and collect VAT on these services as well as the evaluation of audit as an enforcement tool.
1.3.2 Secondary Objective
The main objectives of this study are addressed by the following four secondary objectives:
(i) The first secondary objective will be to investigate the term e-commerce services in order to identify what the service entails and how it could be defined and to do a literature overview relating to e-commerce services in order to understand what the concept includes. The current South African VAT legislation relating to e-commerce services will be considered and compared with the current VAT legislation applied by New Zealand tax authorities and the recommendations of the OECD. This will be done by evaluating the South African VAT Act and comparing it to the VAT Act and practices in New Zealand and the alignment to the recommendations of the OECD in order to identify differences and similarities. This will be addressed in Chapter 2 of the study.
(ii) The second secondary objective will be to explore the enforcement jurisdiction relating to imported e-commerce services, methods to assist foreign suppliers and income authorities with the identification thereof as well as possible collection methods that could be utilised in order to collect the consumption taxes relating the import of digital services. The effective application of forced registration for VAT purposes relating to all non-resident suppliers of e-commerce services as a solution to the collection of VAT in South Africa will also be evaluated. This objective will be addressed in Chapter 3 of the study.
(iii) The final secondary objective that will be addressed by the study is to identify possible audit solutions for VAT transactions on e-commerce services from a tax authority perspective. This will be done with a literature review relating to the audit of e-commerce transactions as well as an evaluation of the current audit practices of tax authorities worldwide relating to e-commerce transactions. This objective will be
The study will focus on the purchase of digital music as indicated in paragraph 2.2.2 (which is categorised under B2C transactions) only due to the extent of services included under e-commerce services, the visibility of these businesses in the e-e-commerce environment and the VAT administration challenges associated with the import of digital music. The comparison between current VAT administration of e-commerce services in South Africa will, furthermore, only be made between South Africa, New Zealand and the OECD recommendations (SouthAfrica, 1996; Bardopoulos, 2012:172) . The choice of legislation comparison and OECD recommendations are based on the fact that New Zealand’s GST system is similar to the VAT system implemented in South Africa and the fact that South Africa must take into consideration international trends, recommendations and legislation when enacting VAT on e-commerce services.
The above approach will enable one to reach a conclusion on the current application of South Africa’s VAT legislation in relation to imported e-commerce services (specifically the digital purchase of music) and possible solutions or considerations for the administration, identification and audit of these VAT transactions.
1.4 RESEARCH DESIGN
The knowledge that the study will reveal relate to the current VAT administration in South Africa of digital e-commerce services and how it compares to the VAT administration in New Zealand and recommendations made by the OECD. The study will thus provide additional knowledge, compared to New Zealand and OECD recommendations that might provide possible solutions to the VAT collection and audit of imported digital services in South Africa.
An interpretivist paradigm will be followed in terms of which research will be done in order to gain knowledge and understanding of the administration and collection of VAT on e-commerce services. This will be done by an in-depth study of literature and research currently available on the study topic. Heavy reliance will be placed on published documentation and reports issued by the OECD due to the fact that the OECD has taken the lead in researching all aspects relating to the administration of consumption taxes on digital services (Van Zyl, 2013:232).
The research method will be an applied descriptive research. This method will be used in an attempt to solve a specific and practical question. The research will be extended to an exploratory research and will be qualitative in nature.
The reason for the chosen research method is due to the fact that a specific question needs to be answered. The conclusion will be reached by applying a systematic method of analysing the South African VAT legislation related to imported e-commerce services, and the analysing of certain administrative and enforcement challenges that are experienced world-wide and in South Africa. An exploratory research will be done due to the current published rulings, publications and interpretation notes relevant to VAT on imported e-commerce services.
The main research objectives will be achieved by conducting a literature review to understand the current VAT legislation in South Africa and the challenges that are associated with the identification and audit of VAT on e-commerce services. A literature review will also be conducted in order to find possible solutions to the research question.
Secondary data will be used to collect data. The secondary data will consist of relevant books, journal articles, academic publications, published reports and Internet resources.
1.5 OVERVIEW 1.5.1 Chapter 1
Introduction, background, research question & objectives, research methodology
The objective of this chapter is to give the background and motivation for this study and to determine the research question and research objectives that the study has to achieve. In addition, the research methodology for the remainder of the study will be established.
1.5.2 Chapter 2
Imported e-commerce services: A comparison of SA VAT legislation vs. New Zealand GST and alignment to OECD recommendations
The objective of this chapter is to understand the general definition of e-commerce and which transactions will be regarded as e-commerce. A comparison will be drawn between Business-to-Business (B2B) transactions and Business-to-Business-to-Consumer (B2C) transactions with emphasis on B2C e-commerce services. This chapter addresses research objective as identified in par. 1.3.2 (i).
The objective is also to further understand the application and implementation of the South African VAT legislation in relation to e-commerce services and how it compares to New Zealand’s relevant legislation and the alignment thereof to the OECD recommendations relating to consumption tax administration. By obtaining a better understanding of the VAT on imported e-commerce services in New Zealand and the OECD recommendations, a conclusion could possibly be drawn on how to improve the implementation of VAT on e-commerce services in South Africa and address the enforceability challenges associated with these services. This chapter addresses the research objective as identified in par. 1.3.2 (ii).
1.5.3 Chapter 3
The identification of enforcement jurisdiction and the evaluation of collection methods relating to consumption tax on imported digital services
The objective of this chapter is to research and analyse the identification of enforcement jurisdiction in an e-commerce environment as well as possible collection methods of consumption taxes relating to imported e-commerce services. The forced VAT registration of non-resident suppliers of e-commerce services as a possible enforcement and collection solution to the South African Revenue Services (SARS) will also be evaluated in this chapter. This chapter addresses the research objective as identified in par. 1.3.2 (ii).
1.5.4 Chapter 4
The audit of the VAT liability on imported e-Commerce services
The objective of this chapter is to understand how the introduction of e-commerce has changed the audit approach from a traditional paper trail environment to a digital environment and how tax authorities world-wide have adapted to the challenge specifically focusing on audit. By obtaining a better understanding of the latter, possible solutions could be identified for tax authorities’ audit approach and the use thereof as an enforcement method. This chapter addresses the research objective as identified in par. 1.3.2 (iii).
1.5.5 Chapter 5
Summary, conclusion and recommendations
This chapter will provide a summary of the findings regarding the VAT enforcement challenges relating to the digital purchase of music and forced VAT registration of non-resident suppliers of digital music as a possible solution. A conclusion will be given on possible audit considerations from a tax authority perspective as an enforcement tool in order to enforce, administer and collect VAT in respect of digital music purchases.
CHAPTER 2
IMPORTED E-COMMERCE SERVICES: A COMPARISON OF SA VAT LEGISLATION VS. NEW ZEALAND GST AND ALIGNMENT TO OECD RECOMMENDATIONS
2.1 INTRODUCTION
Louden and Traver (2013:47) describe the first 17 years of e-commerce as “the first 30 seconds of the e-commerce revolution”. This is mainly due to the fact that e-commerce is growing rapidly worldwide and it is said that it is only the “beginning” of the revolution. Louden and Traver (2013:47) state that the twenty-first century will be “the age of a digitally enabled social and commercial life, the outline of which we can barely perceive at this time”. The latter statement can be confirmed by the following e-commerce trend predictions for 2015 and beyond (Zorzini, 2015):
“Saturated price race will begin” – consumers will be able to compare prices of similar products;
“Consumers will go global” – larger numbers of consumers will start buying from foreign company websites. It is thus expected that businesses will continue expanding their borders to different parts of the world;
“Marketing will get more personalised and will be driven by big data”;
“Corporations will get personal too” – It is predicted that the bigger corporations will start using social media in order to “socialise” with visitors and customers;
“Mobile buying and marketing will boom, bloom and mushroom” – due to the rapid increase of people using mobile devices in order to access the Internet, e-commerce sites are expected to rapidly grow in this area (also referred to as m-commerce);
“Video-based marketing and buying will explode online” – video marketing will increase in order to provide a prospective buyer with a near in-store experience;
“Niche based content targeting will gain momentum” – it is predicted that e-stores will become more focused on specific niche markets and focus more on these markets.
It is further predicted by Statistica that B2C e-commerce sales worldwide will reach 1.92 trillion U.S. dollars in 2016 (Statista, 2015a).
The International Federation of accountants (IFAC) illustrated the evolution of e-business as follows (IFAC, 2002a:5):
Figure 1: Evolution of e-business
Application
Maturity/Experience
From the above, it is clear that e-commerce which is integrated into e-business, as a method of transacting with worldwide customers will continue to grow at a fast tempo. From a tax perspective, and specifically with the focus on VAT, South Africa will have to consider amendments to its current laws and enforcement methods in order to protect its tax base from
E-Communication E-Business E-Commerce Website Information Public relations Product information Integration Integration of purchasing, logistics and products Co-ordination with suppliers and customers Interaction Information on demand Online enquiries Transactions Online Sales/purchases Acceptance of rights and obligations 2 3 4 1
The secondary objective as indicated in paragraph 1.3.2(i) will be addressed in this chapter as this chapter will focus on the definition of e-commerce in order to obtain a better understanding of the term and the current VAT legislation in place relating to B2C imported services in South Africa compared to similar legislation of New Zealand as well as the alignment of the consumption tax legislation to the OECD guidelines.
2.2 WHAT IS E-COMMERCE? 2.2.1 Definition of e-commerce
The term e-commerce is defined in literature as a general term that includes a network of computers and telecommunications used to conduct business between consumer and other businesses. Cockfield et al. (2013:11) define e-commerce as follows: “e-commerce refers to the use of computer networks to facilitate transactions involving the production, distribution, sale, and delivery of goods and services in the marketplace”. Westberg supports this view (Westberg, 2002:4).
Laudon & Travor (2013:50) defines e-commerce as “the use of the Internet, the Web, and apps to transact business. More formally, digitally enabled commercial transactions between and among organisations and individuals”. Different schools of thought however exist relating to the definition of e-commerce and what it entails. It is stated that e-commerce and e-business should be separated as two concepts. Laudon et al. (2013:51) defines e-business as “the digital enabling of transactions and processes within a firm, involving information systems under the control of the firm”. Laudon et al. (2013:51) further states that commerce is a component of e-business and that e-commerce is enabled by the e-e-business process as soon as value is exchanged between different parties. E-commerce is thus a generic term to describe the technology, processing and operations that take place when business or financial transactions are executed by use of electronic means (Steyn, 2010:231).
For the purpose of this study, the definition approved by the OECD for the term e-commerce should also be considered due to the important role that the organisation plays on an international level relating to international economic development and policy setting. The OECD has established a “broad” definition as well as a “narrow” definition for e-commerce. These are set out below (OECD, 2012:89):
Table 1: Definition of electronic transactions (OECD, 2012:89)
E-commerce
transactions OECD definitions
Guidelines for the interpretation of the definitions (WPIIS proposal April
2001)
BROAD definition
An electronic transaction is the sale or purchase of goods or services, whether between businesses, households, individuals, governments, and other public or private organisations, conducted over computer-mediated networks. The goods and services are ordered over those networks, but the payment and the ultimate delivery of the goods or service may be conducted on or off-line.
Include: orders received or placed on any online application used in automated transactions such as Internet applications, EDI, Minitel or interactive telephone systems.
NARROW definition
An Internet transaction is the sale or purchase of goods or services, whether between businesses, households, individuals, governments, and other public or private organisations, conducted over the Internet. The goods and services are ordered over those networks, but the payment and the ultimate delivery of the good or service may be conducted on or off-line.
Include: orders received or placed on any Internet application used in automated transactions such as Web pages, Extranets and other applications that run over the Internet, such as EDI over the Internet, Minitel over the Internet, or over any other Web enabled application regardless of how the Web is accessed (e.g. through a mobile or a TV set, etc.). Exclude: orders received or placed by telephone, facsimile or conventional e-mail.
With reference to section 1 of the Income Tax Act (58 of 1962) (hereafter the ITA) and the VAT Act (89 of 1991) (South Africa, 1962; South Africa, 1991), e-commerce or digital transactions were not defined by South African tax legislation until 2013. A Taxation Amendment Bill was approved in 2013 which proposed the following definition for e-commerce services with effect from 1 April 2014: “E-commerce services means the supply of any services where the placing of an order and delivery of those service is made electronically” (South Africa, 2013b). It should be noted that the general term “e-commerce” is not defined in the Act but only the services related to e-commerce.
The Goods and Services Tax (GST) system of New Zealand is regarded a more modern consumption tax system than the European Union’s current system and is it therefore important to consider the definition provided for e-commerce in the relevant legislation (Copenhagen Economics, 2013). The New Zealand Parliament defined e-commerce as follows: “E-commerce refers to the buying and selling of goods and services over electronic networks, principally the Internet. It includes ordering them on-line (for example, through e-mail or via a web page) and paying for them on-line” (New Zealand Parliament, 2001). The Goods and Services Act (141 of 1985) does not define digital services specifically as per the SA VAT Act but “goods” and “services” are also defined separately as per the SA VAT Legislation that is equally applicable to e-commerce transactions.
From the above definitions it is clear that there are several different definitions for the term e-commerce. There are however, main or common components that are included in all of the above definitions. These include the existence of a purchase and sale transaction which is
enabled by an electronic device or network via mainly the Internet, and the exchange of value between the relevant parties.
For the purposes of this study and with reference to the above definitions, the reference to e-commerce will be represented by any electronically enabled transactions between and among consumer or business and business and from which the exchange of value takes
place.
The major types of e-commerce include the following (Laudon et al., 2013:59): B2C – business-to-consumer
B2B – business-to-business C2C – consumer-to-consumer Social e-commerce
M-commerce – mobile e-commerce Local e-commerce.
For the purposes of this study, focus will be placed on B2C transactions only as motivated in paragraph 2.2.2 irrespective of what media or device is used to enable and conclude the transaction.
2.2.2 Business-to-Business vs. Business-to-Consumer
B2B e-commerce is electronic commerce between companies or businesses (Mohapatra, 2013:71). Literature differs relating to the specific percentage of total monetary value of e-commerce transactions which are generated from B2B transactions, but it is clear that between 80 to 90 percent of the monetary value of e-commerce is represented by B2B (Mohapatra, 2013:71). B2B transactions are however, easier to administer from a consumer tax point of view as the location or jurisdiction of the businesses transacting with each other are usually known or easier to identify which in turn enable the relevant tax authorities to apply the consumer tax where the consumption of the products takes place (OECD, 2001b:12).
B2C e-commerce is also referred to as e-tailing. This relates to the marketing and selling of products and services directly to individual customers online (Botha et al., 2011:129) . According to Statistica (Statista, 2015a), B2C transactions will represent 1.61 percent of the Global Gross Domestic Product (GDP) in 2018. The purchase of digital music is an example of B2C transactions and it is stated that the purchase of digital music increased with 6.9 percent to US$6.85 billion in 2014. According to the International Federation of the Phonographic Industry (IFPI) (2015), the sales of music in digital format have also reached the same portion (46%) of income if compared to music purchased in physical format in 2014. The purchase of digital music also represent 39% of total digital purchases globally from February 2013 to January 2014 (Statista, 2015b).
The delivery of digital services to consumers poses some administrative difficulties relating to consumption taxes due to the fact that the tax should be imposed in the country of consumption and the fact that consumers’ addresses or place of actual consumption are not always known or correct. It is also unlikely that the supplier will have enough information to determine the private consumer’s “center of vital interests” or nationality (OECD, 2001b:12).
The study will only focus on B2C transactions due to the specific challenges relating to VAT administration and enforcement that is associated with this type of transacting method. The study will further only focus on the purchase of digital music due to the fact of the purchase of digital music represents a significant portion of the total monetary value of e-commerce purchases.
According to the IFPI Digital Music Report (2014:11), some of the most common and well known suppliers of legal digital music amongst consumers is YouTube, iTunes, Amazon MP3, Spotify, Deezer and Vevo. From the IFPI (2014:5) report released in 2014 relating to digital music sales, it is evident that the purchase of digital music via the use of electronic suppliers is thriving and reaching new heights. The VAT implications of imported digital music by South African consumers will thus be evaluated further.
2.3 VAT IMPLICATIONS OF E-COMMERCE: SOUTH AFRICA VS. NEW ZEALAND AND ALIGNMENT TO OECD RECOMMENDATIONS
2.3.1 VAT implications of e-commerce: International Tax Policy OECD
Due to the “borderless” nature of e-commerce and the fact that it enables international trade, international tax policies for cross border transactions should be considered. This is confirmed by section 233 of the Constitution of South Africa which states that international law should be taken into consideration when interpreting any law (South Africa, 1996). This matter was also addressed in the Davis Tax Committee report (2014b:17). Cross-border transactions may be subject to taxation in different jurisdictions and is consequently a matter that should be considered and evaluated on an international level.
Even though South Africa is not a member country of the OECD, it has been awarded observer status in 2004. Although the recommendations of the OECD are not legally binding, South African courts have recognised and applied the OECD Commentary to date. Examples of court cases where reference was made to the OECD include SIR v Downing 1975 (4) SA 518 at 525 (AD) as well as ITC 1503 (South Africa, 2014b:18). Based on the latter, it is clear that the OECD guidance relating to e-commerce and the taxation must be considered when evaluating South Africa’s current VAT legislation relating to imported digital services.
In order to ensure that the economic potential of e-commerce is realised in full, it was concluded by the OECD that the same taxation principles that guide governments in relation to conventional international transacting methods should apply to e-commerce transactions. These principles include neutrality, efficiency, certainty and simplicity, effectiveness and fairness and flexibility (OECD, 2001a:3-5; OECD, 2014b:10). These principles will be discussed briefly in the following paragraphs.
2.3.1.1 Neutrality
Neutrality is the fundamental principle of international tax policy and is achieved, in an international context, if the pattern of taxation does not affect the consumer or taxpayer’s choice between investing in the resident country or in foreign countries (Cockfield et al., 2013:35). The OECD states that taxation should be neutral and equitable between conventional transacting methods and e-commerce. It also states that business decisions should be based on economic considerations rather than tax considerations (OECD, 2001a:4; OECD, 2014b:11).
2.3.1.2 Efficiency
The administrative compliance cost for taxpayers and tax authorities must be minimised as far as possible. It is thus a requirement that administrative efficiency of tax relating to e-commerce is in line with the administrative efficiency of traditional transacting methods (OECD, 2001b:4; OECD, 2014b:11).
2.3.1.3 Certainty and simplicity
The OECD (2001b:4; 2014b:11) requires that tax rules should be clear and simple to understand in order for taxpayers to anticipate the tax effect of transactions in advance of the transactions. The rules should include clarity relating to when, where and how the tax should be accounted for. Smith (1776:639-706) also recommended the principle of certainty and simplicity in 1976.
2.3.1.4 Effectiveness and fairness
The guidelines require effectiveness and fairness of international taxation and state that it should produce the right amount of tax at the right time. It further states that tax evasion and avoidance should be kept to a minimum by implementing preventative measures which are in proportion to the risk involved (OECD, 2001b:5; OECD, 2014b:11). The principle of effectiveness and fairness was also recommended by Smith (1776:639-706).
2.3.1.5 Flexibility
It is required that systems for taxation should be flexible and dynamic to ensure that these systems remain compatible to technological and commercial developments (OECD, 2001b:5; OECD, 2014b:11).
2.3.1.6 Core elements of the Taxation Framework Conditions applicable to e-commerce The OECD has developed certain core elements that should be applied when considering whether to impose consumption taxes on e-commerce services. These include the following (OECD, 2001b:5; OECD, 2014b:3-15):
The rules relating to consumption taxation of cross-border transactions should result in taxation in the jurisdiction where the product/service is consumed. This rule is still maintained in terms of the updated VAT/GST Guide issued by the OECD in 2014 (2014b:24). Where music is thus purchased by a South African consumer, this recommendation will implicate that South Africa may collect the VAT on the purchase of the digital music.
The supply of digitised products should not be treated as a supply of goods. Digital music purchases will thus be classified as a “service” for VAT collection purposes.
Countries should consider the use of reverse charge, self-assessment or other similar mechanisms in cases where services and intangible property is obtained from suppliers outside the country in order to protect the country’s revenue base and competitiveness of domestic supplies.
Countries should ensure that relevant systems are developed in co-operation with the World Customs Organisation (WCO) and in consultation with carriers and other interested parties in order to collect taxes on importation of physical goods. These systems should not unduly impede revenue collection nor must they affect the efficient delivery of products to consumers negatively.
2.3.1.7 Specific recommendations relating to B2C transactions
The OECD has made specific recommendations relating to B2C transactions in the International VAT/GST guide (2006a:13; OECD, 2014b:16-18) issued in 2006. These recommendations can be summarised as follows:
Countries should, where considered necessary, implement a registration system where foreign suppliers will be required to register as vendors in order to ensure collection of consumption taxes on B2C transactions. According to this recommendation, the suppliers of digital music will have to register in South Africa if they sell digital music to South African consumers;
Tax administrations must ensure that the tax compliance burden is minimised for foreign suppliers required to register for VAT. This matter was again reiterated in the VAT/GST guidelines issued by the OECD in April 2014 (2014b:13);
Countries must consider applying registration thresholds for imported digital services in a non-discriminative manner;
Countries should consider appropriate control and enforcement measures to ensure compliance and recognise the necessity for enhanced international administrative co-operation.
2.3.2 Vat implications of e-commerce: A South African perspective 2.3.2.1 The Act
The Minister of Finance announced during his budget speech in 2013 that certain amendments will be made to the Value-Added Tax (VAT) Act in order to make specific reference to e-commerce services delivered to South African residents and the VAT administrative and enforcement requirements for these transactions (South Africa, 2013a:59). The provisions of the VAT Act which were affected by the amendments include sections 15(2)(a)(vii), 20(5B), 23(1A) and Paragraph (b)(vi) of the definition of “enterprise” and “e-commerce services” in section 1. These amendments came into effect on 1 April 2014 (South Africa, 2013c).
Specific requirements relating to VAT registration, definition of an enterprise, delivery of goods vs. services and the place of supply will be considered in more detail below.
2.3.2.2 VAT registration
Section 23 of the VAT Act regulates which persons are required to register as a vendor for VAT purposes. In general, a person is required to register as a vendor if (South Africa, 1991):
The person is an enterprise as defined and
the enterprise’s income exceeds or is expected to exceed R1 million in any period of 12 months.
The above will be referred to as the “vendor registration method”.
Section 7(1)(c) of the VAT Act states the following (South Africa, 1991):
“Imposition of value-added tax. – (1) Subject to the exemptions, exceptions, deductions and adjustments provided for in this Act, there shall be levied and paid for the benefit of the National Revenue Fund (NRF) a tax, to be known as the value-added tax-
(c) on the supply of any imported services by any person on or after the commencement date, calculated at a rate of 14 per cent on the value of the supply concerned or the importation, as the case may be.” The latter will be referred to as the “reverse charge method” and it implies that the consumer should pay VAT over to the NRF based on the services imported.
Before the amendments came into effect in April 2014, foreign suppliers were not compelled to register for VAT purposes due to the fact that they wholly transacted with the use of the Internet. These suppliers thus did not have a physical presence in South Africa despite of the fact that they had customers in South Africa (South Africa, 2013b).
According to section 7(1)(c) of the VAT Act, a “reverse charge mechanism” is also applied where a consumer imported electronic services from a non-resident and it is expected from the consumer to render VAT to the NRF based on the value of the transaction. In terms of this section, the purchaser of the digital music will thus be liable to pay over the VAT to the tax authorities. This method of collection is, however, ineffective due to consumers not being aware of the requirement and due to the fact that the consumers are of the opinion that the payment of the VAT is voluntary (South Africa, 2013b:93).
The Taxations Law Amendment Bill of 2013 has, however, included section 23(1A) with effect from 1 April 2014. The section reads as follows: “Every person who carries on any enterprise as contemplated in paragraph (b)(vi) of the definition of “enterprise” in section 1 and is not registered becomes liable to be registered at the end of any month where the total value of taxable supplies made by that person has exceeded R50 000” (South Africa, 1991). In terms of this section, foreign suppliers of digital music who sell digital music to the value of more than R50 000 in any 12 month period to South African consumers will be required to register for VAT purposes in South Africa.
In comparison to the VAT registration threshold of R1 million per section 23 of the VAT Act applicable to domestic vendors in South Africa, concerns may arise relating to the lower threshold of R50 000 applicable to foreign suppliers as this might be regarded as not being aligned to the OECD recommendations of tax authorities being “non-discriminative” when tax thresholds are set as per discussion in paragraph 2.3.1.7.
Paragraph (b)(vi) of the definition of an Enterprise as defined in section 1 of the VAT Act reads as follows:
“vi) the supply of electronic services by a person from a place in an export country, where at least two of the following circumstances are present:
(aa) The recipient of those electronic services is a resident of the Republic;
(bb) any payment to that person in respect of such electronic services originates from a bank registered or authorised in terms of the Banks Act, 1990 (Act No. 94 of 1990);
(cc) the recipient of those electronic services has a business address, residential address or postal address in the Republic…”
limited to the minimum and can it thus be questionable whether SARS’s current processes are aligned with the OECD recommendations. Very limited reliable information is currently available on actions taken by SARS in order to ensure enforcement of the registration process and compliance thereto.
The registration requirement per the SA VAT Act, however, revolves mainly around the fact that an enterprise as defined in section 1 of the VAT Act is applicable and will be discussed further below.
2.3.2.3 Enterprise
An enterprise is defined in section 1 of the VAT Act as follows:
"enterprise" means—
(a) in the case of any vendor, any enterprise or activity which is carried on continuously or regularly by any person in the Republic or partly in the Republic and in the course or furtherance of which goods or services are supplied to any other person for a consideration, whether or not for profit, including any enterprise or activity carried on in the form of a commercial, financial, industrial, mining, farming, fishing, municipal or professional concern or any other concern of a continuing nature or in the form of an association or club;…” (emphasis added) (South Africa, 1991).
From the above, it is clear that certain requirements must be met before a supplier can be regarded as conducting an “enterprise” as defined. These requirements are as follows:
An enterprise or activity must be present;
The enterprise or activity must be conducted on a regular and continuous basis; The activity must be in South Africa or partly in South Africa;
Goods and/or services must be supplied;
The goods and services must be supplied for a consideration.
It is relevant to note that a survey done amongst tax specialists in 2006 indicated that great uncertainty existed whether the provision of digitised services by a non-resident to a SA resident constitute an “enterprise” as defined (De Swardt & Oberholzer, 2006:20).
This uncertainty should however, be eliminated by amendments made to the VAT Act with the inclusion of paragraph (b)(vi) to the definition of an “enterprise” as per section 1 of the Act. This paragraph now specifically refers to the supply of electronic services by a person from a place in an export country (South Africa, 2013b).
Two specific aspects that need further discussion include the classification of digital services (“goods and/or services” must be supplied as per above discussion) in context of the VAT Act as well as the element of “in South Africa or partly in South Africa” as indicated above.
2.3.2.4 Classification of digitised products: delivery of goods or services
As per discussion in 2.3.2.3 above, goods and services must be delivered before a supply can meet the requirements of the definition of an enterprise. It is therefore important to evaluate whether goods and/or services are delivered as this will influence both VAT registration requirements as well as the manner in which VAT is required to be levied (De Swardt et al., 2006:18).
“Goods” are defined as follows in section 1 of the VAT Act (South Africa, 1991):
means corporeal movable things, fixed property, any real right in any such thing or fixed property, and electricity, but excluding—
(a) money;
(b) any right under a mortgage bond or pledge of any such thing or fixed property; and (c) any stamp, form or card which has a money value and has been sold or issued by the
State for the payment of any tax or duty levied under any Act of Parliament, except when subsequent to its original sale or issue it is disposed of or imported as a collector's piece or investment article;…” (Emphasis added)
It is clear from the above definition that a corporeal movable thing or a real right must exist in order for a supply to qualify as “goods” as defined. De Swart and Oberholzer (2006:18) are of the opinion that digitised products cannot qualify as “goods” as defined due to the fact that they are not a corporeal movable things nor are they “real rights” in a movable asset or fixed property.
The OECD (2001c:18) supports the view of De Swart et al. as it was agreed by the OECD that, for consumption tax purposes, digitised goods will not be classified as “goods”.
corporeal thing or fixed property. It will thus be necessary to evaluate the definition of “services” as per the South African VAT Act as well.
“Services” is defined as follows in section 1 of the VAT Act (South Africa, 1991):
“Services means anything done or to be done, including the granting, assignment, cession or surrender of any right or the making available of any facility or advantage, but excluding a supply of goods, money or any stamp, form or card contemplated in paragraph (c) of the definition of "goods" (emphasis added).
Based on the definition above, the term “services” will include anything done or to be done and/or making available any facility or advantage. Stiglingh et al. (2014:1039) state that in cases where a supply is not a supply of goods and also not specifically excluded from the definition of “goods”, it will be regarded as “services”.
Johnston et al. (2013:73) support the view of Stiglingh et al. as stated above and regard transactions that takes place in a virtual world as “services” as defined in the South African VAT Act. The view that digitised products should not be classified as goods is also supported by the OECD (2001c:18).
“Imported services” are specifically defined by the VAT Act as follows (South Africa, 1991):
“…a supply of services that is made by a supplier who is a resident or carries on business outside the Republic to a recipient who is the resident of the Republic to the extent that such services are utilized or consumed in the Republic otherwise than for the purposes of making taxable supplies”
From the above, it can thus be submitted that the purchase of digital music by an South African consumer that is delivered by a non-resident supplier will be regarded as a “service” in terms of the South African VAT Act and will the requirement of a delivery of service thus be met for purposes of the definition of an “enterprise”.
Another consideration and requirement of the “enterprise” definition is that service or goods must be delivered in South Africa or partially in South Africa. Due to the specific nature of digital transactions, this matter will be discussed further.
2.3.2.5 Taxation in the jurisdiction where services are consumed
The OECD concluded that taxes should be levied for cross-border transactions at the place of consumption in order to prevent double taxation or intentional non-taxation where two jurisdictions apply non-compatible place of taxation rules. Due to the nature of digitised products, it might, however, be difficult to administer the implementation of the relevant Act in this regard as the supplier does not necessarily have a reliable delivery address if services are downloaded electronically (OECD, 2001c:24; OECD, 2014b:3-15).
The OECD has defined the “place of consumption” for cross border services or supply of intellectual property for B2C as the jurisdiction where the customer has his or her usual place of residence (OECD, 2001c:24). The OECD is of the opinion that, although the jurisdiction is not necessarily the place of consumption for B2C transactions, it is the most practicable option in e-commerce (OECD, 2001c:25; OECD, 2014b:3-15).
The South African VAT system is a “destination-based” system and the “place of supply rules” are not defined in the VAT Act according to De Koker and Kruger (2004:1-4) which in turn created uncertainty relating to whether the “enterprise” requirements of the VAT Act are fulfilled, i.e. the activity must be “in or partially in South Africa”. As stated earlier, the Amendment Bill 2013 did, however, address these concerns as stated above by including electronic services in the definition of an “enterprise” (South Africa, 2013b:91). The amendments made to the SA VAT Act in this regard are thus aligned with the OECD recommendations relating to place of consumption.
2.3.2.6 Concluding remarks: SA VAT implications for foreign suppliers of imported digital music
The VAT Act was amended with effect from 1 April 2014 to include electronic services in the definition of an “enterprise” and to include “place of supply” rules in the VAT Act. Under these rules, foreign suppliers are now required to register as a VAT vendor due to supplies made to South African customers in the month in which these supplies exceeds R50 000. Due to the fact that the customer location is not always known to the supplier and in order to simplify the application of the specific section in the VAT Act, sub-sections (vi)(aa) and (bb) were included in the definition of an “enterprise”. According to the latter, a proxy for customer location will be either SA residence or payment from a SA registered bank (South Africa, 2013b:93).
The reverse charge mechanism is still applicable in cases where non-resident suppliers did not register as a VAT vendor as stated in the explanatory notes to the draft amendment bill 2013 (South Africa, 2013b:93).
Foreign suppliers of digital services to SA residents will fall into the compulsory VAT registration category and these vendors will be allowed to register on the payment basis (South Africa, 2013b:93). The amendments made to the VAT Act is thus in line with the OECD recommendations relating to imposing consumption taxes in the country of consumption. The registration threshold might be questionable due to the low value compared to the threshold value of domestic vendors.
From the above, it can be concluded that the suppliers of digital music who sold digital music in excess of R50 000 to South African residents or to consumers who made payment from a South African bank will be required to register for VAT in South Africa. Where the foreign supplier is not registered for VAT, the consumer of the digital music is theoretically required to pay the VAT over to SARS. The practical enforceability of the amended VAT Act will be considered in Chapters 3 and 4 of the research.
