The digital economy is experiencing rapid and unprecedented growth. More and more businesses are turning to online platforms to streamline their workflow. Having access to fast, reliable internet solutions has made it possible to choose and use the most popular tools.
During his 2013 budget speech, Finance Minister Pravin Gordhan announced that all foreign businesses supplying eBooks, music and other digital services in South Africa would be required to register as Value Added Tax (VAT) vendors. This tax will impact consumers and businesses providing digital services. Dr Anne Bardopoulos heads up Tax at Deloitte & Touche and answered these questions regarding the tax on digital services.
Q – How did this digital tax come about?
Anne Bardopoulos (AB) – If we look back, in terms of the current applicable legislation, before 1 April, when a South African consumer acquires services from a foreign supplier who is not registered or obligated to be registered for VAT in South Africa, it was up to the consumer to account for the VAT on the service acquired. The issue that came with that has been the incredible growth of the internet, digital services have grown exponentially and this has become difficult for SARS to monitor and collect that tax, plus the fact that the average consumer did not know they had to account for this tax.
So we find ourselves in a situation in 2014 where we have approximately 14 million internet users in South Africa who are acquiring a significant amount of digital content and services from foreign suppliers. Those suppliers aren’t registered for VAT, so that tax revenue money is not being collected.
This is not just a South African issue – we were a bit behind. What this tax will do is bring us in line with what is happening with revenue collection around the world.
Q – Who will be affected and which digital services will be taxed?
AB – SARS have issued a draft regulation detailing which services will be affected. Effectively it is services and not physical goods that you might order over the internet. It is aimed at the digital services that you might download from the internet. Typically things like apps, digital books, online memberships, gaming online, streaming movies, and music downloads are among the services that will be taxed.
Q – So the likes of Apple and Google, for example, will need to register with SARS and charge users VAT, which in turn has to be paid over to SARS.
AB – There is a R50 000 registration threshold that applies to all foreign suppliers that make services available to South African residents, or if the payment originates from a South African bank account. So suppliers need to register if their supplies exceed R50 000 per month.
Q – What impact will this tax have on the consumer?
AB – It should mean that prices will go up by 14%, but that would depend on the foreign suppliers. Some suppliers might incorporate and absorb the cost into the current pricing. Others will levy the 14% tax on the purchase.
Q – How much revenue can SARS expect to get from this digital tax?
AB – It is very difficult to give an accurate figure. There are no accurate stats to determine how big this digital economy is. Hypothetically, if we work on each of the 14 million registered internet users in South Africa purchasing R100 worth of digital services in a year, that translates into R1,4 million in sales, and that means R196 million in VAT revenue. R100 is a small amount though, and typically consumers spend a lot more. If that number were to be R500, then the potential VAT revenue increases substantial to almost R1 billion.
Q – Will this digital tax open the door for the government to levy other taxes in future?
AB – This whole digital era that we are moving into is making it more difficult to collect tax in general, not just VAT. There have been many debates and discussions from an international level by the Organisation for Economic Coordination and Development, to try and find more efficient ways of collecting revenues. We can expect South Africa to move towards these international revenue collection models in the future.
Q – What recourse does the South African government have to force international suppliers to register for VAT.
AB – Jurisdictions are moving to better cooperation and global assistance with collecting and enforcing taxes, as a result of these cross border taxes that have arisen with e-commerce. We are seeing a move with jurisdiction amending their double tax agreements to include VAT.