Jubie Matlou
Adifficult choice confronts the South African Revenue Service (Sars) regarding the taxation of intangible digital goods purchased over the Internet. This includes digital messages, software, multimedia files and film and audio recordings.
A tax void exists for both local and international transactions of such goods. Electronic commerce business transactions operating in cyberspace create jurisdiction and institutional problems for governments worldwide regarding the physical location of a busi- ness, and the easy movement of data files and hardware becomes difficult to detect for tax enforcements.
The one option is for the taxman to raise capacity for monitoring the transaction of these goods or services. But this route is untenable for Sars if the costs of monitoring the traffic of goods or services exceed the revenue that would accrue from the collection of tax. The other option is to turn a blind eye and wait for international precedents on how the issue is resolved.
Sars estimates the total business to consumers for the local electronic commerce market regarding tangible goods at R5,3-billion, but cannot provide the figure for intangible goods.
Opportunities and challenges relating to e-commerce will be the subject of deliberations when about 600 delegates converge at the Gallagher Estate this weekend to develop policy on e-commerce for South Africa. The consultative conference is convened by the Department of Communications.
South African law is silent about the treatment of electronically transmitted goods and services. The Customs and Excise definition of goods is unclear about digital products, given that it was conceived to apply to the physical delivery of goods through designated ports at which duty and certification takes place using standardised paper documentation.
A government discussion paper on e-commerce released in 1999 highlights that it is difficult to apply the law to digital goods because they “can be produced simultaneously in different locations, and copied instantly, without regard to jurisdiction”.
A statement from Sars says company reports on their income include e-commerce information. E-commerce transactions constitute “less than 1% of consumer expenditure … few businesses will derive a major portion of their business from e-commerce. This means these businesses will fall within the Sars standard compliance framework and will be reporting their Internet income as part of their ordinary business income.”
With international transactions questions abound regarding who, where and how much to tax. Can a purchaser of goods claim a tax refund if the seller operates from a different country where a lower tax rate applies?
Sars recently switched from a source-based to a residence-based system of taxation to ensure that South Africa retains its taxing rights over e-commerce transactions. A reverse charge mechanism whereby a VAT-registered customer can claim back on tax deducted applies to business-to-business transactions, but a loophole exists with regard to business-to-consumer transactions.
Other issues that will dominate the policy debate this weekend include consumer protection, privacy, domain naming, intellectual property and the roll-out of information and communications technology infrastructure.
Conflict regarding intellectual property is best captured by the recent stand-off between international entertainment giant Bertelsmann and Napster. Bertelsmann filed a lawsuit against Napster for creating the world’s biggest free music website that saw the industry losing millions of dollars in sales. However, a deal was struck in which Bertelsmann chose to work with the new technology by making its music catalogue available to Napster. In return, Napster undertook to develop a membership fee service that guarantees royalties to musicians and revenue through an encryption mechanism. To this end, Bertelsmann is prepared to make a $50-million cash injection a move that constitutes a de facto takeover of Napster.
In South Africa, the publishing of credit-listed people by the Credit Bureau on the Internet is still fresh in the memory of many who fumed at what they considered the worst invasion of privacy case to date.
A Green Paper on e-commerce released last year calls for input to protect consumers from the dangers of buying goods online. Credit card fraud is cited in many cases as susceptible to abuse. At the same time policy must create opportunities for small and micro entrepreneurs as to their opportunities, responsibilities and liabilities. In the case of disputes arising between different operators on the cyberspace, the establishment of an internationally accredited independent domain name authority is proposed.
The introduction and diffusion of innovations in developing countries always triggers questions around accessibility and poverty alleviation. The Green Paper seeks to solicit means for rolling out information and communications technology infrastructure to poor and rural communities. In the same vein, there is talk about an electronic government system that would allow citizens to access government services online.
Dillo Lehlokoe, coordinator of the policy process, said by the end of Saturday “deliberations [at the colloquium] should be able to inform what legislation on e-commerce should entail. There won’t be any White Paper, from the Green Paper we will be going straight to the drafting of legislation.”