Taxing issue: The growth in international online business-to-consumer and business-to-business trade, both in volume and in the number of participants, has created challenges for the collection of value-added tax. (David Harrison)
South Africa is one of numerous jurisdictions globally implementing new value-added tax (VAT) rules designed to rise to the challenges of a digitising marketplace that can operate beyond the reaches of the tax authorities.
These new regulations, which in South Africa’s case took effect on April 1 this year, are a first step in a process of sweeping tax reforms intended to make multinationals pay their fair share of corporate tax in the jurisdictions where they are active.
Driven by the Organisation for Economic Co-operation and Development (OECD), which promotes trade and investment among its 36 member countries, the VAT initiative is intended to tax the $2-trillion in annual e-commerce revenues.
The OECD says in a March report, titled The Role of Digital Platforms in the Collection of VAT/GST on Online Sales, that global business-to-consumer (B2C) revenues are projected to rise to $4.5-trillion by 2022. “It is mainly the growth in international online B2C trade, both in volume and in number of participants, which has created the most pressing challenges for VAT/GST collection.”
It says digital platforms allow businesses, particularly smaller businesses, to efficiently reach millions of consumers in what is now a global marketplace. “Indeed, recent research suggests that 57% of cross-border supplies of goods are purchased via only the three biggest digital platforms.”
The growth of cross-border e-commerce has potentially obvious negative tax implications for the fiscus, but is also unfair on bricks and mortar businesses that have to pay VAT or goods and services tax (GST).
South Africa has had VAT regulations in place for electronics services since June 2014, but this applied to a relatively limited number of items.
Importantly, the 2014 regulations shifted the payment of VAT from the domestic recipient to the supplier of electronic services in the export country, the point being that it would be hard to collect VAT from thousands of users but relatively easy from a much more limited number of suppliers.
As of April 1, says Prenesh Ramphal of the Sars, new regulations mean that the net is thrown much wider, there now being few exceptions to which electronic goods and services are not VATable. Ramphal says that the South African Revenue Service (Sars) has been collecting in excess of R600-million a year since 2014 — about R3-billion for the five years to date — but that the new regulations broaden the scope from a limited list to all electronic services. Those now within the ambit include software sales, ride-hailing services such as Uber and accommodation services such as Airbnb.
Users of ride-hailing services such as Uber should not expect to see VAT included as a line item on their bill because transportation is exempt from VAT, but the fees Uber charges its subsidiary to run the service will be VATable.
The regulations require foreign vendors who supply in excess of R1-million of services to South African consumers annually to register with Sars to pay VAT.
Although the OECD initiative targets what it calls low-value goods, an example being book sales by Amazon, in South Africa’s case VAT on physical goods is charged by customs and excise when the item enters the country. This means that much of Amazon’s physical offering will not be subject to the new regulations, but sales of digital products by Amazon Web Services will fall in the enlarged net. The exceptions are educational programmes, telecommunication services such as internet access and financial services — for example, buying and selling currency.
Ramphal says Sars is already seeing significant suppliers of electronic services registering as VAT vendors since the new regulations took effect.
He says no pushback is expected from the companies and platforms concerned because there had been extensive consultations with those concerned. “Most big players had extensive input,” he says.
The new regulations also provide for intermediaries, such as platforms that act as marketplaces for other businesses, to be deemed to be the supplier for VAT purposes.
Webber Wentzel’s Des Kruger says the indirect taxation of cross-border e-commerce transactions has been high on the agenda for tax authorities worldwide.
“There is clearly a perception that much of these transactions are escaping indirect tax (essentially VAT) because the supplier and consumer are in different jurisdictions. Following the release of the OECD International VAT/GST Guidelines, most VAT jurisdictions have adopted new rules for the taxation of cross-border e-commerce,” says Kruger.
“In essence, where a supply of services is made by a non-resident to a resident of another country, the non-resident supplier is now required to register as a taxable person [vendor in South African parlance].”
He says South Africa led the way in 2014 when it introduced new rules to tax cross-border e-commerce transactions (referred to as “electronic services”), requiring foreign suppliers to register and account for VAT on these transactions if their turnover of supplies to South African residents exceeded R50 000 (now increased to R1-million).
Kruger says, however, that because electronic services were narrowly defined, business-to-business (B2B) transactions were, in effect, excluded. “Following the release of the OECD guidelines, South Africa, like most other VAT jurisdictions, has broadened the scope of e-commerce transactions subject to VAT. This change is profound and will affect most cross-border e-commerce transactions where the supplier is a non-resident and the recipient is a South Africa resident, whether an individual or company.”
Kruger says most foreign jurisdictions have adopted a distinction between B2B and B2C supplies, the former not being subject to the new rules “essentially because of reverse charge [imported service in local parlance] rules that would in any case capture such B2B supplies in certain circumstances”.
Ramphal the intention was to “keep the rules very simple” and not to distinguish between B2B and B2C transactions. He says, however, that VAT on electronics services for B2B transactions will not apply in terms of the new regulations where a foreign company is supplying services to a South African subsidiary in which it owns more than 70%.
Ramphal sees the administration of the new regulations on a global basis as having significant advantages to the tax authorities because the intention is to share data, the new approach being built on the principle of symmetry and the exchange of information by the authorities, which will enhance compliance.
He says the OECD VAT guidelines are part of its broader base erosion and profit shifting (BEPS) initiative to fight tax evasion and aggressive tax avoidance. “It acknowledges that VAT is a subset of the evasion of income taxes.”
Piercing the Veil, a paper published by the International Monetary Fund (IMF) in June 2018, says new research reveals that multinational firms have invested $12-trillion globally in empty corporate shells.
It says policy initiatives aiming to curb the harmful use of tax havens abound. “The policies, with acronyms such as FATCA [Foreign Account Tax Compliance Act], CRS [common reporting standard] and BEPS, introduce a variety of new reporting requirements: multinational firms must report country-by-country information about their economic activity; banks must conduct background checks of customers to identify foreign-owned accounts and report detailed account information to the tax authorities; and the tax authorities must share tax-relevant information with their foreign counterparts through comprehensive sharing agreements.”
Piercing the Veil cites a 2017 study that used OECD and IMF data and found that “a stunning $12-trillion— almost 40% of all foreign direct investment positions globally — is completely artificial: it consists of financial investment passing through empty corporate shells with no real activity”.
Multinationals have been able to shift their profits to low-tax (or even no-tax) jurisdictions. One mooted solution to this problem is not to tax profits, because they may be low or nonexistent, but rather other economic activity, such as sales. Collecting and sharing VAT data on a global scale, as outlined in the OECD guidelines, is an example of how tax can be made to be paid where it is earned.