Treasury has published new electronic services regulations, detailing which digital products and services will be subject to 14% VAT come 1 April 2014.
The regulations have been published by Finance Minister Pravin Gordhan for comment, and follow the proposals he made in his 2013 budget speech to impose VAT on foreign businesses who “sell e-books, music and other digital goods and services”.
The regulations are called the Electronic Services Regulations and come into operation on a proposed date of 1 April 2014.
“This announcement was made against the backdrop of efforts, both internationally and locally, to bring cross border e-commerce (specifically the digital economy) into the VAT regime,” Treasury said in a statement.
“The current application of VAT on imports does not lend itself to the effective enforcement on imported services or e-commerce where no border posts (or parcel delivery agents, e.g. the Post Office) can perform the function as collecting agents, as is the case with physical goods.”
“The net result is that the local consumers can buy imported digital products without paying VAT. This outcome not only places local suppliers of digital services at a competitive disadvantage (compared to suppliers from abroad) but also results in a loss of revenue for the fiscus.”
In terms of the regulations, the VAT will apply to any supplier of electronic services from an “export country” to any resident in South Africa, or where payment is made from a local bank.
What exactly will be taxed? The list below details all digital goods and services which will be impacted, according to the regulation document:
- distance teaching programmes;
- educational webcasts;
- internet-based courses;
- internet-based education programmes; or
Games and games of chance
- internet-based games, including any electronic game or multiplayer role-playing game;
- interactive games, such as games of chance, where the result is influenced by the skill of the player;
- electronic betting or wagering.
Information system services
Internet-based auction service
Which refers to technical support relating to
- information systems;
- information system services; and
- e-books, which means any digitised content of any book or electronic publication;
- films, which means any broadcast, documentary home-made video, live streaming performance, movie, music video, program, television series, or video
- images, which means any desktop theme, photographic image, pictorial image, or screensaver,
- music, which means any audio clip, broadcast jingle, live streaming performance, ringtone, song, or sound effect,
- software, including apps, system software, or plugins, and any update to these programs.
Any subscription service to:
- information system services;
- social networking services;
- web applications; or
- web series.
The added taxes on digital goods is likely to push the price of goods up, a tax expert has said.
Following the initial proposal for a digital tax, Gerard Soverall, PWC ‘s head of indirect tax, said that, considering the revenue generated by large online retailers, governments are losing out on large amounts of VAT.
“It is a profit issue at the end of the day. VAT at 14% in South Africa is a material number in your profits so online businesses will pass that on [to consumers]. There is not much doubt in that,” said Soverall.
Soverall argued that, even if the 14% SA VAT is passed on to consumers, digital goods are still likely to be more affordable than the physical equivalent purchased in brick and mortar shops.