Value-added tax:Analysis of the supply of cross border electronic services

Abstract

Developments in technology have created a global market place for consumers. Consumers have the option of purchasing goods in a physical store or an online store. Consumers are no longer limited to shopping at physical stores in their own jurisdiction and can shop online from the convenience of their home. Consumers can acquire goods and services from any country in the world. Online shopping provides consumers with a wide selection of goods and services that may not be available in their own jurisdiction. Consumers favour purchasing online since the goods and services acquired from foreign suppliers are usually offered at better prices (price excludes VAT/GST). This creates an unfair advantage for foreign suppliers over local suppliers. The problem with selling a product to a consumer over the internet is that no physical product crosses through any physical border post. These products are not physical goods and are therefore referred to as services. Certain jurisdictions such as South Africa refer to these services as electronic services. Electronic services are remotely supplied by foreign suppliers to recipients resident in the Republic. Tax administrations lose revenue since there are no border posts acting as agent to collect VAT/GST and remitting the VAT/GST to the revenue authority. The foreign supplier would charge no VAT/GST on the supply and the consumer will fail to self‐declare the VAT/GST to the revenue authority. 1 April 2014, National Treasury introduced electronic services which required foreign suppliers of electronic services to register as vendors in the Republic. However, the implementation was postponed to 1 June 2014 to allow foreign suppliers to update its business systems. In 2015, further amendments were made to the electronic services provisions. However, in 2015 the Davis Tax Committee issued the first interim report on VAT to the Minister of Finance which highlighted concerns about the uncertainty and inconsistency in the application of the electronic services provisions outlined in the Regulations. This study aims to analyse the supply of cross border electronic services in the Republic. Any benefits and shortcomings will be assessed in a South African and international context. The VAT Act is based on the New Zealand GST Act. The GST Act will be analysed to identify areas of recommendation to improve the VAT Act, subject to the socio‐economic conditions in South Africa. The BEPS Report and VAT/GST Guidelines will be analysed to identify how the South African electronic services provisions have been adapted for a developing country based on developed country principles.