An evaluation of the practical application of the South African VAT legislation on electronic services : a case study

Abstract

Electronic commerce (e-commerce) is a concept that started being a feature in business in the early 1970s (Wigand, 1997). Numerous businesses now conduct their business online. There have been repercussions arising from this craze as regulators have had to now attempt to regulate this new industry and this has posed significant challenges for tax authorities. National Treasury issued draft regulations in January 2014 that define “electronic services”. These regulations are known as the Electronic Services Regulations (the Regulations) and details which digital products and services will be subject to the 14% VAT when the Regulations were to come into operation on 1 April 2014 (Department of National Treasury, 2014). The effective date was later moved to 1 June 2014 (Department of National Treasury, 2014). The main objective of this dissertation was to explore an aspect of this new definition of electronic services through the presentation of a real life case study. Apple iTunes was profiled and the current VAT legislation was applied to this business. The case study details the transaction and maps out how the current VAT legislation will be applied to this transaction. The research question was whether the current South African VAT legislation was applicable to a real-life transaction of the supply of electronic services of a non-resident, Apple iTunes, taking place in South Africa, would it be found to be practical, effective and efficient? The following challenges affecting the practical application of the legislation were identified:  Determination of the extent of the e-commerce transactions that Apple undertakes with customers online; * The lack of documentation in e-commerce transactions and the inability to ensure validity of the information provided; * The fact that there is no centralised tax administration framework; * Exemption for imports of low valued goods or services; * The low VAT threshold and the registration of FESES; * The burden of compliance created on the FESES as a result of new legislation on e-commerce transactions; * Enforcement of the tax legislation on e-commerce transactions; and *Determination of the place of consumption. Based on the challenges identified it was concluded that the current South African VAT legislation in its current form when applied to a real life transaction of the supply of electronic services of a non-resident, Apple iTunes, taking place in South Africa, would be found: * Not to be practical as SARS would have significant difficulty determining the extent of activities for B2C transactions and SARS would encounter challenges in enforcing the tax legislation on e-commerce transactions as the accuracy of the documentation provided by customers may be questionable. * To be ineffective as the VAT legislation on e-commerce transactions would not be successful in achieving the desired result if it cannot be enforced. * To be inefficient if it continues to create an administrative burden of compliance on the Foreign Suppliers of Electronic Services where the costs outweigh the benefits. The challenges noted in this dissertation are identified. There is no simple resolution to the issues identified as international tax authorities are battling to identify ways to overcome the above-mentioned challenges.