Sars eyes its pound of digital flesh

Finance minister Pravin Gordhan wants foreign sellers of digital goods to register as value-added tax vendors, but tax experts foresee problems ahead. By Craig Wilson.

Government wants to begin taxing virtual goods sold online by foreign companies, including e-books and downloaded music. These companies should be required to register as value-added tax (VAT) vendors, finance minister Pravin Gordhan said in his national budget speech in parliament on Wednesday.

However, the South African Revenue Service (Sars) could find stopping transgressions extremely difficult, tax experts have told TechCentral. It could also stop international vendors from selling to South African consumers.

“It is proposed that foreign businesses which sell e-books, music and other digital goods and services should be required to register as VAT vendors in line with regulations which have been adopted by the European Union and other jurisdictions,” Gordhan said in his speech.

Ernest Mazansky, director of the tax practice at Werkmans Attorneys, says the move may put off large international players. “If you want to sell into Germany, which is a big, rich market, you might be willing to pay the price. This might not be the case when it comes to South Africa,” he says. “Unfortunately, our fiscal policies always mirror other countries without comparing our economy to theirs.”

However, he adds that for many retailers, the move to enforce compliance with VAT may not necessarily be a huge imposition. In order to sell products from local software application stores, for example, and get paid in rands, international suppliers would have had to develop systems regardless. “Adding extra VAT returns to those systems may not necessarily entail that much work.”

According to Mazansky, tax law places the onus on consumers to declare purchases to Sars. However, he says the law isn’t aimed at individuals but, rather, at large corporate entities that are likely to comply anyway.

Similarly, he says that if government approaches a company like Apple, which sells digital content in rand, to pay VAT, it is unlikely to refuse to comply.

“It’s unclear how government is going to enforce this with other retailers, though, especially smaller ones,” Mazansky says. “It might be possible to approach the larger online retailers and ask them not to flout local laws, but it’s going to be impossible to get someone sitting in Bangalore designing software and selling it online to comply.”

Peter Surtees, a director in tax division at Norton Rose, says that because the South African market for digital content is so small, he doubts online retailers will be scared off. “We are just a blip on their radar,” he says. “But it will be an awkward administrative burden [for government].”

Surtees says that given how difficult it will be for government to chase purveyors of digital content, particularly smaller ones, it’s worth asking whether South African consumers will instead be encouraged to declare their purchases.

“Will we as buyers have to account for the VAT to the revenue authorities?” Surtees asks. He says he can’t imagine government trying to “put the squeeze” on enormous international companies like Amazon, but by the same token it’s optimistic to expect South African consumers to play ball.

“It’s going to be interesting to see the logistics. I don’t think it’s going to have a bad effect on our access to e-commerce.”  — (c) 2013 NewsCentral Media

• Image: World Economic Forum