Extra R1bn for Treasury – applies VAT to gaming, iTunes, Amazon purchases

In the early days of internet retailing, countries around the world allowed online shops to ignore sales taxes and VAT. The idea was to promote the growth and development of the nascent online retail industry – governments wanted to give online vendors an advantage to help them persuade consumers to take the plunge and shop online. Fast-forward a few years, and you have giant global retailers like Amazon.com and iTunes generating billions of dollars’-worth of sales that are generally untaxed. With the explosive growth of online retail, traditional brick-and-mortar retailers have found themselves on the back foot, and they’re now crying foul vis-à-vis the tax issue. In response, government around the world are starting to pay serious attention to applying sales taxes to online transactions, both to help traditional retailers compete and, more importantly perhaps, to capture some of the huge pool of money moving online. South Africa is the latest country to join the party; soon all internet sales will attract VAT of 14% just like real-world sales. – FD

To watch this CNBC Power Lunch video click here ANNE BARDOPOULOS - BizNews.com

ALEC HOGG:   As of April, South Africans will be expected to pay 14 percent VAT on digital goods.  Well, we haven’t had to in the past, but it is a global trend.  Anne Bardopoulos, Manager at Deloitte & Touche is with us in the studio.  Anne, digital sales around the world have been skyrocketing.  They seem to be taking off in South Africa.  Why has it taken so long for us to get to the point where we have to have VAT, given that we pay VAT on pretty much everything?

ANNE BARDOPOULOS:  Well, in terms of the previous legislation before the amendments, the average consumer actually had to pay VAT on the downloaded items that they purchased from foreign suppliers.  It was just based on different rules – commonly referred to as imported services – so if you were a consumer and you were downloading an item (not for your business or to make taxable supplies) you in theory, were supposed to go to SARS and account for the VAT.

ALEC HOGG:   Hang on.  We’ve all be breaking the law for how long…  When I was downloading books from Amazon and paying with my credit card, there was no VAT.

ANNE BARDOPOULOS:  There was R100 exemption, so if it exceeded R100…

ALEC HOGG:   Which they do…

ANNE BARDOPOULOS:  Which they often do…  In theory – yes – you were supposed to go to SARS and you were supposed to account for the VAT on it.

ALEC HOGG:   We never knew this.

ANNE BARDOPOULOS:  That was one of the major issues, that the average consumer was completely oblivious to it.  If you were a consumer that did know about it, did you really want to go and spend an entire day at SARS to pay R14.00 of VAT on an item that was R100.00?  It was something that SARS generally was finding impossible to monitor and collect the tax on it.  How do you monitor it?  I was doing some research on how many Internet users are registered Internet users in South Africa, and I was finding differing numbers.  Some websites had ten million and some said 14 million, but let’s just say for argument’s sake – 14 million.  That’s 14 million registered Internet users.  How does SARS control that?  How does SARS actually find and enforce the collection of the VAT of 14 million users?  All they did with these amendments was that they shifted the obligation to collect the VAT back onto the supplier – so that’s all it is; it’s a shifting of an obligation.

ALEC HOGG:   So Amazon.com are now going to have to make sure that when somebody from South Africa – or Apple – buys a product from them, that there’s 14 percent added and Amazon will have to pay it to South Africa.

ANNE BARDOPOULOS:  Yes, exactly – that’s exactly the way it will work in a nutshell.  If you think about it practically, I’m often asked the question ‘how is SARS going to make all these foreign companies register in South Africa?  How are you going to enforce it?’  However, you’re talking about trying to get 80/100 foreign suppliers to register versus 14 million individuals.  Even if they don’t get all 100 foreign suppliers to register, they can at least get the big companies to register and they will start collecting VAT that they haven’t been able to collect before.

ALEC HOGG:   Is that R100 exemption going to continue?

ANNE BARDOPOULOS:  No, not for the foreign supplier when they register, so that R100.00 will no longer apply in that regard.

ALEC HOGG:   When you buy your 99 cents – or 99 pence, I suppose – song from iTunes; in future, it’s going to be 99 pence plus 14 percent.

ANNE BARDOPOULOS:  Yes, the R100.00 exemption hasn’t been around that long.  It’s only been around for a few years.  One may argue that SARS only introduced the R100 exemption because they recognised that there was difficulty with collecting the VAT from the consumer.

ALEC HOGG:   So those of us, who really wanted to follow all the rules and the law, should have gone into the SARS offices, and taken a day off as you say, because they’re not that efficient.

ANNE BARDOPOULOS:  Yes, and then find out how to do it, and how to pay it.

ALEC HOGG:   Then pay the R14 over.  Goodness, how big is this market though?  How many people…do you have any idea how many downloads are going through and how much money is involved?

ANNE BARDOPOULOS:  Again, that’s a very common question that I’m asked and I haven’t come across any official studies or stats that examined that.  I was however, playing around with some numbers from a hypothetical point of view.  If you take 14 million registered users and you work based on say, R100.00 downloaded items per year – and that can vary from your songs to ringtones to eBooks – you’re looking at potentially R1.4 billion in sales, which could amount to about R196 million I think, in VAT.  It can also increase, so if you start thinking ‘well maybe R100 is too small.  What if they’re actually downloading about R500 each per year’, then you’re moving closer to R980 million – close to R1 billion in VAT.  It’s difficult, but there’s definitely a lot of potential for unpaid VAT.

ALEC HOGG:   It’s consistent across…if you go to buy something in a shop or you buy something from an online shop, you should be paying the VAT if that applies.

ANNE BARDOPOULOS:  Yes, exactly.


ALEC HOGG:   In South Africa, when you’ve been downloading ringtones etcetera from South African suppliers, has VAT up to now been charged?

ANNE BARDOPOULOS:  Yes, and that was another reason for making these changes, to at least assist the local suppliers with levelling out the playing field.  Take Kalahari.net for example: it’s very difficult for them to compete with selling digital music when Apple iTunes is selling it without VAT, so at least now the playing field will be level for our local suppliers.

ALEC HOGG:   What happens if you are buying from an Apple iTunes shop outside of South Africa?  Many people have done this.  They’ve created accounts when they’ve travelled around the world, and your address is presumably not a South African address.

ANNE BARDOPOULOS:  It is an issue because the place where the supplier has to address this is, iTunes will have to account for VAT on that sale if it’s being made to a South African resident or if the payment originates from a South African bank account.  With many of these amendments that have come in, there are administrative issues with how you’re going to practically enforce this because you’re effectively telling the foreign supplier that the obligation is on them to track down and verify ‘are you residents of South Africa and is that payment originating from a South African bank account?’ somehow.  It’s very difficult to do that, so to a large extent I wouldn’t be surprised if many foreign suppliers use other methods, for example your Bling address that you give or just basically your credit card details.  There is therefore potential for it to be manipulated, but the scope of people that could manipulate it is likely to be small.  How many people have bank accounts offshore or a foreign address that they can use?

ALEC HOGG: So there is leakage, but it’s minimal.  This is a R1 billion rand plus injection potentially into the fiscus and I suppose we should all celebrate that.  Thanks Anne, for telling us about that and for clarifying exactly what it is. 

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