E-commerce and Income Tax

CHAPTER 5: Income Tax and E-commerce

This chapter discusses the complexities of income tax in the context of e-commerce, focusing on South African income tax law.

5.1 Introduction

E-commerce has globalized trade, creating challenges for tax authorities. Electronic transactions complicate the application of traditional tax principles like residency and source of income. Tax authorities must adapt to technological developments to effectively tax electronic transactions. E-commerce traders should be subject to the same taxes as traditional businesses. South African taxpayers and international trade partners need to understand the tax consequences of their online activities. Ignorance of e-commerce tax rules can lead to increased tax burdens. This chapter will cover the legal basis for income tax, identify problem areas, discuss international solutions, and suggest improvements for the South African system. The focus will be on income tax, but e-commerce can also result in capital gains tax, donations tax, and withholding taxes, as provided in the Income Tax Act 58 of 1962.

5.2 Basic Principles of South African Income Tax Legislation

5.2.1 Introduction

In South Africa, income tax is levied on a person's taxable income for a year of assessment, applying to both natural and juristic persons. The discussion in this chapter will focus on natural persons and companies. Determining taxable income involves:

1. Identifying gross income.
2. Determining exempt amounts to be subtracted from gross income.
3. Determining deductible amounts or losses.

After these steps, rebates may be deducted, and the appropriate tax rate is applied.

5.2.2 Gross Income

Gross income is defined in Section 1 of the Income Tax Act as:

(i) in the case of any resident, the total amount, in cash or otherwise, received by or accrued to or in favour of such resident; or

(ii) in the case of any person other than a resident, the total amount, in cash or otherwise, received by or accrued to or in favour of such person from a source within the Republic, during such year or period of assessment, excluding receipts or accruals of a capital nature.

The definition includes specific situations where amounts are included in gross income regardless of technical non-compliance (section 1(a)-(n) of the Income Tax Act).

Residents are taxed on their worldwide income, while non-residents are taxed on income from a South African source. Key elements of this definition require scrutiny to determine if a person involved in e-commerce is subject to income tax in South Africa.

5.2.2.1 Total Amount in Cash or Otherwise

The "total amount in cash or otherwise" refers to money or items with monetary value (Lategan v CIR). In CIR v Delfos, the court stated that amounts without monetary value cannot be classified as income. When taxpayers receive non-cash amounts, the market value at the date of receipt is included. Cryptoassets, though not traditional cash, comply with this element (SARS 2018(c)). Income from cryptoasset transactions constitutes a total amount in cash or otherwise.

5.2.2.2 Received By, Accrued To, or In Favour Of

For income tax to apply, there must be a receipt or accrual of an amount. Tax is levied at the earlier of the two events (SIR v Silverglen Investments (Pty) Ltd). Receipt means taxpayers receive the amount on their own behalf and for their own benefit (Geldenhuys v CIR). Accrual involves determining if a taxpayer has become unconditionally entitled to an amount.

In e-commerce, credit card payments often establish physical receipt. However, transaction details on secure internet sites may not be accessible to the revenue services. Tracing monetary receipts by taxpayers can be problematic. Determining when an amount accrued can also be difficult, as entitlement to payment may depend on delivery or other conditions. The volumes of transactions and taxpayer identification also pose challenges, creating opportunities for fraud and tax evasion.

5.2.2.3 Excluding Receipts and Accruals of a Capital Nature

Gross income excludes receipts and accruals of a capital nature. Capital (the tree) produces revenue (the fruit). For example, interest is revenue produced by capital in the bank (CIR v Visser). Determining whether an amount is capital or revenue involves assessing the taxpayer's intention. If the taxpayer intended to be involved in a "scheme of profit making", the amount is revenue (Elandsheuwel Farming (Edms) Bpk v SBI). Other factors include transaction frequency, taxpayer profession, stated intention (ipse dixit), asset history, and continuity of activities (Legwaila 2019:88).

Taxpayers can realize a capital asset at its best possible value (CIR v Richmond Estates (Pty) Ltd). Each case is judged on its own merits to determine if the taxpayer's intention changed to generating profit (Natal Estates v CIR).

SARS applies these guidelines to cryptoassets (SARS 2018(c)). If a taxpayer is a bitcoin miner with the intention to make a profit, the income is deemed revenue and is included in gross income.

Establishing a taxpayer's intention in e-commerce is challenging when their identity is unknown or unverifiable. Finding a resident company's memorandum of association may be difficult if the correct company name is not displayed on their website. Foreign companies have different governing rules, and the identities of directors or managers are not always known, making it difficult to determine a company's intention.

5.2.2.4 Year of Assessment

Income must be received or accrued within a specific year of assessment to be taxable in that year. Determining the year of assessment for foreign companies receiving income from a South African source or for virtual companies can be difficult.

5.3 Legal Basis for Levying Income Tax (Jurisdiction)

Individuals are taxed based on their place of residence or source of income. South Africa uses a residence-based system, taxing residents on worldwide income. Non-residents are taxed on income from a South African source. It is important to understand the concepts of residence and source to understand why e-commerce transactions often escape taxation.

5.3.1 South African Residents

5.3.1.1 Natural Persons/Individuals

Residents are taxed on their worldwide income (section 1 of the Income Tax Act). Determining residency involves a two-step test:

1. Determine if the person is ordinarily resident in South Africa.
2. If not ordinarily resident, assess physical presence in South Africa.

ORDINARILY RESIDENT IN THE REPUBLIC OF SOUTH AFRICA

Determining ordinary residence requires a factual enquiry into the circumstances of the case. In CIR v Cohen, the court defined ordinary residence as the country to which a person would naturally return from their wanderings; their usual or principal residence, their real home.

If a person's real home cannot be determined, the physical presence test is applied.

PHYSICAL PRESENCE TEST

A person is considered a resident if they are physically present in South Africa for:

• More than 91 days in aggregate during the year of assessment.
• More than 91 days in each of the five years prior to the year of assessment.
• More than 915 days in aggregate during the five years prior to the year of assessment.

This makes the person liable for income tax on their worldwide income.

5.3.1.2 Non-Natural Persons/Companies

A company is a resident if it is incorporated, established, or formed in South Africa, or if its place of effective management is situated in South Africa.

In Oceanic Trust Co Ltd NO v CSARS, the High Court clarified that the place of effective management is where key management and commercial decisions are made. If these decisions are made at multiple locations, the place of effective management is where these decisions are primarily made (SARS 2015:5-6). Technological advancements, such as Skype meetings, complicate this determination (SARS 2015:6).

5.3.2 Non-Resident Taxpayers

Non-residents are taxed on income earned if the income originates from a South African source.

5.3.2.1 South African Source

Section 9 of the Income Tax Act defines when receipts or accruals are from a South African source. Common law principles must be considered for electronic transactions (DTC 2016(a):62). Determining the originating cause involves identifying the quid pro quo provided by the taxpayer in return for the income (CIR v Lever Brothers & Unilever Ltd).

In Millin v CIR, the court found that the source of royalty income was the place where the person exerted their wits and labour. Where multiple sources exist, the main, real, or dominant source test is applied. This becomes difficult to apply in e-commerce where different functions are performed in various source countries.

Example:

In ITC 1779, an auditor in Cape Town traded currency online using facilities provided by a US-based foreign exchange trader. The transactions were online and not linked to a physical location. He made decisions online and profited from currency changes. No money was transferred to him directly, but an online account reflected his balance.

The court applied the Millin case and found that the taxpayer was entitled to offset losses incurred outside South Africa against his income earned in South Africa because he exerted his wits in the decision-making process. The Davis Tax Committee (DTC) recommends amending Section 9 of the Income Tax Act to tax non-residents on e-commerce transactions where goods and services are used or consumed in South Africa (DTC 2016(b):36).

5.3.2.2 Controlled Foreign Companies

Under Section 9D of the Income Tax Act, income received by a non-resident company can be attributed to a South African resident if the controlled foreign company (CFC) rules apply. A proportional percentage of the net income earned by a foreign, non-resident company can be attributed to a resident if they hold more than 50 per cent of the participation rights in the foreign company.

The CFC rules will not apply to a resident if they:

• Hold less than 10 per cent of the total voting or participation rights in the CFC.
• Hold the participation rights indirectly through another company that is a resident.
• The participating rights are held by an insurer, portfolio, or collective investment scheme as defined in Section 9D(2).

Exclusions also apply to foreign business establishments, insurance policies, amounts included in taxable income of a company, and foreign dividends.

The amount included in the South African resident's income is proportionate to their percentage of participation rights. For example, if a South African company holds 55 per cent of the voting rights in a Mauritian subsidiary, 55 per cent of the Mauritian company's net income will be included in the income of the South African resident company (Buys & Cronjé 2004:312). This is one way in which e-commerce profits are included in the South African tax net.

5.4 Cross-Border Issues

5.4.1 Introduction

The internationalization of the working arena has created cross-border jurisdictional problems for income tax. Taxation depends on the specific system of the country where a person resides and participates in trade. A person could be subject to tax on the same income more than once, resulting in international double taxation, which can be avoided through national laws or double tax agreements (DTAs) (Olivier & Honiball 2011:4).

Despite the risk of double taxation, there is also a risk of taxpayers escaping the tax net altogether.

5.4.2 Addressing Cross-Border Issues

Knowledge of the South African system and anti-avoidance measures are essential, along with a working knowledge of international instruments. Transfer pricing, the manipulation of prices between related entities across jurisdictions, is a relevant anti-avoidance measure (Arnold 2016:89). Section 31 of the Income Tax Act requires taxpayers to account for transfer pricing at "arm's length" (Legwaila 2019:550). This means that prices charged between related parties should be the same as those charged between independent parties (Mboweni 2019:2). Regulating transfer pricing in e-commerce is difficult because identifying the parties, establishing related entities, and determining arm's length transactions is significantly obstructed.

South Africa has concluded several double tax agreements (DTAs) to alleviate double taxation (Olivier & Honiball 2011: 1). Most DTAs are based on the OECD Model Tax Convention on Income and Capital (2017) (OECD MTC). South African law should be interpreted in accordance with international law (Section 233 of the Constitution), so instruments such as the OECD MTC should be taken into account.

During the late 1990s, the taxation of internet transactions was controversial. In 1998, the US government opposed it. By 2000, the US government supported the OECD in coordinating international tax initiatives. The OECD, the Australian Tax Office (ATO), and the UK government developed reports and discussion papers outlining principles for taxing e-commerce (Fitzgerald et al. 2011:576-579):

• Neutrality
• Efficiency
• Certainty and simplicity
• Effectiveness
• Fairness
• Flexibility

In addition to the problems of anonymous transactions, jurisdictions must avoid international double taxation. The Income Tax Act provides deduction, credit, and exemption methods (Olivier & Honiball 2011:4).

5.4.2.1 Residence and Place of Effective Management

Article 4 of the OECD MTC determines residency of individuals and companies. A four-step test is applied to determine the residence of a person:

1. If they have permanent homes in more than one country, it is the country in which personal and economic relations are closer (centre of vital interests).
2. If these cannot be determined, or there is no permanent home, an enquiry into their habitual abode must be made.
3. If there is no habitual abode or a dual presence, the country of which the person is a national citizen will be their residence.
4. In cases where the enquiry can still not be resolved, and a person is a national citizen of both countries, then the countries in question shall by mutual agreement determine the residence of an individual (Article 4, par. 2 of the OECD MTC).

Article 4(3) states that the residence of a company that is resident in both contracting countries will be determined by mutual agreement, considering the place of effective management, place of incorporation, and other relevant factors. The OECD MTC commentaries referred to the place of effective management as the place where key decisions regarding management and commercial activities are made by the most senior managers of a business.

Phone and video conferencing makes it difficult to determine the location of decision making. Managers can physically move between countries or hold meetings online, rendering the place of effective management to be cyberspace.

5.4.2.2 Business Profits and the Concept of Permanent Establishment

Article 7 of the OECD MTC states that the business profits of an enterprise are only taxed in the resident country of the enterprise, unless it has a permanent establishment in the country of source. If a business has a permanent establishment in the country of source, the profits attributable to it will be taxable in that country. This raises the question of whether e-commerce and the presence of a website can satisfy the requirement of a permanent establishment.

A permanent establishment is defined in Article 5(1) of the OECD MTC as "a fixed place of business through which the business of an enterprise is wholly or partially carried on." Article 5 also lists specific inclusions in the concept. The commentaries to Article 5 of the OECD MTC contain guidelines to answer the question as to whether a website, webpage or server can be regarded as a permanent establishment.

Computer equipment must be treated differently from the data and software stored on it. A website consists of data and software that exist in cyberspace and cannot be traced to a specific tangible asset. A server can be traced to a physical place and could qualify as a permanent establishment (OECD 2017:110).

Specific activities or uses are excluded from the scope of permanent establishments, including the use of facilities and maintenance of stock and goods that are intended solely for display, delivery, or storage purposes (Article 5, par. 4 of the OECD MTC).

If an enterprise does not own its own server but pays a fee to an internet service provider (ISP), the mere hosting of a server does not amount to permanent establishment. However, if a business controls, owns, leases or operates a server, the place where it is located will likely constitute a permanent establishment. The OECD has recognized that in the digital age, it is insufficient to allocate taxing rights solely on physical presence (OECD 2019:6). A new nexus where taxing rights are relocated in favor of the user/market jurisdiction is suggested (OECD 2019: 4).

A problem that still arises is the fact that even such equipment may be moved, in which case the fixed nature of the server may be affected or the tax jurisdictional link is lost. The OECD commentary on e-commerce states that the test is not whether the machines are capable of being moved, but whether they are in fact moved (OECD 2017:111).

In addition to the business having a server in a particular country, it is further required by the OECD that the business must wholly or partially carry on its core business at the place where their server is located. A communication link, advertisements, or gathering or passing on information will be regarded as preparatory or auxiliary secondary in nature. The presence of staff is not a requirement for the establishment of permanent establishment.

The OECD suggests that this new nexus could contain thresholds that are adjusted to ensure that it is also beneficial for smaller economies (OECD 2019:5).

5.4.2.3 Attribution of the Business Profits

Once it has been determined that a country has the right to tax business profits of a non-resident enterprise, it must be established how much profit should be allocated to that jurisdiction. The permanent establishment should be treated as if it were a separate business from the enterprise that it represents, operating in similar circumstances and dealing independently of the main enterprise (Article 7 of the OECD MTC).

The commentaries raise a valid point that the ISP will not usually be an agent with the authority to regularly enter into contracts in the name of all the businesses that make use of its internet services. In 2010, the OECD insisted that very little profit would be attributable to servers that constitute permanent establishments (OECD 2010:26). However, more profits could be attributable if the suggested new nexus is to be applied. A three-tier mechanism is suggested:

• Amount A: A portion of non-routine profit of a consolidated group is allocated to market jurisdictions where users are located.
• Amount B: A fixed return for certain routine marketing and distribution activities taking place in market jurisdictions.
• Amount C: Binding and effective dispute resolution mechanisms including any additional profit where in-country functions exceed baseline activities.

Consequently, a multitude of problems exist in the application of the substantive income tax rules to e-commerce.

CHAPTER 6: E-commerce and Value-Added Tax

This chapter explores the complexities of applying value-added tax (VAT) to e-commerce transactions, focusing on South African VAT law.

6.1 Introduction

The South African VAT system relies on establishing the identity of parties and the location of consumption of goods and services. This is challenging in e-commerce due to its anonymous and borderless nature. This chapter examines the basic principles of the VAT system in South Africa as stipulated in the Value-Added Tax Act 89 of 1991 (VAT Act), problems associated with e-commerce and VAT, the Organisation for Economic Co-operation and Development's (OECD) guidelines, and approaches other jurisdictions are using to tax e-commerce.

6.2 Legal Basis for the Levying of VAT in South Africa

6.2.1 Introduction

VAT is accounted for and collected on every transaction in the production and distribution chain. The VAT system uses a subtractive or credit input method, allowing VAT vendors to set off the tax incurred (input) to make taxable supplies.

Example:

A VAT vendor buys a sound system for R9200 (R8000 [value] + R1200 [VAT]) and sells it to a consumer for R11 500 (R10 000 [value] + R1500 [VAT]). The VAT vendor paid R1200 VAT (input tax) and is liable for an output tax of R1500. Setting off the input and output tax, the VAT vendor has a VAT liability of R300. The final consumer ultimately carries the tax burden.

6.2.2 Levying VAT

VAT is levied in three instances:

1. When a vendor supplies goods or services in the course or furtherance of an enterprise in South Africa (section 7(1)(a)).
2. When goods are imported into South Africa by any person (section 7(1)(b)).
3. When imported services are supplied to any person in South Africa (section 7(1)(c)).

SUPPLY

The term "supply" is defined in section 1 of the VAT Act as including performance in terms of a sale, rental agreement, instalment credit agreement, and all other forms of supply, whether voluntary, compulsory, or by operation of law, irrespective of where the supply is effected, and any derivative of "supply" shall be construed accordingly.

Problems created by e-commerce that pertain to supply are related to determining:

• When the supply occurred (to determine the tax period).
• Where the supply occurs (tax jurisdiction).
• The nature of the supply (whether it is a sale, exchange, or rental agreement).
• The value of the supply.

Since 2014, there have been significant developments relating to the supply of "electronic services," defined as any service "by means of an electronic agent, electronic communication or the internet for any consideration" (section 1 of the VAT Act).

Essentially, electronic services means that the supply depends on information technology, that it is automated and requires very little human intervention. In addition, it does not include the mere delivery of a product by way of electronic means (SARS 2019: Q7). These developments relate to section 7(1)(a) of the VAT Act, and e-commerce transactions that do not fall within this category are dealt with in terms of general VAT principles.

6.2.2.1 Supply of Goods and Services by a Vendor in the Furtherance of an Enterprise

For a transaction to be subject to VAT in terms of the first levying provision, four basic requirements must be met:

1. A supply
2. By a vendor
3. Of goods or services
4. In the course and furtherance of an enterprise

VENDOR

Section 1 of the VAT Act defines vendor as "any person who is or is required to be registered under this Act". The definition of person includes several entities. In order for a "person" to be a "vendor", the person must be registered or be required to be registered in terms of the VAT Act. Those persons who currently have a turnover of more than R1 million per annum are required to register as vendors for VAT. A person who expects to have a turnover of R1 million for the tax year must register as a vendor.

A further compulsory registration provision has been inserted relating to a foreign person who supplies electronic services and an intermediary or platform. Section 23(1A) stipulates that a foreign person who supplies electronic services and an intermediary or platform must also register as a vendor when the total value of taxable supplies exceeded R1 million in any uninterrupted 12-month cycle.

Before this insertion, foreign suppliers of e-commerce products were not compelled to register as VAT vendors. Instead, in terms of section 7(1)(c) (discussed in par 6.2.3 below), the onus was placed on the customer who wanted to consume electronic services in South Africa.

The second type of person affected by this insertion is an intermediary, which is "a person who facilitates the supply of electronic services supplied by the electronic services supplier and who is responsible for issuing the invoices and collecting payment for the supply" (section 1 of the VAT Act).

In instances where an electronic services supplier supplies its services through an intermediary's platform, the electronic services provider does not have to register as a vendor if the following conditions are met (SARS 2015: 2):

• The only electronic services it supplies are via the intermediary platform.
• The intermediary is a registered VAT vendor.
• The intermediary and electronic services supplier concludes a written agreement indicating that the intermediary must account and is liable for VAT on the electronic services supplied through the platform.
• The intermediary will keep records of these transactions as stipulated in section 29 of the Tax Administration Act 28 of 2011.
• The intermediary accepts that it is liable for outstanding VAT on the electronic supplies.

GOODS OR SERVICES

Goods are defined in section 1 of the VAT Act as:

"[C]orporeal movable things, fixed property, any real right in any such thing or fixed property, and electricity, but excluding (a) money; (b) any right under a mortgage bond or pledge of any such thing or fixed property; and (c) any stamp, form or card which has a money value and has been sold or issued by the State for the payment of any tax or levy due under any Act of Parliament, except when subsequent to its original sale or issue it is disposed of or imported as a collector's piece or investment article." From the definition of goods, it seems clear that intangible things such as intellectual property or personal rights will not be regarded as goods for VAT purposes.

A service is defined in section 1 as:

"[A]nything done or to be done, including the granting, assignment, cession or surrender of any right, or the making available of any facility or advantage, but excluding a supply of goods, money or any stamp, form or card contemplated in paragraph (c) of the definition of "goods"."

This definition is very wide and includes almost any conceivable transaction. If a supply does not fall within the definition of goods, it can readily be included in the definition of services. In the context of e-commerce, it is clear that digital goods that fall within the definition of electronic services are a specific type of service. Furthermore, educational services and telecommunication services will also constitute "services", as it is intangible.

IN THE COURSE AND FURTHERANCE OF AN ENTERPRISE

In general, an enterprise relates to the supply of goods and services on a continuous basis in, or partially in, South Africa for a consideration (section 1 of the VAT Act). Apart from a continuous supply, the supply must also be done for a payment before it will constitute an "enterprise". Moreover, the supply must be conducted in the furtherance of the enterprise for the vendor to have to account for VAT. The supply in the furtherance of the enterprise must also take place in South Africa or partly in South Africa.

In order for the supply of electronic services by a person outside of South Africa to constitute an enterprise, at least two of the following circumstances must apply (section 1 of the VAT Act):

• The recipient of the electronic services is a South African resident.
• The payment for the electronic services stems from a South African bank.
• The recipient of the electronic services must have a residential, business, or postal address in South Africa.

Additionally, when a person also known as a platform or electronic marketplace - facilitates the supply of electronic services supplied by the electronic services supplier, it would constitute an "enterprise if this intermediary were responsible for collecting payment and issuing invoices (section 1 of the VAT Act). In this respect, the intermediary will still be considered "responsible" for collecting payment and issuing invoices when these functions are outsourced as long as the intermediary remains accountable for it to the electronic services supplier

The question then arises whether a foreign electronic services supplier and an intermediary could be liable to account for VAT. Section 54(2B) of the VAT Act regulates this situation, and stipulates that an intermediary and not the electronic service supplier is deemed to have made a supply and is thus accountable for the VAT when:

• The intermediary is a vendor
• The electronic service supplier is not a resident of South Africa and not a registered vendor, and
• The electronic services are supplied or to be supplied by the electronic service supplier in South Africa.

**Example: **A, a registered vendor, conducts its business in South Africa by supplying e-books for download. A also provides the platform where ringtones that are supplied by a foreign electronic services supplier, B, can be downloaded. A issues the invoices and collects the payment on both the supply of the e-books and the downloaded ringtones. If B is not a registered vendor, section 54(2B) of the VAT Act would apply, and A would need to account for the VAT on all the supplies, while B will not have to account for VAT at all.

This amendment to the definition of enterprise has resulted in a deemed place of supply rule, specifically pertaining to electronic services. When dealing with services where the product delivered through electronic means - for instance, a legal opinion by a foreign lawyer's firm - would not be deemed electronic services, the deemed place of supply rule cannot apply and you would need to consider whether the legal opinion is subject to VAT in terms of section 7(1)(c) of the VAT Act.

6.2.2.2 Importation of Goods

The importation of goods will also give rise to liability for VAT. In this case, even a non-vendor will be liable for VAT (section (7)(1)(b) of the VAT Act). However, not all imports are treated in the same manner. For example, goods imported from countries such as Botswana, Lesotho, Namibia and Eswatini (formerly Swaziland) – referred to as the BLNS countries - are subject to different VAT import rules than those goods imported from the European Union (EU).

Due to the tangible nature of goods, their importation poses less of a threat to revenue loss. This is because imported goods have to be cleared for use in South Africa by the Customs Division of SARS.

6.2.2.3 Importation of Services

Section 1 of the VAT Act defines imported services as follows:

"Imported services" means a supply of services that is made by a supplier who is resident or carries on business outside the Republic to a recipient who is a resident of the Republic to the extent that such services are utilized or consumed in the Republic otherwise than for the purpose of making taxable supplies."

VAT is payable by a vendor or a non-vendor only in respect of imported services if the services are not used to make taxable supplies in South Africa. The time of such a supply will be the earliest date of either the date an invoice is issued or when the recipient has paid (section 9(1) of the VAT Act). The value of the supply will be the value of the consideration or the open-market value of the supply (section 10(3)).

The recipient of the imported service has to account for VAT by providing SARS with a return and payment within 30 days (section 14(1) of the VAT Act) of the invoice being issued or payment being made, whichever occurs first (section 14(2)).

As mentioned, before the amendments pertaining to electronic services were made, consumers of electronic services were responsible for the VAT on these transactions in terms of the reverse charge mechanism provided for in section 7(1)(c). At present the VAT associated with the supply of "electronic services" by a foreign electronic services supplier is levied in terms of section 7(1)(a) (discussed in par 6.2.2 above). When the supplier of electronic services is subject to VAT in terms of section 7(1)(a), the recipient of this imported service would not be liable for VAT in terms of section 7(1)(c) (section 14(5)(a) of the VAT Act).

This does not mean that section 7(1)(c) of the VAT Act has become redundant for purposes of e-commerce. The reverse charge mechanism could still be applied when the services do not constitute electronic services - for instance, in the case of telecommunication services or where the supply of the electronic services does not represent an enterprise.

As the amendments that pertain to electronic services were meant to address the concerns regarding non-compliance of consumers and creating a level playing field for domestic and foreign suppliers of domestic services, these amendments were not intended to impose a new tax.

Nonetheless, the current provisions create a disparity between foreign suppliers of electronic services and foreign suppliers of services other than electronic services. The reason for this disparity lies in the fact that section 7(1)(c) provides for the levying of VAT on imported services that are not used for making taxable supplies in South Africa. If the supply of e-commerce services - excluding electronic services as defined - is made for business purposes, i.e. to make taxable supplies (business-to-business [B2B], transactions), then the levying provision of section 7(1)(c) does not apply.

Yet, when the supply by the foreign services supplier is electronic services, as defined, and section 7(1)(a) applies, it applies irrespective of whether the services were acquired to make non-taxable supplies (business-to-consumer [B2C]) or taxable supplies (B2B). Consequently, the amendments relating to electronic services has the effect of bringing most foreign suppliers who supply electronic services to domestic businesses into the net of South African VAT.

The inclusion of B2B transactions pertaining to electronic services appear to be nonsensical, as a supply by a foreign electronic services supplier to a vendor in South Africa who will be using the supply to make taxable supplies, would be tax neutral. This is because the vendor would be able to claim input tax for the VAT charged by the electronic services supplier. The failure by National Treasury to exclude B2B transactions from the ambit of the provisions relating to electronic services seems to create an unnecessary administrative burden for SARS and the foreign services provider who would be required to register as a VAT vendor and submit returns.

In this respect, National Treasury contends that there is no distinction made between B2B and B2C transactions, and as such a distinction also does not apply to domestic suppliers. To curb the administrative burden created by the inclusion of B2B transactions, National Treasury has excluded the electronic services supplied between companies in the same group from the electronic services provisions.

The Davis Tax Committee (DTC) recognised that relying on a taxpayer's interpretation of whether an imported service would be used to make taxable supplies could result in VAT underdeclaration. Requiring foreign suppliers of electronic services to register and account for VAT, even when they may be able to claim input tax on the supply, could be seen as an attempt to reduce VAT underdeclaration.

6.2.3 Exporting of E-commerce

Since VAT is taxed based on where goods and services are consumed, when services are exported (i.e. consumed in another jurisdiction), it will be subject to VAT in South Africa at a rate of zero per cent provided that the requirements listed in Section 11(2) are met. This means that there will be no actual output tax collected on this supply, but the input tax incurred in making this supply can be claimed.

A heavy burden remains on the taxpayer who is involved in e-commerce, because documentary proof or even electronic verification of such transactions is not always readily available.

6.3 International VAT/GST Guidelines

The OECD's aim of drafting international standards to harmonise tax is apparent in the realm of VAT and e-commerce. The OECD developed the International VAT/GST Guidelines with the most recent version completed in 2015. The Guidelines are not peremptory for countries, but rather offer principles to avoid confusion and reduce the risk of double taxation and non-taxation (OECD 2017: Preface). These principles deal mostly with services and intangibles in the realm of VAT (OECD 2017: Preface).

The OECD stipulates that the supply of services and intangibles should be subject to VAT where it is consumed