SARS eCommerce VAT change

The National Treasury has proposed major changes to how Value-Added Tax (VAT) is collected on cross-border eCommerce services. 

This was revealed as part of the Treasury’s proposed Draft Taxation Laws Amendment Bill for 2024. Significant changes are set to be made to income tax and VAT legislation. 

Among these changes are amendments to regulations regarding “electronic services” under the VAT Act. 

The global growth of eCommerce has pushed the National Treasury to change these regulations once before. 

Before 2014, VAT collection on foreign electronic services, including electronic commerce, was ineffective and inefficient due to low customer compliance. 

In particular, there were issues with the “reverse charge” mechanism implemented by the South African Revenue Service (SARS). 

This resulted in lost revenue for the government and an unfair advantage for foreign providers who did not collect VAT on the sale of their goods and services. 

The changes made by the National Treasury in April 2014 effectively ended this advantage. 

Further changes were made in 2019 when SARS broadened its net to capture a wider range of foreign electronic service providers to boost VAT collection. 

PwC tax experts explained that this change exceeded international guidelines and aimed to maximise VAT collection on business-to-business (B2B) and business-to-consumer (B2C) services. 

Many foreign suppliers of electronic services complied with these new regulations and duly paid their VAT. However, some were unaware of the changes and their new tax obligations, leading to penalties and interest on historic debt. 

Now, the National Treasury is proposing another major overhaul of how VAT is collected on electronic services, including eCommerce. 

The main focus is simply administration by limiting VAT collection to situations where foreign suppliers sell products directly to consumers. 

In effect, PwC’s tax experts said this will be a reversal of the policy implemented in 2019 as companies that were previously registered to collect VAT on B2B transactions may not need to anymore. 

There are concerns about the fairness of the changes. The National Treasury and SARS will be consulting with stakeholders regarding these amendments. 

The release of the draft bills is a critical and necessary step for effective tax laws in South Africa, and stakeholders are encouraged to engage the government to be part of meaningful change.

While these tax changes are set to impact all foreign electronic service providers, there has been a concerted effort from the government and SARS to collect revenue from Chinese giants Shein and Temu. 

These efforts were also set to erode Shein and Temu’s competitive advantage related to clothing imports. 

Many local competitors contend that Shein and Temu’s market dominance is partly due to their avoidance of the same import duties that local businesses face.

Jean-Louis Nel, the tax director at Van Huyssteens Commercial Attorneys, highlighted that packages valued below R500 are subject to a 20% tax rate.

Retailers argue that Temu and Shein strategically break down larger orders into smaller parcels to remain under the R500 threshold.

After taking advantage of the lower 20% tax rate, these parcels are consolidated again before being shipped to customers.

Nel explained that Temu and Shein exploit the ‘de minimis’ rule by dividing imports to stay under the R500 limit. “This results in a flat 20% tax rate and no VAT,” he said.

“Retailers are upset by this tactic because their imports are taxed at 45% plus an additional 15% value-added tax,” Nel stated.

This practice places substantial pressure on South African retailers, as consumers are likely to favour lower-priced products.

However, SARS has delayed implementing a 45% tariff on clothing imports, sying that further engagement is needed. 

SARS Commissioner Edward Kieswetter said this does not mean the taxman will not continue to implement existing regulations more effectively. 

To address this issue, SARS and Customs have committed to levy the same duties and taxes on clothing items under R500 as on bigger orders.

SARS Commissioner Edward Kieswetter told News24 they would continue clamping down on “unfair advantages created by international online retailers and eCommerce platforms”.

Kieswetter said the state lost out on more than R3 billion in unpaid taxes and is actively addressing this problem.