Davis Commission shows its hand on VAT after long deliberations
The South African tax environment has been an issue that has been under the microscope by government and public alike for a number of years now. The biggest issue that needs to be addressed is the fact that 6% of the population bears the burden of the whole country’s tax revenues.
The South African tax system has changed significantly since the recommendations of the Katz Commission in 1995. The introduction of VAT signalled a fundamental shift in South Africa’s taxation landscape and it was on this basis that in 2013 the then Minister of Finance, Pravin Gordhan, announced that members of the Davis Tax Committee (DTC) would assess the South African tax policy framework.
Financial services
Charles de Wet, Head of Indirect Tax at PwC Africa says the DTC notes that the taxation of financial services continues to challenge VAT design due to the cost of cascading. Cascading occurs where an intermediate supply to a financial institution is subject to VAT and cannot be deducted by the financial institution which then becomes a hidden cost.
The DTC concludes that while the cascading effect is more prevalent in the banking industry, it is also evident in the life insurance industry, both of which are major contributors to the South African economy.
“Ultimately when a supplier of financial services cannot recover the VAT paid on intermediary services, the irrecoverable VAT forms part of the cost. The financial service provider faces a choice here, where they either raise the price of the service, absorb the VAT cost or find another way of delivering the same service without the VAT cost,” adds de Wet.
The financial services industry plays a significant role in the South African economy, and importantly, the DTC report urges that further work needs to be done by the South African Revenue Services (SARS) and National Treasury to consider measures adopted in other jurisdictions to prevent increased costs in these industries.
Electronic commerce
The regulation of electronic commerce also remains a focal point for the DTC, which has made notable recommendations concerning electronic services supplied by foreign businesses to South African recipients. The taxation of electronic services in South Africa is relatively recent, with regulation having been implemented 1 June 2014, ahead of other regions such as the European Union, Australia and New Zealand which have only now expanded the scope of their legislation.
The DTC sees it as critical that the legislation is flexible enough to keep pace with the fast paced and ever-changing technological environment of ecommerce, an area where it notes that further work needs to be done.
While the current electronic services legislation seeks to tax predominately services supplied in the business-to-consumer space, the DTC has strongly recommended that this distinction is eliminated and that all transactions (including transactions between businesses) are subject to VAT in the same manner. “This finding is significant as the current South African VAT legislation does not seek to distinguish between business-to-business and business-to-consumer suppliers, and it is likely that significant changes to the electronic services regulations will be required to ensure it is consistent with South Africa’s VAT principles, and to broaden and strengthen its application as our economy modernises.”
While recent reports have suggested that the existing electronic commerce legislation is not broad enough to capture all supplies, and National Treasury has already announced moves to include software into the scope of services, the DTC interestingly notes that, in the case of online advertising, the existing regulation may not need to be amended or changed since it may be argued that the current regulation includes these activities. The DTC has recommended that a guide should be published to clarify the position.
The actual impact
What effects will this have on the public?
De Wet points out that the findings by the DTC will now be presented to the Minister of Finance and National Treasury and represent the view of the committee and its recommendations on a particular aspect of tax. As such it does not constitute tax policy but contains details of the aspects that could be taken into account in determining the future direction of tax.
“Any reform of VAT that seeks to address the VAT rate requires that other factors also be addressed. Primarily these relate to the regressive nature of VAT and the perception that a shift from income taxes to VAT will result in greater income and wealth inequality. To this end, the tax system as a whole, and its impact on the SA economy as well as growth objectives and development objectives need to be considered, together with social security benefits, rather than focusing on individual elements.
Editor’s Thoughts:
At this stage it is difficult to comment on the proposed timing on the DTC finishing its work or National Treasury implementing any of the findings. De Wet notes that it is likely some announcements will be made in the National Budget in February next year. One hopes that these announcements will benefit the industry as a whole. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.
