Importing digital products – what are the tax implications?
As the world’s digital economy has grown, we have seen a significant rise in the number and type of digital products traded globally. Physical products cross a border post and need to be cleared through customs before being allowed entry into the country. Digital products, also referred to by SARS as electronic services, can be downloaded in a blink without customs intervention, but that does not mean that they are free from SARS regulation.
What is a digital product or electronic service?
Simply put, a digital product is electronic or digital content that is supplied by electronic means, for example via the Internet or another telecommunication service. Some examples of commonly traded electronic services include online educational programs, webinars, podcasts, games, online advertising, audiovisual content such as e-books, images, music, or videos, access to online publications, digital memberships, web hosting, software downloads, cloud computing, and online booking services.
What is not a digital product or electronic service:
Electronic services should be distinguished from those services that, by their nature, are not electronic services, but are delivered or communicated by electronic means. For example, professional services, research, management services, or administrative services that are conducted outside of South Africa, and the results of which may be sent to South Africa by electronic means. Importing and exporting services have their own set of rules which we have summarised here. Also excluded from being an electronic product are:
- Telecommunication services
- Educational services from a recognized education authority
- Electronic products are sent between the same group of companies.
When is a digital product considered to be imported and what parties are involved:
SARS considers a digital product imported when: the supplier is not a South African resident AND two of the below three criteria are met:
- The recipient is a resident of South Africa
- The recipient has a South African address
- The payment was made from a South African bank account.
If the above conditions are met, the foreign electronic services supplier is the exporter, and the resident or locally residing entity is the importer. If the supply of foreign digital products is facilitated, for example by payment collection, by a local entity then SARS defines this third-party facilitator as an “intermediatory”.
Tax implications for the importation of electronic products into South Africa
Fortunately, there is currently no import duty tax liable on imported digital products. In 1998 World Trade Organization members agreed on a Declaration on Global Electronic Commerce including not imposing customs duties on electronic products. This agreement is reviewed periodically but is still upheld by member countries, including South Africa.
There are, however, VAT implications for the foreign supplier as set out in the South African VAT Act. If the foreign supplier’s South African digital sales exceed R1 million for any consecutive 12-month consecutive period then the foreign supplier, or their local intermediatory who receives payment, is required to register with SARS as a VAT vendor. There is an exception to this rule, being if the sales volume over the R1 million threshold was solely because of abnormal circumstances of a temporary nature, then the vendor shall not be liable to register for VAT. Once registered VAT is then to be levied at a rate of 15%, collected and paid over to SARS. All tax invoices need to be issued in South African rands.
If desired, voluntary VAT vendor registration is available to foreign digital service suppliers with sales of R50 000 or more in a 12-month period. Should sales volume drop to below the R1 million threshold over a 12-month period then foreign suppliers may deregister for VAT.
