Have you ever considered, as you put in that order for a CD or computer software over the internet, whether the transaction could have any tax consequences?
For example, if you are not a registered vendor for VAT purposes and you buy a software package over the internet, the package should probably be subject to VAT on importation. However, the package may be down-loaded via the internet and the tax authorities will be none the wiser. Even if the item is a physical item, like a CD or book, on which customs duty, as well as VAT, should be paid, if it is received through the post, the chances are you haven't paid the VAT and duties to the authorities.
In addition, you have probably paid for it by giving your credit card number and the bank has paid the amount, notwithstanding that you should have applied to Exchange Control for permission to do that.
This isn't going to make a huge difference to the South African Revenue Services (SARS), you may think, but the growing use of the internet poses a number of significant tax questions. The issue has been recognised and is being discussed in Europe and America.
Glen Kohl, in his last public speech (October 18, 1996) before leaving the post of American deputy assistant treasury secretary, said: "The greatest challenge facing the tax system is the handling of new technology, particularly in the global context." The American Treasury office of tax policy has since issued certain regulations in this regard, but the tax world is far from having all the answers.
The tax issues don't only relate to individuals buying the odd software package or CD and not paying VAT on it, but also to the larger question of income tax, and where businesses who are entering the world of internet commerce should pay tax on their income.
Consider, for example, the situation where a South Africa consumer buys goods, say a couple of CDs, from an internet "shop" page which is generated in Australia, and the supplier is in Europe. Who pays what tax, and where, on the profits from the sale? And how do the Revenue authorities trace and audit the transaction? This is particularly interesting if you consider that on-line businesses can spring up and disappear overnight, taking state revenue with them.
The South African Revenue authorities appear to have given little consideration to the question of internet transactions.
The South African tax system is based on the "source principle", that is, income is taxed in South Africa if its source is South African or deemed to be South African. To establish what the source of income is, you must establish what the originating cause of the transaction is, and then decide where that originating cause is located. In addition, there are various "deeming" provisions, for example, where a contract is concluded in South Africa, then the source of the income arising from that contract is deemed to also be South Africa.
So, in our example, was the sale concluded in South Africa or Australia? Where should the profit on the transaction be taxed? It may be that the laws of both countries require that it be taxed there. This could be significant if we're not looking at one CD but container loads of them.
Double tax agreements (DTA's), which are reached between two contracting countries in order to alleviate the problems of double taxation, may help solve the problem to a degree, where they exist, but many DTA's rely on the concept of residence or permanent establishment.
A permanent establishment means a fixed place of business and includes a branch, a place of management or office. It excludes a warehouse or place of business established to collect information or do advertising for the business.
The question which then arises is whether an internet page or worldwide web site is a permanent establishment!
What is clear is that SARS, like its counterparts overseas, is going to have to apply its mind to the question of tax and internet transactions.
In the meantime, you should remember that, when you buy items from other countries over the internet, you are probably liable to pay VAT and/or customs duties when the items arrive.