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nix
26-10-2010, 04:52 PM
Hi all,

My name is Niki, I'm a member of an independent software development company based in the Western Cape. We develop educational software and web games for clients in SA and overseas. We've had a fairly smooth ride thus far, that is until our accountant pointed out a snag involving VAT and our foreign clients.

First a disclaimer: I'm neither an accountant nor a tax practitioner. The information I present is based on my understanding after consulting with practitioners and SARS officials. My reasons for posting is to determine what measures other developers in our field have taken to avoid the pitfalls I present while remaining complaint with the ruling VAT legislation.

What's the problem then? As SA residents any vendor who supplies a non-resident is required to retain documentary proof of why they rated their goods/services as a zero rated supply.

According to SARS callcenter officials there a ruling stating that software delivered electronically can be rated at 0% VAT because it is seen as 'Direct export goods'. For example, a SA developer has created an exciting game and has sold it via the internet to some devout US indie supporters. The price of the game does not include VAT and they don't need to charge their customers VAT either.

In the case where a SA developer is contracted to develop a game for a US company using a supplied IP licence, something else comes into effect. In order to transfer ownership of copyright to the US client the SA developer has to ensure that the client agrees not to use the IP in SA. Please refer to http://www.sars.gov.za/home.asp?pid=5996# Section 11(2)(m) ? services connected with intellectual property rights

So as SA Game Developers we find ourselves in a ridiculous situation where we have to expect our client to somehow ensure that no SA resident is going to buy the final product or we need to charge them 14% extra.

The tax consultants at my local SARS branch suggested that I apply for a special ruling which will enable us to conduct our business, but will also take a number of months to achieve. What is the interim solution, to charge or not to charge ? they suggested charge the customer now and refund them later.

Hopefully some diligent dev has already overcome this issue. Hopefully there is an exceptionally simple solution. Either way I look forward to hearing from the community.

Regards,
Niki

dislekcia
26-10-2010, 06:47 PM
I've fired off a round of questions to the people I know who tackle IP law. But in the meantime a rather flippant idea hit me: Why not sell the international IP and the the South African IP in separate agreements? If you sell the SA IP for free, then 14% of that is 0 ;)

nix
26-10-2010, 08:46 PM
I was thinking along a similar line - if one were to physically ship a copy of the final build to the customer you should have all the export papers needed for Section 11(2)(L) - services supplied to non-residents.

I'll run both scenarios past my people in the morning.

[Edit] - http://www.cyberlawsa.co.za/cyberlaw/cybertext/chapter9.htm
Here is an excerpt from a book written on the subject

Wahooney
27-10-2010, 09:05 AM
In South Africa no guidelines have been issued in this regard, and any supplier of services to a foreign recipient would experience severe problems in maintaining adequate proof in this regard.

This quote is especially relevant. What are developers currently keeping on record to prove their VAT compliance?

dislekcia
27-10-2010, 02:18 PM
Via @phaezen on twitter:


a way to cover your but is to get a shipping address, even if it is download only and use an ip sniffer


and yes, people will try and get around it to not pay the VAT, but as long as you show a reasonable effort on your side


also you only pay the VAT on the VATtable sales, so should make no difference to margins if that is what they are concerned about

Still asking around...

nix
29-10-2010, 09:12 AM
Seems like phaezen is talking about when and when not to charge VAT- that's not quite the issue. The issue is the documentation required to substantiate 0% VAT. Since the supply is electronic, developers don't have a paper trail (via customs) to prove that the supply was an export and therefore 0%.

Interpretation note #31 - http://www.sars.gov.za/home.asp?pid=5996# describes the proof required in order to validate the 0% rating.

The article - http://www.cyberlawsa.co.za/cyberlaw/cybertext/chapter9.htm presents the problem much more clearly than I did in my OP.

Having read through that article it's clear to me that there is no simple solution, so I've taken your advise and approached a lawyer - I should have an answer in the next few days.

It seems that most devs aren't aware of this issue and simply apply 0% without the documentation - exactly as I have been doing. Lets hope the lawyer can point us all in the right direction, and if we're already compliant then at least we have confirmation.

AndrewJ
29-10-2010, 02:06 PM
Thanks for this thread and also for keeping us in the loop Niki! We appreciate your efforts.


Community.GiveItem(Users.nix, new DeliciousMuffin(Flavour.Banana));

nix
01-11-2010, 05:38 PM
A quick update, I've just got off the phone with the lawyer and we seem to have an answer. Not one that I was expecting but it's sound advice.

The simple answer is that there is no simple answer. The legislation is not clear on many aspects of the exportation of intangible goods so it's open to interpretation. There have been no rulings and no substantial court cases to refer to either, while the unofficial word from SARS is that they are working on it. The key issue is that once the supplier establishes an interpretation they must stick to it.

So what follows is the generally accepted interpretations.

Software supply is considered a service since the end user is only really granted licence to use the software.
If the supply is not consumed within SA then VAT does not apply.
Since software is a service and if the recipient is a non-resident then the only supporting documentation needed is listed in Section 11(2)(l) of Interpenetration Note 31.

Section 11(2)(ℓ) ? certain services supplied to non-residents

Supplier?s copy of the zero-rated tax invoice
Recipient?s order or the contract between the recipient and the supplier;
Proof of payment (including the Exchange Control declaration form from the Reserve Bank, where the consideration exceeds exchange limits)

There are some catches though.

Selling items from a server located in SA is subject to 14% VAT
When selling to end users (not businesses) in the EU the supplier must be registered in one of the EU territories.


This puts my mind at ease because now I know how to define our work and where it can fit into the legislation. Compliance under these conditions is pretty straight forward.

It was a very interesting chat with the lawyer, and even though this seems to be limited to software it has massive implications in the creative industry as a whole. He provided examples of how the legislation does not cater for the advertising, photographic and film industries or even how tricky licensing an IP across borders is.

Hope this helps prospective game biz gurus.

Thank you to all those who chipped in directly and indirectly- oh and the muffin.

dislekcia
02-11-2010, 10:14 AM
So basically, always have a contract, don't use payment providers that host servers in SA and keep invoices in order to declare 0 rated tax.

Neat! Thanks a lot for the sleuthing. I can't stress how important it is for anyone about to actually start SELLING a game to spend an hour or two talking to a lawyer before they go live, just to iron out the details.

hawk
02-11-2010, 10:53 AM
This was pretty interesting to follow, I'm not involved in the dev of games/apps/products or anything but it was interesting to read.

Gazza_N
02-11-2010, 11:16 AM
Thanks for that, nix. Damned interesting stuff, and not something I'd considered personally. I always figured that, being software, you just sold your game, got your money, and that was it. Being made aware of possible legal niggles is a godsend!

Have another muffin! :P

BlackHawk
02-11-2010, 02:08 PM
Thanks alot for the supplied info, nix! Knowing is half the battle! ;)