VAT ON ELECTRONIC SERVICES – AMENDED REGULATIONS AND GUIDANCE FROM SARS
Unlike tangible goods that physically transfer from one country to another through border posts, electronic services supplied via electronic communication or the internet can go undetected by revenue authorities. In an effort to address this, amended regulations came into effect on 1 April 2019, which widen the application of VAT to foreign suppliers of electronic services.
Electronic services are defined as 'any services supplied by means of an electronic agent, electronic communication or the internet for any consideration'. This definition is extremely wide and leaves foreign suppliers in uncertain waters on whether they are required to register for VAT or not.
SARS published an explanatory memorandum and a document setting out answers to frequently asked questions (FAQs) that provide some guidance on how to apply VAT to non-resident suppliers of electronic services in South Africa. SARS explains that the policy intent is to subject those services that are provided using minimal human intervention. For example, legal advice supplied by a law firm in Germany, which is sent to a person in South Africa via email, will not be considered an electronic service as the electronic medium is merely used to deliver the result of the service supplied.
The SARS publication provides useful, practical examples of what would constitute electronic services, such as:
- online shopping portals;
- web-based broadcasting; and
- download of or access to e-books, music, film; other audio visual content, software and online booking services.
The intention is to update the FAQs on a regular basis with additional practical scenarios to assist non-residents in determining whether they fall within the ambit of the VAT regulations.
A noteworthy exclusion is the supply of electronic services by a non-resident company to a resident company that forms part of the same group of companies, provided the services are supplied exclusively for the purposes of consumption by the resident company.
Furthermore, section 54 (2B) of the VAT Act, which became effective from 1 April 2019, allows a non-resident supplier of electronic services to appoint an intermediary VAT vendor in South Africa to act in its stead, i.e. it would supply the electronic service to the intermediary which would be regarded as making the supply to residents and not the non-resident principal.
On a further positive note, the obligatory registration threshold for foreign suppliers of electronic services has been increased to mirror the registration threshold for South African vendors. In the past, non-resident suppliers were obliged to register for VAT if their taxable supplies in a 12-month period were valued at ZAR 50 000. However, the threshold has now been increased to ZAR 1 million in any consecutive 12-month period.
The imposition of VAT on foreign suppliers should decrease any economic distortion there could be compared to domestic suppliers of similar services who are subject to VAT.
Please do not hesitate to contact our VAT team, which includes Patricia Williams, Rob Hare and Hermann Marais in Johannesburg and Aneria Bouwer in Cape Town, to discuss any queries that you might have in respect of the amended regulations or the FAQs document.