Unpacking the impact: VAT updates in South Africa for electronic services
Charles De Wet from our South African firm, ENS Africa, updates on VAT obligations for international suppliers providing electronic services to recipients in South Africa.
Charles De Wet from our South African firm, ENS Africa, updates on VAT obligations for international suppliers providing electronic services to recipients in South Africa.
The South African Revenue Service has imposed updates to legislation which means suppliers outside of South Africa who provide services by means of the internet to customers in South Africa may need to register for VAT. Here, our South African firm reports on the impact and outlines how the ENS team can assist.
In order to widen the tax base and enhance revenue, the South African Revenue Service (“SARS”) is focused on foreign suppliers of electronic services and, in particular, their obligation to register as value-added tax (“VAT”) vendors in South Africa (“SA”) and levy VAT on supplies to SA customers, including business customers.
In 2014, SA promulgated legislative amendments and regulations (“2014 Regulations”) to capture within the SA VAT net the services of non-residents supplied electronically to resident persons by inter alia introducing the concept of “electronic services” to section 1 of the Value-Added Tax Act, No. 89 of 1991 (“Act”). In terms of the 2014 Regulations, foreign suppliers of electronic services were required to register for VAT (commonly referred to as goods and services tax or GST in other countries) in SA and levy VAT (presently at a rate of 15%) on supplies to SA resident customers. The 2014 Regulations captured only a limited number of transactions and generally encapsulated only business-to-consumer (“B2C”) supplies. In this regard SARS has issued (and likely will continue to issue) positive binding rulings to confirm that the granting of a license to distribute media does not constitute the supply of “electronic services” as envisaged in the 2014 Regulations.
In 2019, a new set of regulations was promulgated, replacing the 2014 Regulations (“2019 Regulations”). The 2019 Regulations currently remain in force, and considerably expanded the services that fall within the concept of “electronic services” for purposes of the Act. Essentially, any service rendered to a SA customer “by means of the internet” or other electronic communication may be captured. Significantly, business-to-business (“B2B”) supplies now also fall within the ambit of the SA electronic services regime.
SA VAT legislation therefore does not necessarily distinguish between B2C and B2B electronic supplies. However, there are potential arguments to nevertheless exclude certain B2B supplies, particularly in the context of supplies of broadcast or media licenses.
All foreign suppliers of electronic services to SA customers are required to register as VAT vendors in SA if they meet the registration threshold of ZAR1 million (circa EUR49 500) in a 12-month period, regardless of the nature of the SA resident person to whom their services are supplied.
SARS has recently issued correspondence to approximately 2 800 foreign suppliers (including suppliers of broadcasting services) whom SARS suspects of supplying electronic services to SA residents. The correspondence issued is an “invitation” to register for VAT in SA and/or a notification of a “mandatory” VAT registration obligation in SA, in terms of the electronic services regime. This is part of a SARS revenue-collection project, and it is anticipated that SARS will continue to issue such correspondence directly to foreign suppliers.
Potential impact
In instances where foreign suppliers have received correspondence from SARS, there may be an obligation to register as a VAT vendor in SA, and thus file VAT returns together with corresponding VAT payments. SARS may impose interest and penalties (typically 10%, but up to 200%) on what they regard as an outstanding VAT liability.
Even where foreign suppliers have not yet been approached by SARS, they should nevertheless consider whether they have any potential SA VAT obligations in terms of the electronic services regime if they supply services to SA residents from offshore.
Our recommendations
We recommend that foreign suppliers who provide any services to SA customers by means of the internet and/or who have received correspondence from SARS advising them of an obligation to register for VAT in SA, approach SA tax advisors to first determine their potential tax exposure (if any); and, if necessary, consider the appropriate remedial action, before engaging with SARS.
The relevant supply agreements should be carefully reviewed to determine whether the services supplied are actually electronic services, whether the supplier may clawback the VAT owing from the SA resident recipient and/or whether the foreign supplier is obliged to issue valid tax invoices to enable the SA resident recipient to claim such VAT as input tax.
Timelines
Foreign suppliers of electronic services should establish whether any supplies are made to SA customers and consider whether registration as a VAT vendor in SA is required. This should preferably be done prior to correspondence from SARS in this regard.
In instances where correspondence is received from SARS, SARS will typically insist on strict turnaround times in which they expect feedback. It is important to not unnecessarily delay engagement with the SARS process, but foreign suppliers should be aware that they are entitled to appoint local SA tax advisors to first understand their potential VAT obligations before formally responding to SARS’ correspondence.
How we can help
Notwithstanding that a foreign supplier has received correspondence from SARS as referred to above, it is not necessarily so that the foreign supplier in fact has a VAT registration obligation in SA.
We have experience in and are available to assist foreign suppliers in assessing their SA VAT obligations. As a first step, we (as registered tax practitioners in SA) assist clients by preparing a tax opinion to confirm whether they have a VAT registration obligation in SA and, if so, when this obligation arose and the quantum of their exposure to tax in SA.
Once we have been appointed, we are well-placed to (and generally do) handle all interactions with SARS on behalf of our clients, including managing timelines (discussed above).
Following the finalisation of our formal tax opinion, we typically also assist our clients with approaching SARS for a binding ruling to the extent that there are arguments to mitigate their exposure to tax in SA.
For further information, please contact:
Charles de Wet – Tax Executive, email: cdewet@ensafrica.com;
Jo-Paula Roman – Senior Associate, email: jroman@ensafrica.com
Anjé Albertyn – Associate, email: anjalbertyn@ensafrica.com
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