VAT and Cross-Border Electronically Supplied Services
By Wilna Scholtz, Director, KISCH Tax Advisory
According to South African legislation, Value-Added Tax (“VAT”) is levied on vendors' supplies of goods and services and on the importation of goods and specific services into the country which includes the supply of electronic services.
The supply of electronic or subscription services is classified as a supply in terms of the VAT Act. The original Electronic Services Regulation (ESR) was published on 28 March 2014 and came into effect on 1 June 2014, but the scope of services only covered a restricted list of electronic services.
This was an attempt to tighten loopholes in cross-border technology/cyber regulations, National Treasury and SARS amended the definition of ‘enterprise’ in the Value Added Tax Act No 89 of 1991 to include the supply of “electronic services”, where a foreign supplier of electronic services is deemed to conduct an enterprise in the Republic if it satisfies any two of the following three requirements:
- The recipient of the services is resident in South Africa;
- The payment for the electronic services originates from a bank in South Africa; and
- The recipient has a business, postal or residential address in South Africa.
An updated ESR was published on 18 March 2019 under notice No 42316, which came into effect on 1 April 2019, wherein the list of electronic services was expanded to include any supplies of electronic services subject to a few exceptions such as:
- Educational Services;
- Telecommunications services; and
- Certain group company transactions.
The intent of the regulation was to widen the scope of the initial limited list of “electronic services”, it is however unclear from the new definition provided in the 2019 ESR what “electronic services” entails exactly as the definition provided in the Regulation merely states “those electronic services prescribed by the Minister by regulation in terms of this Act”.
On 18 March 2019 an explanatory memorandum was issued to provide more clarity on this definition of “electronic services” in Section 1(1) of the VAT Act. It was explained in the memorandum as “those services that are provided using minimal human intervention”. An example given is the use of an Application (App).
In 2019, the VAT rules were expanded to cover more foreign electronic service providers, aiming to maximize VAT collection for both business-to-business (“B2B”) and business-to-consumer transactions (these changes exceeded international guidelines). Regardless of these efforts, many international suppliers complied late/were not aware of their VAT obligations, which lead to penalties.
As it stands, any non-resident supplying services to a resident “by means of the internet” or other electronic communication is required to register for VAT and levy VAT at the standard rate (15%) on such supplies, when the value of the services exceeds R1 million in a 12-month period. This obligation arises even if the resident is VAT registered and entitled to deduct the full VAT amount as input tax. It does not make sense to impose VAT on B2B transactions where the relevant jurisdiction has a reverse charge mechanism, because any VAT imposed on B2B transactions where the recipient would not be entitled to a full input VAT deduction would be subjected to a reverse charge mechanism (tax liability moves from the supplier to the customer).
With the above in mind, it comes as good news then that Treasury’s proposed Draft Taxation Laws Amendment Bill for 2024 proposes major changes to how VAT is collected on cross-border eCommerce services, and significant changes are set to be made to income tax and VAT legislation, including regulations regarding “electronic services” under the VAT Act.?National Treasury is proposing limiting VAT collection to situations where foreign suppliers sell products directly to consumers. If these amendments are implemented, B2B suppliers will no longer have an obligation to be registered as vendors in South Africa.?The National Treasury and SARS will be consulting with stakeholders regarding the proposed amendments.?
It is important to note, however, that whether the law changes with regards to B2B suppliers or not, B2B suppliers might still have had an obligation to be VAT registered in terms of prior VAT cycles and they need to be aware of this, take the necessary steps, and re-issue any necessary invoices to avoid VAT leakage (the amount of VAT which is actually recoverable or can actually be set off) when local customers are eventually time barred claiming the VAT levied in terms of those invoices.
The above proposed changed notwithstanding, SARS is also attempting to crack down on
clothing retail giants like Shein and Temu, with local companies accusing them of anti-competitive practices due to import duty and VAT avoidance. This is because imported packages valued below R500 are subject to a 20% tax rate (much lower than that of packages valued over R500). Local retailers argue that Temu and Shein strategically break their larger orders into smaller parcels in order to remain under the R500 threshold. From 1 July, SARS has committed to taxing clothing items manufactured internationally and bought from international e-tailers in small quantities (under R500) at the same rate as large quantities (R500 and above). Now the cost of clothes manufactured outside of the country and bought via an e-shop, will include:
- A share of the customs charge on the container it arrived in;
- Customs duty at 45% of the value; and
- VAT at 15% of the final value in the online store.
If you have any queries on the above or require any tax advice, please contact:
Wilna Scholtz
Director
KISCH Tax Advisory
+ 27 83 265 2573
Wilnas@kisch-ip.com
