Effective 1 June 2014, South Africa will apply VAT to supplies of electronic services (e-services) made by foreign suppliers to South African customers.
The South African VAT Act does not contain any “place of supply rules” — that is, the VAT rules that in other VAT systems determine the jurisdiction that may tax a specific transaction.
Further, the application of the South African VAT Act is not limited to South African residents, and it also does not make a distinction between business-to-consumer transactions and business-to-business transactions.
Taken together, these facts mean that any person’s activities may fall into the South African VAT net. However, despite the potentially limitless scope of the VAT law, the VAT Act was recently amended to specifically include foreign suppliers of “electronic services” as subject to South African VAT.
In South Africa, anyone who carries on an enterprise and exceeds a certain turnover threshold must apply for VAT registration. An “enterprise” is basically any business activity performed in the Republic, potentially resulting in a very wide scope.
The amended definition of “enterprise” now also includes an “electronic services” provision that any person is carrying on an “enterprise” for South African VAT purposes if it either:
- Supplies “electronic services” from a place outside of South Africa to a South African resident
- Involves a payment for the electronic service that is made through a South African bank
Therefore, a foreign supplier of electronic services that makes taxable supplies that exceed ZAR50,000 after 1 June 2014 will be required to register and account for VAT. The standard VAT rate will apply to these sales, which is currently 14%.
It should be noted that this turnover threshold is not subject to any time limitation. Moreover, a South African resident can be a private consumer, but it can also be any business or other entity in South Africa, including a subsidiary or sister company.
In the final regulation released at the end of March 2014, electronic services are defined as:
- Educational services (educational services only qualify as e-services if supplied by a person that is not regulated by an educational authority in the foreign country)
- Games and games of chance
- Internet-based auction services
- The supply of e-books, audio visual content, still images and music
- Subscription services to any blog, journal, magazine, newspaper, games, internet-based auction service, periodical, publication, social networking service, webcast, webinar, web site, web application and web series
As a result of the change, in practice, most of the electronic services covered by the new rules are services that are more commonly supplied B2C rather than B2B.
However, as we said earlier, there is no distinction between B2B and B2C supplies in South Africa’s modern VAT system. If the services listed are supplied B2B, the foreign supplier still has a VAT registration obligation.
Therefore, we recommend that all businesses with customers in South Africa carefully review whether they render any of the above services (or are paid for out of South African bank accounts).
Further, it is worth noting that if a mixed supply contains various elements and even one of them is an electronic service, the whole service will be caught in the South African VAT net. For example, subscriptions services for websites or web applications, as well as for educational services, may be elements that are included in intercompany head-office charges.
Another positive outcome of the consultation process is that the registration process for foreign suppliers of electronic services has been simplified. In particular, the entire process can be completed online.
To register for VAT, a supplier of electronic services must submit its application form together with scanned copies of supporting documentation. The registration for providing e-services may exist separately from any registration the company already has (although a supplier may also decide to use its existing registration).
Contrary to a normal foreign VAT registration, the supplier is not required to appoint a VAT representative in South Africa or open a local South African bank account. However, the applicant is required to provide contact details of a local representative for receiving information and correspondence.
Registration is mandatory from the end of the month when the threshold is exceeded (starting 1 June 2014). However, if a supplier estimates that it will exceed the threshold, it may register for VAT straight away at the specific office in Alberton that deals with electronic services. The registration application is generally processed within a few working days.
The potential scope of the new rules is fairly wide, and there are bound to be gray areas. But one piece of advice is clear: when in doubt, get a ruling! The South African tax authorities have clearly articulated that if a supplier is in doubt about, for example, whether its services fall within the scope of the new rules, it should reach out to them to ask for a ruling.
Obtaining a tax ruling in South Africa is a fairly straightforward process, and local advisors can help foreign companies draft the request and discuss it with the authorities, if necessary.
What should we do if we supply e-services?
- Identify whether you supply electronic services to South African residents that are covered by the new rules (including supplies to individuals, intercompany charges, B2B and B2C supplies).
- Quantify your supplies to South African recipients. Will you exceed the threshold? When?
- Prepare to file for a VAT registration as soon as possible. Identify your VAT reporting obligations going forward and how you will meet them (e.g., ensure you will be able to identify affected sales, submit reports on time, supply the information required and comply with invoicing rules).
- Consider the impact of the new rules on your reporting systems, contracts and pricing. For example, can you add VAT to your prices? Do you need to update your website?
- Consider the impact of the new rules on any other activities you currently undertake in South Africa (e.g., sales of goods).
- Stay connected to developments as more details are released about the new provisions.
This article was first published in EY´s Indirect Tax Briefing: July 2014
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