In 2014, South Africa adopted legislation to subject certain limited services supplied via electronic means to VAT, regardless of the place from where the services were supplied. The legislation was at such stage primarily directed at subjecting business-to-consumer ("B2C") supplies to VAT, in keeping with international standards.
However, the current regulations governing the scope of "electronic services" subject to VAT in South Africa ("2019 Regulations"), have significantly broadened the concept from the original 2014 regulations.
Under current law, any non-resident person who supplies services to a resident person "by means of the internet" or other electronic communication will be required to register for VAT and levy VAT (at the standard rate, presently 15%) on such supplies, when the value of services exceeds ZAR 1 million in a 12 month period.
The above obligation arises even if the resident person to whom the non-resident supplies its services is registered for VAT and is entitled to deduct the full VAT amount so levied as input tax. In other words, unlike B2C transactions, where individual consumers usually cannot claim the VAT on the relevant supplies as input tax; there is, in the context of business-to-business ("B2B") transactions, unlikely to be any additional revenue collected for the benefit of South Africa as a result of the VAT registration of the non-resident supplier. This unfortunate outcome is made worse by the administration costs incurred by both non-resident persons who are liable to comply with the obligation to register for VAT in South Africa and meet all attendant filing and payment obligations, as well as what one may assume are not insignificant costs incurred by the South African Revenue Service ("SARS") to enforce and review the compliance of B2B electronic service suppliers.
In our recent experience, a number of non-resident taxpayers, with various B2B business models, have been approached by SARS to advise them of a "mandatory" obligation to register for VAT under the domestic electronic services provisions.
As a result of SARS engagements flowing from these registration notices, we have learnt the following:
- Applications for a prospective registration date to avoid late payment penalties and interest (which could be remitted post-assessment in terms of a separate Tax Administration Act, 2011, process) under section 23(4)(b) of the VAT Act, 1991, have (despite the lack of additional revenue collected from the registration) in all cases yielded a registration date of 1 October 2019, i.e. six months post an actual registration date of 1 April 2019, when the 2019 Regulations came into effect.
- While a very important distinction exists between intellectual property ("IP") rights granted by a non-resident person (for example, a broadcast or media right) and the content which, if the broadcast right is exercised, may be acquired and commercialised; SARS regards the IP right and the content as one and the same thing for VAT purposes. With respect, our view remains that IP rights are not legally or in any relevant way supplied "by means of the internet" and thus do not fall within the scope of the 2019 Regulations. The royalties withholding tax implications as a consequence of the VAT view adopted by SARS bear further consideration.
It was therefore a welcome surprise that the 2024 Budget Review contained an announcement that it is the intention of the legislature to revise and update the 2019 Regulations to limit the scope to only non-resident vendors supplying electronic services to non-vendors or end consumers. If these amendments are implemented, B2B suppliers will no longer have an obligation to be registered as vendors in South Africa.
The question thus arises: what do non-resident B2B suppliers do until the law changes or in respect of the past? In our view, unless the changes in law signalled in the 2024 Budget Review are retroactive in effect (which does not seem likely), non-resident B2B suppliers must regularise their soon-to-be wholly historic VAT liabilities in South Africa. The changes proposed are therefore a positive development but are unlikely to provide any relief to foreign B2B suppliers with South African customers in respect of the past.
An important commercial consideration in this context is the five year period for South African vendors in which to claim VAT as input tax. Accordingly, non-resident B2B suppliers must, even if the law is changed, carefully monitor whether they have incurred the obligation to register for VAT in South Africa in terms of prior iterations of the electronic services regulations. Additionally, they must ensure that their invoices are timeously re-issued (assuming they were not registered when the invoices were originally issued) in order to avoid the permanent VAT leakage that would arise if South African customers are time-barred from claiming the VAT levied in terms of the invoices.
On the basis that the amendments to the electronic services regime are expected to be effected by way of regulation, it would not be necessary to follow the same process and timeframes applicable to primary tax legislation. Law-makers therefore have the opportunity to fast-track the implementation of the regime change. We anticipate, however, that draft regulations will be published for comment later in 2024 and the effective date thereof will tie in with the typical effective dates for annual tax law amendments, being January or April of the year following the year in which the amendment is announced (in this case, 2025).
Reviewed by Charles de Wet, Executive, in ENS' Tax department.
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