Extensive Reform for Suppliers of Electronic Services

Proposed amendments expanding the scope of electronic services resulting in a VAT registration liability for foreign suppliers

In 2014 the Value-Added Tax Act, 89 of 1991 was amended to include in the definition of “enterprise” the supply of “electronic services” by a non-resident to a recipient in South Africa. Accordingly, foreign suppliers of such electronic services are required to register for VAT where supplies made exceeded R50 000.

The regulation defining such “electronic services” included the provision of certain educational services, games and games of chance, internet-based auction services, e-books, audio-visual content, still images, music and various subscription services, but excluded services such as cloud-computing and software, which are often supplied in the business-to-business (‘B2B’) environment.  During the 2017 Budget Review it was announced that regulations prescribing foreign electronic services subject to VAT would be broadened to include cloud-computing and other online services.

On 21 February 2018, the Minister of Finance published draft regulations (“Draft Regulation”) as well as a draft explanatory memorandum to propose changes in the VAT Act which, if enacted, would result in a significant overhaul of the VAT treatment of electronic services.  

The proposed amendments in essence:

  • repeal the current ESS Regulation and provide for the deletion of all the specific categories of electronic services previously stated; and
  • now defines “electronic services” broadly to include any service supplied by means of an electronic agent, electronic communication or the internet, excluding the supply of telecommunications services as defined and the supply of educational services by a person regulated by an educational authority in a foreign country.

This new definition is sufficiently broad to require that SA VAT is accounted for by the foreign supplier on many services that were not previously in scope.  These include:

supplies of software, anti-virus and cloud-computing,

  • administrative services in a corporate group environment delivered electronically,
  • online advertising,
  • broadcasting,
  • access to databases and information systems,
  • any consulting services delivered online, including on a pay-by-use basis,
  • training via e-Learnings, and
  • monetising electronic agents, electronic communication or websites.

The result of the amendment is so broad that possibly every supply of services by means of an electronic agent, electronic communication or the internet, except for telecommunications and educational services, for a consideration, would fall within the ambit of the Draft Regulation and could potentially require foreign suppliers to register and account for VAT to the South African Revenue Service (‘SARS’).

It is significant that the SA VAT Act does not contain any specific distinction between B2B supplies and supplies made directly to South African consumers (‘B2C’).  Internationally this distinction often applies and results in a lower compliance burden on foreign business.  Excluding B2B supplies also reduces the compliance burden for SARS as auditing, collecting and enforcing VAT requirements cross-border is a difficult and costly exercise for Revenue Authorities with no ultimate revenue gain.  

A registration threshold of R50 000 in any consecutive period of 12 months is, when converted to foreign currency (approximately $4,300, €3,500 or £3,000), very low.  This ignores the costly impact of compliance cost that such a low registration threshold has on non-resident businesses.  This threshold is also substantially lower than the R1 million threshold that applies to resident businesses and goes against the principle of neutrality that is included in the OECD International VAT guidelines.

It has been proposed that intermediaries and platforms be allowed to register as vendors and to account for the VAT on sales made through such platforms, provided that the platform/intermediary facilitates the supply and is responsible for issuing the invoice and collection of the payment.  This may assist to alleviate the administrative burden that may be caused by increasing the number of electronic services suppliers that will have to register as vendors.

If enacted, the proposed amendments will become effective on 1 October 2018 and National Treasury has allowed a short period of time to provide comments before 22 March 2018.  There is a window of opportunity to make representations to limit the impact of these changes. 

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Sanchia  Temkin

Sanchia Temkin

Senior Manager, Media Relations, PwC South Africa

Tel: +27 (0) 11 797 4470

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