The National Treasury recently published an amended Regulation for electronic services, in line with the proposal by the Minister of Finance in Budget Review 2017, that the value added tax (VAT) base for electronic services was to be expanded.

Seelan Moonsamy, consultant: tax at Baker McKenzie, Johannesburg

The amended Regulation has an effective date of 1 April 2019. International suppliers of services to South African customers, must evaluate whether their supply of services qualify as electronic services, and whether this would create a liability to register for VAT in South Africa.

The amended Regulation ushers in the following noteworthy changes:
* the previous list of specific services that comprised electronic services was jettisoned and replaced with a broad definition of electronic services as, “….:any services supplied by means of an electronic agent, electronic communication or the internet for any consideration…”;

* there is some relief for B2B transactions that take the form of intra-group transactions i.e. where the South African company is a wholly owned subsidiary of the foreign company (i.e. the foreign service provider), these transactions are excluded from the scope of electronic services;

* the activities of an “Intermediary” are now included in the ambit of an “enterprise; and

* the registration threshold for suppliers of electronic services was adjusted upwards to ZAR 1 million, on a rolling 12 month basis.

What’s the impact?

The impact of the amended Regulation is that all services that are supplied from abroad by an “electronic agent”, “electronic communication” or the “internet” are now electronic services for the purposes of VAT.

What is envisaged by the definition is that the services being supplied are essentially automated and involve minimal human intervention; and are impossible to ensure in the absence of information technology.

Only a limited number of services that may be provided by the above means are excluded from the definition of electronic services, namely educational services regulated in the export country of the foreign service provider, and telecommunication services.
The reach of the new Regulations is staggering and may also include the supply of the following services: software subscription services; the use of software by an entity in South Africa provided electronically by its holding company situated abroad (unless the exclusion applies); broadcasting; cloud computing; advertising services; gaming; any reservation services made via an online platform, and so forth.
It is also interesting to note that there is no distinction between business-to-business (B2B) or business-to-consumer (B2C) supplies in the amended Regulation, notwithstanding the fact that this differentiation was strongly advocated for, before the amended Regulation was published. The corollary is that B2B and B2C supplies are treated similarly for VAT purposes.

Intermediaries

Foreign intermediaries that facilitate the supply of electronic services (on behalf of the foreign service provider) and who are responsible for invoicing and collecting payment for the electronic services, are also required to register for VAT.

In essence, where a foreign service provider uses an intermediary (ie a Platform) to supply services to customers located in South Africa, and the Platform is responsible for issuing the invoice and collecting the payment in respect of the supply of the services, the Platform is “deemed” to be the provider of the electronic services. It is the Platform and not the foreign service provider that would be liable to register as a VAT vendor in South Africa.

Conclusion
All foreign businesses that supply electronic services in South Africa should determine if their services are supplied by means of an electronic agent, electronic communication or via the internet. If the total value of taxable supplies made by the foreign supplier in any year exceeds ZAR 1 million, a liability to register for VAT may be triggered.

Failure to register for VAT in a timeous manner may have a huge financial impact for these foreign service providers, as SARS would levy penalties and interest and this may also lead to reputational damage.