National Treasury is proposing several amendments to the regulations governing the value-added tax (VAT) treatment of electronic services.
One welcome proposal is a simplified VAT registration regime for offshore companies supplying goods and services to a local business. If the offshore entity supplies electronic services to a South African VAT vendor, it no longer needs to register for and charge VAT in South Africa.
National Treasury says the reason for the change is that the digital economy continues to evolve. It is therefore necessary constantly to review South Africa’s VAT legislation in this regard.
“Further, as global and domestic experience in this relatively new arena of tax legislation grows, lessons are learned and amendments may be necessary, especially in the sphere of tax administration.”
South Africa introduced electronic services legislation in June 2014 and significantly expanded the scope thereof in 2019.
Currently, the regulations require that a foreign company must register for VAT and charge VAT at a standard rate if it supplies services to South Africa and the value of the services exceeds R1 million in a 12-month period.
Charles de Wet, tax executive at ENSafrica, says the South African regulations are odds with those in the rest of the world. Other jurisdictions differentiate between business-to-business and business-to-consumer.
Much pain but no gain
In South Africa, the obligation to register and charge VAT arises regardless of the identity of the recipient of the service, and regardless of whether the recipient is entitled to deduct the VAT as output tax.
“The obligation on non-residents to register for VAT in South Africa therefore arises even if no additional revenue is collected for the benefit of South Africa,” ENSafrica adds.
This creates frustration and irritation and creates an administrative burden for the foreign entity, as well as the South African Revenue Service.
The proposed amendments have left the main text of the “electronic services” definition untouched. However, they propose an expansion of the exclusions to the definition.
Treasury explains that the proposed exclusion relates to services provided “from a place in an export country by a non-resident person where such supplies are made solely to vendors that are registered for VAT in South Africa”.
This is a form of business-to-business exclusion that applies to suppliers that make supplies only to other businesses in South Africa, provided the recipient business is a registered vendor.
Treasury adds that the policy rationale behind this is to ease the administrative burden on suppliers and recipients where there is little or no gain to the fiscus.
The reasoning behind not excluding the need to register for and charge VAT earlier on electronic services is concerns relating to “fairness and equity” between offshore suppliers and domestic suppliers.
Simplified VAT regime
“These concerns still exist; however, non-compliance is easier dealt with and litigated domestically than across borders.” The government has reconsidered its position and is proposing this amendment to ensure that the VAT regime is as “simplified as possible” for non-resident suppliers that have no physical presence in the country.
This is in line with the globally accepted recommendations made by the Organisation for Economic Co-operation and Development and to encourage compliance where legal jurisdiction to enforce compliance may be a challenge.
De Wet says this basically brings us in line with international best practice and reduces the administrative burden on foreign entities when doing business with South African companies.
“Companies who had registered in South Africa will now be able to deregister and stop charging VAT on their transactions with local companies. However, when they offer electronic services to individual customers they still need to register and charge VAT.”
More tweaks
Another tweak to the regulations relates to the words “minimal human intervention”. These words were used in the explanatory memorandum for the 2019 amendments, but they were never introduced in the VAT Act or the regulations.
“The intention was for the interpretation of these provisions to be done within the spirit of that concept. However, it has since come to government’s attention that non-resident suppliers have been interpreting this concept too widely and against what the initial intention was,” Treasury says in the 2024 draft explanatory memorandum.
It is proposed that the interpretation of which services fall within the regulations be “as wide as possible” with no regard to the words “minimal human intervention”.
De Wet says this brings clarity because the words have been interpreted too widely in the past, mainly to circumvent VAT registration when supplying electronic services.
Treasury has also clarified the position for companies offering electronic services when the R1m threshold for VAT registration is exceeded. As with other small businesses, there is no need to register for VAT if the threshold is exceeded “solely as a consequence of abnormal circumstances of a temporary nature”.
The amendment simply clarifies that the same rules also apply to electronic services, De Wet adds. The proposed amendments will come into operation on 1 April 2025.
Amanda Visser is a freelance journalist who specialises in tax and has written about trade law, competition law, and regulatory issues.
Disclaimer: The views expressed in this article are those of the writer and are not necessarily shared by Moonstone Information Refinery or its sister companies. The information in this article does not constitute financial planning, legal, or tax advice that is appropriate to every individual’s needs and circumstances.
