South Africa draws more foreign suppliers of electronic services into its VAT net
On March 18, 2019 the South African National Treasury issued revised regulations on electronic services for VAT purposes, which became effective on 1 April 2019 (the Revised Regulations).
In terms of the VAT Act, 1991 (the VAT Act) a foreign supplier of electronic services to South African customers (including businesses) will be required to register and account for VAT in South Africa if at least two of the following circumstances are present:
- the customer is a South African resident
- the payment of the services originates from a South African bank account
- the customer has a business, residential, or postal address in South Africa
Under the Revised Regulations, electronic services are now defined more broadly to mean “any services supplied by means of an electronic agent, electronic communication or the internet for any consideration.” The only exclusions from the new definition of electronic services are regulated educational services, telecommunication services and certain supplies to group companies.
The VAT Act has also been amended to catch electronic services supplied by an intermediary. An intermediary is defined as a person who facilitates the supply of electronic services or who provides their platform to foreign suppliers for rendering services to South African customers and is responsible for the issuing of invoices and collection of payment. Persons falling within the definition of an intermediary will be deemed to be making the supply of electronic services (rather than the foreign supplier) and required to register for VAT in South Africa.
DLA Piper Comment: The Revised Regulations expand the definition of electronic services, which will no doubt create more VAT registration obligations for foreign suppliers. Foreign suppliers of electronic services to South African customers (including businesses) and local group companies, either directly or through intermediaries, should urgently assess whether they have an obligation to register for and account for VAT in South Africa on the supply of these services.
Unlike other jurisdictions, the Revised Regulations do not make a distinction between business to business (B2B) and business to consumer (B2C) transactions. Often in a B2B context the recipient of the supply is entitled to an input VAT deduction and thus there is no requirement to account for output VAT. According to the National Treasury, this distinction does not exist for local suppliers; therefore, introducing the distinction under the Revised Regulations would create an unfair cash flow advantage for non-resident suppliers. Unfortunately, even for B2B suppliers of electronic services, there will be an obligation to account for local output VAT.