B2B exclusion

First, it is proposed that the ES regulations be amended to introduce the business-to-business ("B2B") exclusion to simplify the VAT regime for non-resident suppliers with no physical presence in SA and encourage compliance. Proposed Regulation 2(d) excludes from ES those services supplied from an export country by a non-resident of SA where such services are supplied solely to vendors registered for VAT in SA ("Registered Vendors"). This means that a foreign supplier of ES to a Registered Vendor would no longer be required to register for and charge SA VAT.

While the proposed amendment aims to streamline the SA VAT regime, it may result in significant challenges for foreign suppliers that are already registered for VAT and that supply both to customers directly ("B2C") and to Registered Vendors (i.e., mixed supply) as they may face administrative challenges, such as deregistration for VAT if their B2C supply of ES is below the VAT registration threshold of ZAR 1 million ("Threshold") and potential re-registration if it exceeds the Threshold. It is also unclear what mechanism foreign suppliers must apply to apportion their supply of ES and determine whether they have an obligation to remain registered for VAT. With respect to B2B supply of ES, it is also unclear whether SARS will require any documentation to evidence that the exclusion applies or whether foreign suppliers can unilaterally make an assessment as to whether they have any VAT obligations with no specific documentary requirements for SARS to assess.

In light of the proposed amendments, SARS recently informed the public that it intends to implement measures to ensure that the deregistration process is smooth for foreign suppliers that will no longer be required to account for VAT by virtue of satisfying the B2B exclusion. It would be ideal if the same level of administrative ease could be afforded to foreign suppliers that may be required to reactivate their VAT registrations.

Intra-group company exclusion

It is further proposed that the intra-group company exclusion contained in the current ES regulations be amended to exclude intra-group companies from the definition of ES to the extent that the service supplied by the foreign company is "exclusively discovered, devised, developed, created, or produced" by it for the purposes of consumption by the resident company. As the Explanatory Memorandum associated with the Draft Amendments does not outline the policy rationale for this proposal, we assume that its purpose is to further narrow the intra-group company exclusion.

The issue is that the Draft Amendments do not provide a definition for "exclusively discovered, devised, developed, created, or produced", considering that development, creation and production may be a collective effort between the foreign company and a third party due to the skillset, infrastructure, capacity and other considerations to successfully develop ES. In a SARS-published guidance document titled "FAQ – Supplies of Electronic Services", dated 5 July 2019, SARS states that services procured by the foreign company on behalf of the resident company would not fall within the intra-group company exclusion. It is rather unclear under the proposed amendments whether ES resulting from cross‑collaboration – for example, where the foreign company made contributions toward the development of the service – would give rise to tax implications as the services would not have been exclusively developed by it. This ambiguity may hinder compliance as foreign companies may not be aware of how the exclusion should be applied.

In any event, retaining the intra-group company exclusion may be futile considering the proposed B2B exclusion, which requires that a foreign company supply ES to a Registered Vendor. In most instances, the resident "related" company would likely be a Registered Vendor; therefore, related companies would qualify for the proposed B2B exclusion.

Amendments to the provisions relating to intermediaries

It is not uncommon for foreign ES suppliers to use an intermediary that facilitates the supply of ES, issues invoices and collects payment, etc., which is essentially a principal-agent relationship. Where an intermediary supplies ES on behalf of a foreign principal, that supply is deemed in terms of Section 54(2B) of the VAT Act, 1991 to be made by the intermediary, which must then account for such supply (in addition to its own), provided that certain requirements are met. One of the requirements is that the foreign principal not be an SA resident and not be a Registered Vendor. Under the Draft Amendments, it was proposed that Section 54(2B) be amended to remove this requirement. The intention behind the proposed amendment is, firstly, to hold the intermediary responsible for all supply of ES made through its platform, including those by non-resident principals irrespective of their SA VAT registration status, and, secondly, to ease the administrative burden on the foreign principal, to ensure that VAT is not accounted for twice (by the principal and the intermediary) on the same supply.

Undoubtedly, the proposed changes place a heavier burden on intermediaries as, in light of the B2B exclusion, they would now have to monitor the supply of ES made by the principal to determine whether it qualifies for the B2B exclusion or falls under the ES regime. A further administrative complexity arises where the principal supplies ES to both B2B and B2C markets, which the intermediary would have to monitor and potentially account for.

Conclusion

Although the proposed amendments are seemingly well received, clear guidance on the transitional phase and noted concerns must be given to ensure legal certainty and compliance and achieve the overall purpose of the proposals. We hope for increased engagement between SARS and all relevant stakeholders to address these concerns and urge taxpayers to seek professional advice to prepare for how these proposals, when implemented, will affect their businesses.

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Ayanda Mavata, Trainee Solicitor, has contributed to this legal update.