South Africa first imposed VAT on electronic services in 2014. At the time, only a limited range of services were considered in scope. This included certain educational services, games and games of chance, internet-based auction services, subscription services, and the supply of e-books, audiovisual content, still images and music. Amendments that became effective in April 2019 saw the definition of electronic services being updated to include any services - subject to the exceptions discussed below - supplied by means of an electronic agent, electronic communication or the internet for any consideration.
An electronic agent is defined as a computer program or an electronic or other automated means used independently to initiate an action or respond to data messages or performance in an automated transaction, while electronic communication is a means of communicating by way of data messages. Accordingly, any services that rely on information technology and are supplied with limited to no human intervention, such as through an online platform or application, qualify as electronic services for South African VAT purposes. This is similar to the test applicable under the EU VAT Directive (2006/112/EC), under which an electronically supplied service is defined as any service delivered over the internet or an electronic network and the nature of which renders their supply essentially automated and involving minimal human intervention, and impossible to ensure in the absence of information technology.
It is important for an entity to consider the true nature of its services when determining whether it supplies electronic services. For example, under the 2014 electronic services definition, a supplier who made certain services available through an electronic platform would not have been considered to be supplying electronic services. If, however, access to the platform was obtained through a subscription service, which was considered an electronic service under the 2014 definition, that supplier may have had an obligation to register for VAT. Of course, under the 2019 electronic services definition, supplying services through a platform is undoubtedly a supply of electronic services. In addition, certain supplies of services, such as making goods available for rental through a platform, may be deemed by the VAT Act to be a supply of goods and would therefore not qualify as electronic services. However, the supplier may still have a VAT registration obligation as a result of the nature of the supplies of those goods. To determine if a VAT registration obligation exists, the normal considerations with respect to the carrying on of an enterprise in, or partly in, South Africa on a continuous or regular basis must be considered. Should the supplier be liable to register for VAT, this would be a normal VAT registration which would not qualify for any of the specific rules that apply to foreign suppliers of electronic services.
The definition of electronic services specifically excludes the supply of (a) educational services by an educational authority under the laws of the respective jurisdiction, (b) telecommunication services and (c) services supplied by a foreign company to a South African group company exclusively for consumption by that group company.
The supply of educational services by the state, a school registered under the South African Schools Act or a higher education institution such as a university registered under the Higher Education Act, which are all considered educational authorities, is exempt from VAT in South Africa. It is therefore expected that the supply of educational services by a foreign supplier who supplies such services electronically to students in South Africa should also qualify for exemption. However, not all jurisdictions have a legal structure that requires educational institutions to be registered, with the result that these institutions are not regarded as "educational authorities" for purposes of the VAT Act and the educational services supplied to South Africans are thus subject to VAT. This is clearly a discrepancy that must be addressed by lawmakers, but in the interim, some foreign educational institutions may very well have a VAT registration obligation in South Africa.
Telecommunication services are specifically excluded from the definition of electronic services. Telecommunication services are interpreted to mean any services that relate to the transmission, emission or reception, and the transfer and assignment of the right to use capacity for the transmission, emission or reception of signals, writing, images, sounds or information of any kind by a telecommunications system. They include access to global information networks, but do not include the content of the telecommunications. Therefore, the provision of, for example, internet access, video calling, and fixed or mobile telephone services constitute telecommunication services. Note, however, that any digital content, such as voice, sound, data, text, video, animation, etc., transmitted by way of the telecommunication service does not fall under telecommunication services. Rather, it is likely that if the digital content is supplied for a consideration, the supply thereof would constitute a supply of electronic services as defined.
Supplies between group companies
The South African VAT Act does not contain grouping rules and companies within the same group of companies transacting with one another must therefore charge and account for VAT on every transaction. With respect to the supply of electronic services, the legislature has provided some relief to group companies in that the supply of electronic services by a foreign company to a South African resident company within the same group of companies is excluded from the definition of electronic services, but only to the extent that the resident company uses those services exclusively for its own consumption. Accordingly, where a group's head office in a foreign country supplies software to its subsidiary in South Africa exclusively for that subsidiary's own consumption, the supply would fall outside the ambit of the South African VAT system. However, where the subsidiary on-supplies those services the foreign supplier would be regarded as supplying electronic services in South Africa.
VAT registration obligations
Carrying on an enterprise
The obligation to register for VAT in South Africa, regardless of whether you are a foreign supplier of electronic services or not, arises where a person carries on an enterprise in, or partly in, South Africa and total taxable supplies exceed the VAT registration threshold of ZAR 1 million in any consecutive 12-month period. For the purposes of the supply of electronic services, a person who supplies electronic services from a place in a foreign jurisdiction will be regarded as carrying on an enterprise in South Africa where, what is commonly referred to as the two-out-of-three test, is met; i.e., where any two of the following three circumstances are present:
- The recipient of the services is a resident of South Africa.
- Any payment made in respect of the electronic services originates from a South African registered bank.
- The recipient of the electronic services has a business, residential or postal address in South Africa.
Any legal person that has its place of incorporation in South Africa is considered a South African resident. It is generally more complicated for foreign suppliers to determine the residency of an individual recipient. In this instance, foreign suppliers generally tend to fall back on the recipient's provided physical (i.e., residential), postal or business address, or even the IP address, although this is not a legal consideration.
Means of payment
It is generally easy to determine the origin of a payment if the recipient of the electronic services pays for those services by credit card. This is often the most common payment method used by electronic services recipients. When different payment methods are available, such as vouchers, it becomes somewhat more intricate. A gift voucher that is not restricted to a specific territory, for example, could have been paid for by a person in a foreign jurisdiction and gifted to a South African resident who then uses that voucher as a means of payment for the electronic services. In this case, the means of payment for the electronically supplied service will not reveal the location of the end-user. To mitigate the risk of noncompliance, the foreign electronic services supplier must make sure that it obtains all relevant details to determine whether the two-out-of-three test is met.
In the past, it was uncommon for foreign suppliers of electronic services to obtain the physical (i.e., residential), postal or business address of the recipient of its services. While it is important in determining whether the two-out-of-three test is met, there was no other (legal) reason for suppliers to obtain this information. However, following a change in legislation in December 2021, foreign suppliers are now required to include the recipient's address on their tax invoices and must now legally obtain this information.
Timing of registration
Once the foreign supplier determines that it carries on an enterprise in South Africa and has exceeded the VAT registration threshold, it must register for VAT with the South Africa Revenue Services ("SARS") within 21 days.
VAT registration process
The registration process for foreign suppliers of electronic services is unfortunately still a manual process whereby the application form and supporting documents are emailed to the relevant department in SARS. Upon receipt, SARS will assess the application and issue a notice of registration. It is a general rule that a taxpayer who carries on an enterprise in South Africa and is liable to register for VAT must open a South African bank account and appoint a local representative. This requirement, however, does not apply to foreign suppliers of electronic services who must register for VAT in South Africa. The foreign supplier is nevertheless still required to appoint a representative who would be SARS' point of contact for the supplier and who would be responsible for registering and administering the electronic filing (eFiling) platform through which VAT returns must be filed. This is a separate registration process, which can become complicated if the person registering does not have a South African tax number, but can easily be resolved through the correct channels.
Consequences of noncompliance
Noncompliance with the requirements of the VAT Act, including failure to register and pay VAT, is a criminal offense which is, on conviction, subject to a fine or imprisonment of up to two years. It is not common for SARS to pursue foreign suppliers of electronic services to enforce compliance, but this is expected to change in line with developments in the global tax environment where governments are leaning toward working more closely together to ensure global tax compliance through multilateral agreements. For now, SARS relies on suppliers to comply voluntarily. However, any previous noncompliance comes with a price.
Under the provisions of the Tax Administration Act, 2011, SARS will impose a 10% administrative penalty on the late payment of any VAT due, as well as interest at the prevailing rate. SARS may also seek to impose understatement penalties of up to 200% on the VAT due.
Foreign entities are also cautioned to consider any regulatory issues they may face from a corporate governance perspective with respect to noncompliance.
Voluntary disclosure relief
A permanent voluntary disclosure program is available to taxpayers who wish to get their tax affairs in order. The program provides relief from criminal prosecution, administrative and understatement penalties. Any foreign supplier of electronic services who has a historic VAT liability may apply to SARS for the voluntary disclosure relief through the relevant channels once it is registered for VAT. It is important to ensure the application complies with the relevant requirements in that it must (a) be voluntary, (b) be full and complete in all material respects, (c) not result in a refund due by SARS and (d) be made in the prescribed format.
Determining an entity's VAT obligation in South Africa may seem fairly straightforward, but there are many variables to consider, as set out in this article. There is often a divide between the tax law and the practicalities of business, causing great uncertainty with respect to an entity's tax compliance obligations. Failure to address this could be regarded as negligence or even tax avoidance and result in severe penalties and potential regulatory issues. It is therefore important to consider every aspect of the law and how it applies to your business.