The supply of most goods or services in South Africa is subject to value-added tax ("VAT") at 15%. Where cross-border services are involved, challenges can arise to establish whether the non-resident supplier is required to register for and charge VAT to the South African resident recipient, or whether the recipient purchaser is required to self-assess (reverse charge) VAT at 15% on imported services. This distinction is particularly relevant in the context of electronic services.
South Africa introduced electronic services legislation in June 2014 and significantly expanded the scope thereof with effect from 1 April 2019. In the context of electronic services, a non-resident supplier (who does not have any physical presence in South Africa) is regarded as carrying on a VAT "enterprise" in South Africa if it supplies "electronic services" as prescribed by the Minister of Finance by regulation, and at least two of the following circumstances are present (the "2/3 rule"):
- the recipient of the service is a South African resident;
- the payment for such services originates from a South African bank account; or
- the recipient has a business address, residential address or postal address in South Africa.
Subject to certain limited exclusions, the term "electronic services" is broadly defined in VAT Regulation No. 429 (published in Government Gazette No. 42316) to mean any services supplied by means of an electronic agent, electronic communication or the internet for any consideration. Section 23(1A) of the VAT Act requires that the non-resident supplier must register for VAT at the end of the month where the total value of its taxable supplies of electronic services has exceeded ZAR1-million in a consecutive 12-month period.
Although not always easy to categorise, electronic services typically include services provided via digital marketplaces or other online platforms (eg, virtual transaction management or lead generation services), software licences, software-as-a-service arrangements, information technology services and online subscription services, among other things. The contractual arrangements between the parties and the requirement to pay a consideration for the service are key factors to consider before concluding that a service is an "electronic service" for VAT purposes.
In contrast, any services (including electronic services) acquired by a South African resident recipient from a non-resident supplier are regarded to be "imported services" for VAT purposes to the extent that the services are used or consumed in South Africa for purposes other than for making taxable supplies. Generally, where the non-resident supplier is not registered for VAT, the recipient purchaser must account for and pay VAT at 15% to the South African Revenue Service ("SARS") on the value of the imported services acquired for non-taxable use. A self-assessment in terms of section 7(1)(c) is a final cost and no input tax or other deduction or adjustment is available to the recipient in respect thereof.
However, in terms of section 14(5)(a) of the VAT Act, the recipient is not required to pay VAT on imported services if the service is subject to VAT in terms of section 7(1)(a) of the VAT Act, thus if the service is supplied by the non-resident supplier as a "vendor" (being a person who is or is required to be registered for VAT) in the course or furtherance of an "enterprise" (including an electronic enterprise) in South Africa. In this case, the non-resident supplier would be liable to declare and pay the VAT to SARS.
In essence, the recipient is left in the same net VAT position, as it would be able to claim an input tax deduction in respect of the taxable use portion of any actual VAT incurred while the non-taxable portion will remain a VAT cost, but the VAT reporting obligations are different. It is therefore critical to establish whether or not the non-resident supplier is required to register for VAT (for example, as an electronic services provider), as well as what the effective date of its VAT registration is.
Complex VAT analysis
According to SARS' VAT Connect Issue 15 (published in December 2022), the recipient purchaser "may have to ask the supplier a few questions to establish if that person is liable to register for VAT or not". However, in practice, many challenges arise for the recipient purchaser to determine whether the non-resident supplier has a VAT registration obligation in South Africa.
Except for the contractual arrangements that would be known between the parties, the recipient may not be familiar with the supplier's (offshore) business operations and, furthermore, may not have the necessary technical resources to embark on a detailed VAT analysis in this regard. Even if the recipient is able to establish what the supplier's VAT position is, or to outsource such a determination at an additional cost, there is no legislative requirement for the recipient to ensure compliance by the supplier with its South African VAT obligations, nor is there any requirement upon the recipient to enforce such compliance. This could leave the South African recipient vulnerable from a VAT perspective.
Ultimate liability for the VAT
A further important consideration is to determine which party is ultimately responsible for the VAT (and potentially late payment penalties and interest) in the event that the non-resident supplier belatedly registers for VAT on a retrospective basis. Section 67(1) of the VAT Act allows the non-resident supplier to recover the VAT from the South African recipient, unless a written agreement between the parties provides otherwise. This could result in double-taxation for the South African recipient on any non-taxable use portion of the imported services where it has previously self-assessed VAT at 15% in this regard.
Given the absence of VAT legislation providing for an input tax or other adjustment to be made by the recipient purchaser, it is not enough for it to simply raise awareness of the South African electronic services legislation. A recipient purchaser of offshore electronic type services should carefully consider the relevant VAT and pricing clauses of its contractual arrangements with the non-resident supplier and ensure that it is satisfied which party is to bear the VAT cost.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.