The much-anticipated amendments to the regulations for purposes of the definition of "electronic services" in section 1 of the VAT Act, No. 89 of 1991 ("VAT Act") have been released for public comment.
The proposed amendments in respect of B2B supplies
As we have explained in our prior publications on this topic, under current law, any non-resident person who supplies services to a resident person "by means of the internet" or other electronic communication will be required to register for VAT and levy VAT (at the standard rate, presently 15%) on such supplies, when the value of services exceeds ZAR1million in a 12 month period. This obligation arises regardless of the identity of the recipient of the service, and (especially in context of business-to-business ("B2B") transactions) regardless of whether the recipient is entitled to deduct the VAT so levied 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.
The proposed amendments have left the "core definition" of "electronic services" untouched, i.e. an electronic service is, in principle, still any service supplied by means of an electronic agent, electronic communication or the internet for any consideration (importantly, note comments below regarding the interpretation of the "core definition" and "minimal human intervention").
The exclusions to the above definition are, however, proposed to be expanded, in most relevant part, to remove from the scope of the electronic services regime "services supplied from a place in an export country by a person that is not a resident of the Republic where such services are supplied solely to vendors registered in the Republic in terms of section 23 of the [VAT] Act" (emphasis added). We will refer to the above as the "New Exclusion".
What this means for non-resident suppliers
The draft explanatory memorandum published together with the draft regulations states that the New Exclusion "is a form of [B2B] exclusion". This is correct insofar as the New Exclusion applies only to business-to-vendor supplies. The onus will therefore sit with non-resident suppliers to confirm the VAT registration status of each of their South African recipients in order conclude that the New Exclusion will apply.
The draft explanatory memorandum records that the policy rationale behind the New Exclusion "is to ease the administrative burden on...suppliers and recipients where there is little or no gain to the fiscus", and "to encourage compliance where legal jurisdiction to enforce compliance may be a challenge". Despite this insight, it is unfortunate that the effective date of the New Exclusion (and the new regulations as a whole) is proposed to be 1 April 2025.
There is accordingly no relief on the cards, it seems, for non-residents who are caught by the soon-to-be replaced current regulations. It is unfortunate that the effective date of the New Exclusion has not been fast-tracked to put an end to uncertainty and the many enforcement efforts by the South African Revenue Service where there is "little or no gain to the fiscus", and likely jurisdiction issues.
What if services are not supplied "solely" to registered vendors?
The New Exclusion in its current form reads as an "all or nothing": if a non-resident supplier of electronic services supplies some services to South African non-vendors, there is a risk that the provision in its current form will mean that all services supplied to South African residents would be subject to VAT. Such a result, it is submitted, would perpetuate the very same inefficiencies that the New Exclusion is directed to correct. The New Exclusion should therefore be refined to cater for this nuance to avoid unbusinesslike outcomes.
The "solely" requirement in the New Exclusion also does not indicate whether regard will be had to the value of the supplies made by a non-resident to South African non-vendors. If this requirement were to remain (in some form) in the New Exclusion, it should be reworded to inter alia capture services of non-resident suppliers only to the extent that the services are supplied to non-vendors and provided that the value of such supplies exceeds the VAT registration threshold of ZAR 1 million in a 12-month period.
What this means for resident recipients
The obligation on resident recipients of foreign services to declare output tax on imported services to the extent that the services are used for purposes other than taxable supplies remains unchanged.
The reverse charge mechanism in section 7(1)(c) of the VAT Act therefore continues to apply. It has, however, been proposed in the draft Tax Administration Laws Amendment Bill, 2024, that section 14 of the VAT Act be amended to increase the days within which reverse VAT should be declared from 30 to 60.
The proposed amendments in respect of intra-group supplies
The electronic services regulations were amended in 2019 to exclude services supplied between companies in the same group. We will refer to the above as the "Intra-group Exclusion".
The Intra-group Exclusion in its current form essentially states that excluded from the scope of the electronic services regime are services supplied by a non-resident group company to a South African group company if the first company "itself supplies those services exclusively for the purposes of consumption...by the company that is a resident of the Republic".
The new draft regulations propose that the Intra-group Exclusion be amended to refer to only services supplied by a non-resident group company in instances where those services were "exclusively discovered, devised, developed, created or produced for the purposes of consumption...by the company that is a resident of the Republic".
According to the draft explanatory memorandum, the proposed amendment is directed specifically at intra-group supplies involving global contracts. Careful attention should be paid to this proposed amendment by global enterprises with any corporate presence in South Africa. We are aware that it is common practice (often in line with transfer pricing requirements) that global contracts are recharged to South African subsidiaries. Such recharges may result in the South African VAT registration of, for example, a foreign head office. For this reason, we strongly recommend that comments by industry-participants are collated and submitted.
In our view, the interaction between the New Exclusion and the Intra-group Exclusion should be made clearer by National Treasury.
The "core definition" and "minimal human intervention"
One of the stated intentions of the "electronic services" definition (referred to in the explanatory memorandum published along with the current version of the regulations) was that only services involving "minimal human intervention" would be captured.
The new draft explanatory memorandum attempts to retract the above guidance and states that the interpretation of the services that fall within the regime should be interpreted "as wide[ly] as possible with no regard to the words 'minimal human intervention'". It is not necessarily clear how the intention of the "core definition" could be amended after its promulgation without amendment to the core definition itself.
What is next?
There are a number of further amendments proposed in the new draft regulations, especially relating to "intermediary services", that we will comment on in a separate publication.
The due date for comment on the new draft regulations is 31 August 2024.
Our team will submit formal comments and will assist clients who intend to submit comments on their own letterhead.
*Reviewed by Charles de Wet, executive in ENS’ Tax department
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.
