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South Africa fines MNEs for electronic services VAT

When delivering electronic services in South Africa, multinational corporations face the danger of incurring substantial fines if they fail to register for value-added tax.

When providing electronic services in South Africa, MNEs face significant fines for failing to register for VAT, yet the South African Revenue Service has a wide definition of electronic services.

Severus Smuts, director and indirect tax head at Deloitte Africa in Johannesburg, advises multinationals to assess their VAT arrangements carefully to ensure they are not subject to VAT in South Africa.

“It could be quite a costly affair if SARS goes back five years or more [in assessing VAT liability], it would be substantial liability when considering the additional penalties and interest,” says Smuts.

This warning comes at a time when overseas firms operating in South Africa are unclear about their VAT registration status due to a SARS interpretation shift.

Andre Meyburgh, director of indirect tax at KPMG in Johannesburg, states that he frequently observes international corporations violating the nation's VAT requirements.

“One of the things that we still see people get wrong continuously, maybe they’re not aware of it or they’re turning a blind eye, is the issue of VAT registration obligations for non-residents making supplies of electronic services in South Africa,” says Meyburgh.

The challenge for businesses, according to him, is that the legislation's definition of what defines an electronic service is too wide.

“It essentially defines electronic services as any service that is supplied by electronic means,” says Meyburgh.

“When you read that code [legislation] that will include a lawyer, for example in London, writing an opinion and emailing it to a person in South Africa in exchange for a fee”.

There appears to be a discrepancy between what the law specifies, how SARS interprets it, and the National Treasury's explanation memorandum (EM).

According to Smuts, SARS seems to be aware of the discrepancy between the statute and the EM. The revenue service has adopted a broad definition of what constitutes an electronic service.

“This means any services that foreigners provide via electronic means, in other words over the internet, are likely to be viewed by SARS as falling within the VAT net,” says Smuts.

SARS did not reply to demands for comment immediately.

Lost in translation

Since the April 2019 implementation of South Africa's modification to the VAT legislation governing electronic services, it appears that much has been lost in translation.

This has had a chilling effect on non-resident companies who provide electronic services to South African entities.

According to the rules, services delivered electronically are subject to VAT registration requirements. This leaves the definition of what makes an electronic service sufficiently broad to encompass a wide variety of activities.

The EM had indicated that it was not their aim to tax all services delivered via technological methods. However, these tasks would not qualify as electronic services if they required substantial human input.