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.
Despite this, the tax authorities said that the administration will adhere to the law and not the EM. This meant that organisations that provided advise through email for a charge were suddenly included in the definition of taxable electronic services.
“This makes it absolutely bizarre because, as you can imagine, all the international firms communicate with one another on a regular basis by electronic means, especially in this day and age, and there’s often a fee attached to those [communications],” says Meyburgh.
He believes there are still a significant number of unregistered providers who, in theory, are subject to this legislation.
The National Treasury must provide clear guidance on the matter or amend the regulations to reflect its policy objectives, which do not encompass such a broad variety of operations.
This policy aim, according to Smuts, is explicitly expressed in the March 2019 EM, which is meant to aid international electronic services providers and the general public in gaining clarification regarding electronic services regulations.
“At the end of the day, SARS applies the law as it stands and one can understand that that is their mandate,” says Smuts.
When it becomes evident that a given action falls under the purview of electronic services, many organisations face the issue of retroactive compliance. This might necessitate applying the regulations back to the date of responsibility.
These include some educational and telecommunication services, as well as intra-group transactions and activities facilitated by a South African intermediary firm.
This further compounds the situation by imposing fines and interest for non-registration or non-payment of VAT.
If a business fails to register for VAT, the tax administration may impose harsh fines. It is usual for organisations to have liability covering a period of eight to ten years preceding the most recent modification in 2019.
Even if the voluntary disclosure programme (VDP) is utilised and tax authority relief is granted, this would only cover the five-year prescription period and would not apply to periods in which tax returns were not filed.
“Clearly, if you’ve not previously registered for VAT then you could not have submitted tax returns and this is the reason prescription does not apply,” says Meyburgh.
In the worst-case scenario, penalties would range from 10 percent to 200 percent of income, with interest added on top.
The VDP gives relief and the remission of all fines. The applicant would be responsible for the amount of outstanding VAT back payments and any applicable interest.
Mbusi Mthwane, a senior manager and tax specialist at SNG Grant Thornton in Johannesburg, believes that the VDP is a suitable answer.
“If the tax authority finds this out by themselves, the consequences are dire as the penalties are charged up to 200% of revenue,” says Mthwane.
According to him, the tax authorities has a policy that encourages enterprises with tax concerns to pay in advance and litigate their claims afterwards.
“The Tax Administration Act 2011 places the burden of proof on the taxpayer, and we therefore recommend prior communication with SARS in the form of a binding ruling as to discharge the burden of proof,” says Mthwane.
Additionally, businesses might attempt to finance payments by recovering these sums as input tax from consumers or by using their own revenues.
“The minute you deal with customers like banks, certain insurance companies or state-owned enterprises that are not fully vatable, you cannot recover the full VAT and you are still liable for tax,” says Meyburgh.
International consulting businesses who provide advise to South African customers through email or even Zoom may be subject to a penalty. The taxing authorities may contend that these actions qualify as electronic services.
However, there are actions businesses may take to determine whether or not they are subject to VAT in South Africa.
Companies might seek to get a ruling from SARS, and if unsuccessful, they could bring the case before the High Court. Another option would be to petition the court for a clarification order to establish the statute's right interpretation.
Businesses who have collectively failed to pay VAT should register with SARS and begin paying taxes from the right date. Then, they would petition for VDP to have their fines remitted.
To avoid missing the deadline, the firm in issue must submit the application within one month of registering for VAT. Such businesses will also require the assistance of tax experts in determining their VAT due.
“The tax practitioner will ensure that, before the transaction is entered into, it is clear if the business needs to register or not,” he says.
This is a rising issue for global corporations who provide services to South African clients. Given the frequency, duration, and quantity of transaction fees, this has become a danger for businesses as well.
To avoid significant fines, multinational corporations would do well to evaluate the VAT regulations in South Africa and seek assistance from local specialists. The challenges of interpretation will persist for the foreseeable future.
By fLEXI tEAM