South Africa's electronic services, overseas suppliers, and VAT
Contrary to popular belief, overseas providers of electronic services in South Africa are nevertheless required to register for VAT, even if they work via a local middleman, according to Baker McKenzie's Jana Krause and Jarryd Hartley.
There is a widespread misperception in South Africa's VAT system that international providers of electronic services (ES) do not need to register for VAT if the supply are made through an intermediary who is registered for VAT in South Africa and keeps track of the VAT. However, neither the law nor the South African Revenue Service support this (SARS). A foreign provider of ES can be in violation of the Value Added Tax Act, 1991 (VAT Act), which is a punishable offense under the Tax Administration Act, 2011, as a result of such a misunderstanding (TAA).
The "imported services" provisions of the VAT Act, which essentially impose a reverse VAT charge on the domestic receiver who buys such services for reasons other than making taxable supplies, charged inbound supply of services, including those delivered electronically, prior to 2014. While this method functions rather effectively in a business-to-business setting, it is less probable in a business-to-consumer one, especially where e-commerce transactions are involved, that the consumer would be held responsible for the VAT owed.
South Africa is considering implementing VAT on e-commerce transactions as a result of the Organization for Economic Cooperation and Development's action plan to address tax revenue losses caused by base erosion and profit shifting. The VAT Act was changed to apply VAT on ES in June 2014. Thus, the responsibility for accounting for VAT was essentially transferred from the domestic recipient to the foreign ES provider, who was now required to register for VAT in South Africa. This registration was necessary for foreign ES suppliers whose total ES supplies to South African residents, people with local business, residential, or postal addresses, or people who pay for the service with accounts held in South Africa were greater than the initial R50,000 ($2,800) threshold for VAT registration in any consecutive 12-month period.
Although the 2014 ES definition only covered a small range of services, further changes went into effect in April 2019. Due to this, the range of services that qualified as ES was expanded to encompass any services that were provided for any consideration via an electronic agent, electronic communication, or the internet (with a few exclusions). Additionally, the VAT registration barrier was raised to R1 million (from R50,000).
A foreign ES supplier must register for VAT in South Africa within 21 days of the total value of ES supplied to individuals in South Africa exceeding the VAT registration threshold of R1 million in a consecutive 12-month period. At this time, a foreign ES supplier is regarded as carrying on an enterprise for VAT purposes.
On behalf of ES suppliers, intermediaries enable the provision of ES and are in charge of creating invoices and obtaining payment for such deliveries. A deeming provision that permitted intermediaries to account for the VAT when they are working on behalf of overseas ES suppliers who are not VAT-registered in South Africa was included in the 2019 VAT changes. However, even if the foreign ES supplier only makes supplies to people in South Africa through an intermediary and the intermediary is already remitting the VAT, neither this deeming provision nor any other provision in the VAT Act excuses the foreign ES supplier from registering for VAT where it meets the VAT registration threshold.
To the extent that a foreign ES supplier is not yet VAT-registered in South Africa, the legislation currently states that a VAT-registered intermediary may only account for the VAT on deliveries enabled by it on behalf of a foreign ES provider. The overseas ES provider is required to register with SARS as soon as the total value of supplies made to customers in South Africa reaches the VAT registration level. After the foreign ES supplier registers for VAT, the intermediary is no longer allowed to account for the VAT and is required to, in accordance with the VAT Act's standard agent/principal rules, give the foreign ES supplier the necessary statement (within 21 days of the end of the month in which supplies were made) so that it can account for the VAT in its own VAT returns.
In response to question 26 of its Frequently Asked Questions - Suppliers of Electronic Services (FAQ document), SARS reaffirmed this position, stating that a foreign ES supplier who exceeds the registration threshold but does not register as a vendor "may be guilty of an offence and remains liable to register and account for VAT on electronic services in the supplier's VAT return" However, there still seems to be a widespread misperception that the VAT Act exempts overseas ES sellers from registering if they solely supply ES through intermediaries.
One factor contributing to the misunderstanding may be the publication by SARS of a draft Binding General Ruling (BGR) in or around 2015, which was intended to rule that a foreign ES supplier would not be required to register for VAT in South Africa if they only supplied ES through an intermediary's platform, the intermediary was VAT registered in South Africa, and the foreign ES supplier and intermediary entered into a written agreement confirming that the intermediary would account for VAT on the supplies. However, because SARS never made this decision, it has no real-world implications. The Act should include such an exception, for a number of reasons, including the fact that as it is, it places a significant administrative burden on not only the foreign ES supplier but also the intermediary and SARS.
This gap in the law has been concealed up to this point due to misinterpretation of, or outright disrespect for, the law, which causes numerous issues for all parties. The first issue is that a foreign ES supplier's refusal to register results in an unintentional violation of the VAT Act, which may result in fines or jail time of up to two years under the TAA's requirements.
Another issue is that in order for the foreign ES supplier to file its own VAT returns and pay the required VAT, the intermediary must give the foreign ES supplier an account of all deliveries made through the intermediary within a specific month. As a result, the intermediary would have to independently keep track of the taxable ES supplies made available by each specific foreign ES source. Many intermediaries either do not keep the information in such detail, do not have the systems necessary to keep such detailed records, or may simply find it burdensome to provide the information because doing so would be extremely expensive and time-consuming for the intermediary, who is likely providing ES on behalf of numerous foreign ES suppliers simultaneously.
The overseas ES provider would be unable to file its returns and pay the VAT without the necessary information. Even if it can figure out how much VAT is owing to SARS, it would be doubly taxed to pay the VAT when the intermediary is already included it in its VAT report. Similarly, this would also result in a significant administrative load for SARS, which would have to look into this intricate network of connections to determine who is responsible for paying how much VAT. The information might not exist or be accessible in many circumstances. In terms of enforcement, this is an unacceptable situation.
According to the Electronic Services Explanatory Memorandum, which explains the regulations prescribing ES for the purposes of the definition of "electronic services" in section 1(1) of the Value-Added Tax Act, 1991, the main reasons for these amendments to the VAT Act were the difficulties presented by the cross-border supply of ES, as these are provided through the internet and are "largely invisible to tax authorities" Additionally, because it was impossible to check for compliance and collection, South Africa's dependence on receivers disclosing VAT on imported services was problematic.
This unfavorable legal stance may be the result of the legislature's imprecise understanding of the repercussions in practice when ES is delivered through intermediaries. Given SARS' publicized but unreleased draft BGR that was ostensibly abandoned, this seems unusual. The requirement that foreign ES suppliers who only supply ES through intermediaries still register for VAT may have a legitimate justification, but it is likely a back-up measure taken by the legislature to give SARS access to the intermediary in the event that the foreign ES supplier is not VAT registered.
In any case, the strategy is flawed, and the law needs to be amended to prevent double taxation and/or tax evasion, explain these ambiguities, and remove any potential harm to the National Treasury. The simple fact that a foreign corporation is required to register for VAT in South Africa but fails to do so might result in more serious repercussions than simply the TAA fines.
In the meanwhile, overseas providers of ES should make sure they are not misusing this widespread misunderstanding about VAT registration in South Africa and unnecessarily exposing themselves.
By fLEXI tEAM