One of the basic requirements for a transaction to attract VAT in the hands of the supplier of any goods or services in South Africa is that the supplier must supply those goods or services through the course or furtherance of an enterprise carried on in South Africa.
However, in today’s day and age, the digital and virtual economy has a massive variety of goods and services offering where the supplier of those goods and services does not necessarily have to be physically present in South Africa to provide those goods or services to a South African consumer. The use of the Internet has resulted in South African consumers having access to a plethora of goods and services provided by overseas suppliers. One such service is your typical streaming service such as Netflix, Disney+, Amazon Prime etc. where someone in South Africa can subscribe via the internet to have access to the content offered.
South Africa introduced VAT rules pertaining to ‘electronic services’ in 2014 with subsequent amendments being introduced during 2019 which essentially brought certain ‘electronic services’ into South Africa’s VAT “net”. This would typically result in a foreign entity (who has no physical presence in South Africa) being liable for the registration in South Africa as a VAT vendor if they meet the electronic services enterprise definition inserted into the Value-Added Tax Act No. 89 of 1991 (as amended) (“the VAT Act”) as well as the compulsory registration requirements contained in section 23(1A) of the VAT Act. In recent years SARS has increasingly been able to identify such electronic services providers by raising queries with the recipients of these services (who would typically be South African residents (either individuals or companies) and then informing these providers of their VAT obligations in South Africa (based on information obtained from the service provider’s customers).
To determine whether a foreign entity falls within the electronic services regime for VAT purposes requires a systematic analysis which can be summarised as follows:
- Is the supplier supplying ‘electronic services’ as defined? The Minister of Finance has set out in a Regulation (No.316) the definition of ‘electronic services’ as well as certain exclusions thereto.
- Are the services supplied from an export country i.e. a country other than South Africa?
- If yes to both questions (1) and (2) one needs to test whether any of paragraphs (b)(vi) or (vii) of the ‘enterprise’ definition in section 1(1) of the VAT Act applies.
- Lastly, if question (3) is answered in the affirmative one needs to determine whether the compulsory VAT registration requirements found in section 23(1A) pertaining specifically to electronic services suppliers are met.
It should be noted that it isn’t always straightforward as to whether a service qualifies as an ‘electronic service’ or not, nor is it always certain that a foreign entity must register for VAT as an electronic services provider. It is therefore advisable to obtain professional advice to successfully conclude whether someone is liable to register as an electronic services provider for VAT purposes in South Africa.