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Value-added Tax on electronic services supplied by persons outside South Africa

Wednesday, 09 April 2014   (0 Comments)
Posted by: Authors: Heinrich Louw and Danielle Botha
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Authors: Heinrich Louw and Danielle Botha (DLA Cliffe Dekker Hofmeyr)


Section 7(1)(a) of the Value-added Tax Act, No 89 of 1991 (VAT Act) makes provision for the levying of Value-added Tax (VAT) in respect of the supply by any vendor of goods and services in the course or furtherance of any enterprise carried on by that vendor.

The VAT Act defines an 'enterprise' with reference to a "person in the Republic or partly in the Republic” supplying goods or services.

Accordingly, a person or business that is not in South Africa would not ordinarily be seen as carrying on an enterprise and supplying goods or services in the course or furtherance of that enterprise.

Such a person or business outside of South Africa would therefore not become liable to register as a vendor and account for VAT under s7(1)(a) of the VAT Act in respect of supplying any goods or services.

Nevertheless, s7(1)(c) of the VAT Act provides for VAT to be levied in respect of the supply of any 'imported services'. 'Imported services' is defined in the VAT Act as services supplied by a person who is not resident in South Africa or who carries on business outside of South Africa, to a person who is resident in South Africa and uses or consumes such services in South Africa.

In terms of s14 of the Act, the person receiving the services is obliged to account for the VAT, and not the person or business supplying the services.

New dispensation in respect of electronic services

The Taxation Laws Amendment Act, No 31 of 2013 has introduced amendments to the VAT Act that alters the above position in respect of the supply of electronic services.

Specifically, the definition of an 'enterprise' has been amended to include the supply of electronic services by a person or business outside of South Africa to a recipient in South Africa (or where payment for the services comes from a South African bank).

In other words, persons or businesses outside of South Africa supplying electronic services to South Africans, will be seen as conducting an enterprise.

As a consequence, such foreign person or business could become liable to register as a vendor in terms of s23 of the VAT Act and to account for VAT in terms of s7(1)(a) of the VAT Act on the supply of electronic services to South Africans.

Specifically, in terms of s23(1A) of the VAT Act, the person or business will become liable to register as
a vendor "at the end of any month where the value of taxable supplies by that person has exceeded R50 000”.

To the extent that VAT is levied on the supply of electronic services in terms of s7(1)(a), the transaction would be excluded from also attracting VAT under s7(1)(c).

However, s7(1)(c) of the VAT Act otherwise still remains in place in respect of the importation of services.

S14(5)(e) provides that VAT does not have to be accounted for under s7(1)(c) of the Act (ie on the importation of services) where the value of the supply is less than R100 per invoice (the so-called de minimus rule).

Unfortunately, to the extent that VAT must now be levied under s7(1)(a) in respect of electronic services, the de minimus rule will not apply. This effectively means that smaller transactions, such as the purchase of a music track from a foreign on-line store, would not be excluded from the VAT net.

These amendments are effective as of 1 April 2014.

Definition of 'electronic services'

The VAT Act defines 'electronic service' as "those electronic services prescribed by the Minister by regulation...”

On 28 March 2014 National Treasury published (Government Gazette No 37489, Notice R 221) regulations listing various 'electronic services'.

These services are divided into categories, including education, games and games of chance, Internet-based auction services, miscellaneous services including e-books, audio-visual content, still images and music and subscription services. It includes the provisions of these services "by means of an electronic agent, electronic communication, or the Internet”.

It is quite clear that 'electronic services' encapsulates services provided by many industry giants such as E-bay, Apple, Netflix, Amazon and Google.

It should be noted that the list of electronic services in the regulations is limited and many potential electronic services have not been included. Most notably excluded are the supply of software applications and many cloud-based services such as on-line storage or virtual servers. For example, the supply of applications through Apple’s App Store or Google Play (excluding games), and the provision of storage through Google Drive, Dropbox or Amazon S3, would seemingly not constitute the supply of "electronic services”.

The reason for limiting the scope of what constitutes an electronic service is as follows.

VAT levied under s7(1)(c) of the VAT Act in respect of 'imported services' is limited in that it does not extend to the importation of services by local vendors (as opposed to end-consumers) for purposes of making taxable supplies.

The reason for this limitation is presumably to reduce the administrative burden on local businesses to have to account for VAT on the importation of services in circumstances where they would in any event be entitled to an input VAT deduction. The broad policy has therefore been that business-to-consumer (or B2C) supplies should be subject to import VAT while business-to-business (or B2B) supplies should be excluded.

However, where the supply of an electronic service will now be taxed under s7(1)(a) of the VAT Act, no such exclusion exists and local business would have to pay VAT to the foreign supplier and then claim an input VAT credit.

In response to this, National Treasury stated in a press release published simultaneously with the regulations that it purposefully reduced the scope of the definition of electronic services by attempting to exclude such services that would mainly or generally be supplied in a business-to-business context, as opposed to a business-to-consumer context.

However, services that are excluded from the ambit of electronic services would still be subject to import VAT under s7(1)(c) of the VAT Act to the extent that they are not used by a vendor for the purposes of making taxable supplies, and consumers have to account for such VAT.


An obvious concern regarding the imposition of obligations on foreign persons or businesses is the issue of compliance and enforcement.

The new provisions effectively shift the compliance burden in respect of electronic services from the local recipient to the foreign supplier.

One of the reasons given for this change is the low level of compliance by local recipients in respect of the importation of services. The question that arises is whether the foreign persons or businesses (over which the South African authorities have no jurisdiction), would more readily comply than the local recipients (over which the South African authorities do have jurisdiction).

The administrative compliance burden on foreign suppliers of electronic services in respect of VAT could be quite onerous.

The person or business would need to register as a vendor in South Africa, and meet various registration requirements. Special requirements have not yet been announced, but could include, for example having a local bank account. A local representative may also need to be appointed.
Other than registration requirements, the person or business would have to have systems in place identifying transactions with South Africans that attract VAT, accounting for VAT, submitting returns, and making payment to the South African Revenue Service (SARS).

A foreign service provider may very well decide to not supply services to South Africans in order to avoid
any complications or incurring compliance costs.

Be that as it may, because of the nature of providing electronic services in an on-line environment, a foreign service provider might not even know that it is providing services to a person in South Africa. Even if the service provider does know, there is a good chance that it might not be aware of South African VAT laws at all.

For whatever reason, should a foreign service provider not comply with the VAT Act, it is not clear how SARS intends to enforce compliance with the extra-jurisdictional application of South African law.

In the United States we have seen the introduction of the Foreign Account Tax Compliance Act through which that government attempts to enforce compliance by foreign financial institutions with United States law by withholding payments emanating from the United States. The VAT Act has no similar 'penalty' system and it is not certain whether the introduction of such a system would be effective at all.

Earlier this year judgment was handed down in the North Gauteng High Court in the case of Commissioner of South African Revenue Service v Krok and another (case no 1319/13 - as yet unreported). That case dealt with an international treaty between South Africa and Australia which, inter alia, provided for mutual assistance between the two countries in respect of enforcing tax debts. The Australian tax authorities had assessed the taxpayer (who had assets in South Africa) for tax
and requested SARS to assist it with enforcement in terms of the treaty. SARS applied for a preservation order against the taxpayer in the High Court and the court granted the order.

In light of this case, SARS may very well intend to rely on current or future international treaties to enforce the VAT Act in other jurisdictions.


It is not clear whether the amendments regarding the supply of electronic services is merely an experiment on the part of National Treasury and SARS to see how far they can push the application of South African tax law and relentlessly assess, and enforce against, even the smallest foreign service provider, or whether it is a calculated move to widen the VAT net just a little by getting at least a few of the big industry players to comply.

It will be interesting to see how many foreign service providers register as vendors over the coming months and what SARS will do if they don’t.

This article first appeared on



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