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Intragroup Transactions and E-services

Saturday, 14 June 2014   (0 Comments)
Posted by: Author: Victor Terblanche
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Author: Victor Terblanche (VATit) 

With effect from 1 June 2014, electronic services supplied from a place in an export country to a resident of South Africa will be regarded as an "enterprise” activity for Value-Added Tax purposes ("VAT”).   The electronic services will also be regarded as an "enterprise” activity in so far as payment for the services originates from a bank registered in terms of the Banks Act, 1990.  As a result, all foreign suppliers of electronic services will be liable to register for VAT in South Africa subject to it falling within the definition of "electronic services” and its turnover exceeding R 50 000 in any consecutive twelve-month period. 

Inclusion of electronic services as an enterprise activity is largely supported by the various stakeholders, businesses and the tax profession as it levels the playing field for our South African suppliers.  Historically, local suppliers of electronic services were at a disadvantage as foreign suppliers did not charge 14% VAT and could offer more competitive prices for their products.  Electronic services are also similarly taxed in various other jurisdictions which results in additional income for their Governments.

A media statement was released by National Treasury on 28 March 2014 in which it indicated that a main concern of stakeholders was that the draft Regulation was too wide as it included certain types of electronic services which were predominantly of a business to business nature.  As a result, National Treasury excluded certain services from the list and issued Regulation 37489 on 28 March 2014 in which electronic services were defined under the following headings:  educational services, games and games of chance, internet-based auction services, miscellaneous services and subscription services.    

Various International businesses utilise intragroup shared services and these service centres are generally located outside South Africa.   The shared service centres often supplies what could be regarded as "electronic services” to their group companies and charge a fee for such services.  Historically, the South African recipient would not be obliged to declare output tax on such services if utilised in the course or furtherance of its enterprise activities.  Where the recipient utilised the service for both enterprise and non-enterprise activities, it would declare output tax to the extent that the services were used for non-enterprise activities in terms of the reverse charge provision contained in section 14 of the Value-Added Tax Act, 1991.  The question is whether or not intragroup shared service providers should now register for VAT as suppliers of electronic services?   

Regulation 37489 currently includes various "electronic services” which could be regarded as being applicable to intragroup transactions i.e. distance teaching programmes, educational webcasts, internet based courses, educational webinars, electronic publications shared on intranet, audio visual and still images, webcasts, webinars,  subscription to websites, web applications and various other electronic services for which a subscription and/or fee is charged.  These services are often not the primary business activities of the Group of Companies and are also not supplied to any other parties outside of the Group.  Based on the current application of the law, the shared services centres may be liable for VAT registration in South Africa if it supplies any of the "electronic services” contained in the Regulation to its connected parties.  

In my opinion, the intention to tax the foreign suppliers was mainly to provide an equitable solution for the commercial supply of electronic services to individuals as the reverse charge mechanism was mostly ineffective in recovering the output tax from individuals.  The reverse charge mechanism remains effective where business to business transactions are entered into and a compulsory VAT registration specifically for intragroup transactions would be an additional compliance and administrative burden for both SARS and the supplier.

Clarity should be provided by National Treasury and the Regulation should potentially be amended to exclude supplies made between connected parties for the purposes of shared services as the current reverse charge mechanism will ensure that the fiscus will not be prejudiced.       

In the interim, VATit would advise all South African entities that are utilising international shared services to assess whether or not its connected parties may be liable for VAT registration and inform them accordingly.  Management fees paid to international connected parties should also be analysed to determine whether it contains a component for the supply of "electronic services”. 

This article first appeared on the May/June edition of Tax Talk.



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