Foreign e-service sellers could be liable for tax

The concept” of “electronic or digital commerce has often been referred to over the past years.

It typically involves a supplier who provides its products electronically via the internet, such as software packages, applications, streaming services and so on.

Several countries (including SA) have implemented measures by which the relevant tax authority may tax the suppliers of these services — in the main through Value Added Tax (VAT) or Goods and Services Tax (GST). The supplier usually has no operations, physical presence or activities in the recipient’s country. Notwithstanding this fact, the foreign supplier might be required to register for VAT and/or income tax purposes. This article briefly discusses the relevant tax considerations of a foreign supplier of electronic services (e-services) from a South African perspective.

VAT CONSIDERATIONS

Since 2014 SA has implemented a specific VAT regime for nonresident suppliers of electronic services. Electronic services mean “any services supplied by means of an electronic agent, electronic communication or the internet for any consideration”.

A nonresident providing electronic services is deemed to carry on an enterprise in SA if at least two of the following three requirements are met:

● The recipient of the services is a South African resident;

● Any payment for those services originates from a South African bank; and

● The recipient of the services has a business address, residential address, or postal address in SA.

If an enterprise is carried on, then the nonresident will only need to register for VAT in SA if the value of its supplies exceeds R1m in a continuous 12-month period.

Practically, if a nonresident is required to register for VAT as an electronic service provider, Sars will require the nonresident to register as an “external profit company,” in other words a branch. Once registered, the nonresident is obligated to charge VAT at the standard rate on the supply of electronic services to South African recipients.

The registration of a branch for VAT purposes poses the question of whether this branch could result in any income tax implications from a South African perspective for the nonresident. Furthermore, would the supply of electronic services be subject to income tax in SA?

INCOME TAX CONSIDERATIONS

From an income tax perspective, a branch of a nonresident will generally be subject to South African normal tax if the income is attributable to a “permanent establishment” in SA. A “permanent establishment” is a complex term, also usually regulated by the relevant double tax treaty (if applicable), but generally means a fixed place of business through which the business of an enterprise is carried on. This is a factual question that considers where the activities of the enterprise are conducted and the physical presence in SA.

Although VAT registration may be a factor, it does not automatically mean that a permanent establishment is present. A double tax treaty is an agreement between SA and the relevant foreign country of which the supplier will be a resident. The agreement typically determines each jurisdiction’s taxing rights with respect to amounts received by or accrued to residents of those countries from sources in either of the states.

If a permanent establishment is present, SA (as the “source” country) will be entitled to levy tax on income attributable to the permanent establishment (taking into account any expenditure attributable to the permanent establishment). Determining whether (i) a permanent establishment is present and (ii) what income (and expenses) are attributable to that permanent establishment requires a complex factual analysis. This is, however, a crucial analysis as it determines taxing rights.

When applying these principles to electronic or digital commerce, it is unlikely, notwithstanding the VAT registration, that a foreign supplier of purely electronic or digital commerce will have sufficient physical presence in SA to establish a permanent establishment. However, it remains a question of fact as a foreign supplier with South African offices, employees, and support staff may very well tip the scales in favour of a permanent establishment.

To conclude, registering for VAT does not automatically mean an entity is also subject to income tax. And conversely, not being subject to income tax does not mean that no VAT obligations arise.

Where a foreign supplier is conducting any business, whether electronic or digital commerce or otherwise, in SA, the tax implications are complex and, therefore, obtaining tax advice is essential in ensuring one does not fall foul of any South African tax legislation. From the South African recipient of foreign services perspective, informing the foreign supplier of potential tax implications is advisable.

REGISTERING FOR VAT DOES NOT AUTOMATICALLY MEAN AN ENTITY IS ALSO SUBJECT TO INCOME TAX