VAT changes for foreign e-service suppliers
Regulation encompasses educational services, games of chance and internetbased auction services
VAT law amendments relating to foreign suppliers of electronic services have been promulgated, with an initial effective date of April 1. At the time of going to press a two-month delay to the changes was announced. In December last year, the Treasury and the South African Revenue Service (SARS) published a draft regulation for public comment, listing the services which will constitute electronic services.
The draft regulation was to apply to supplies of electronic services by any foreign enterprise to a recipient who is a South African resident; or where a payment to that foreign enterprise in respect of electronic services originates from a bank envisaged by the Banks Act. The services listed in the draft regulation included electronic services where such services are supplied by means of any electronic agent, electronic communication or the internet for any consideration.
The draft regulation included educational services, games and games of chance, information system services, internet-based auction services, maintenance services, miscellaneous services and subscription services where such services are supplied by means of any electronic agent, electronic communication or the internet.
The draft regulation initially intended to also apply to business-tobusiness (B2B) supplies. On February 20 the Treasury and SARS held a public workshop to discuss the regulation. General consensus was that the legislation should not apply to B2B supplies as this would create an additional compliance burden on certain VAT-registered vendors without a notable benefit because the imported services (reverse charging) mechanism already applies to VATregistered vendors. The government acknowledged the comments, in relation to B2B supplies in particular, and undertook to revisit this issue.
The Treasury and SARS held a final workshop on March 19 on the regulation. All indications were that the regulation would have been finalised by the end of last month. Although it was intended that the implementation date would also have been announced, implementation will not occur before May 1, and could be postponed beyond May 1.
It was envisaged that SARS would issue a binding general ruling by the end of last month. It may consider drafting a VAT double taxation agreement to regulate scenarios where supplies could be subject to VAT in multiple tax jurisdictions. The government made it clear that SA will not use the VAT legislation to differentiate between B2B and business-to-consumer supplies, other than by way of listing applicable services in the regulation itself.
At the workshop the government announced that educational services as contained in the draft regulation will remain the same. The regulation, as it applies to games and games of chance, is expected to contain the addition of wording to the effect that electronic betting or wagering in respect of the (i) outcome of race; or (ii) any event or occurrence will be contained in the regulation. It is also envisaged that the wording about activities contained in sections 4(1) and (2) of the National Gambling Act, 2004 will be deleted. The provisions contained in the draft regulation relating to internet-based auction services are expected to remain unchanged.
The provisions contained in the draft regulation in respect of miscellaneous services will change to the effect that the references to “film” will be replaced by “audiovisual content”. Application of the regulation to “software” will be deleted. The provisions contained in the draft regulation in respect of subscription services will remain unchanged, except its application to databases and information system services will be deleted.
Regarding B2B, other than those already outlined above, the government also announced the final regulation will not apply to information system services and maintenance services. This change makes tax policy sense.
The government took note of the various practical and administrative difficulties relating to the registration of foreign electronic service providers. In response, it announced a number of welcome changes to the VAT Act, application thereof, and the regulation. compliance with the “tax invoice” requirements contained in the VAT Act will be made easier for foreign e-service VAT registrants. Although tax invoices will need to contain a statement giving effect to something like “issued in terms of binding general ruling xxx”, tax invoicing will not need to be sequential, although a “ZA” indicator will be required.
The foreign registrant will need to establish a clear audit trail to enable SARS to identify South African sales. The applicable exchange rate will be the rate applicable at the VAT time of supply. Foreign registrants will be allowed to use the rates published by Bloomberg or the European Central Bank. Foreign e-service suppliers will probably have one of three options on how to display “consideration” (value plus VAT) on the face of the invoice, including: (i) displaying the value in foreign currency and the VAT in rand; or (ii) providing an additional document that reflects the VAT in rand; or (iii) using a standard rand invoice. An invoice will have to contain: (i) the name and address of the supplier; (ii) the VAT number of supplier; (iii) a description of the services supplied; and (iv) the invoice number. The words “tax invoice” will not be required to be displayed on the face of the invoice. Compliance with these four requirements will entitle recipients to an input tax deduction, given that other provisions of the VAT Act are complied with.
Foreign e-service VAT registrants will need to account for and pay VAT to SARS in respect of all VAT on invoices paid in a specific tax period. Payment will have to be effected in rand. Price advertisements will have to contain a statement that VAT at the standard rate of 14% is added to prices quoted where the supply is subject to South African VAT.
Foreign e-service VAT registrants will have to obtain formal approval to store records in an export country. SARS will issue prescribed forms in this regard. VAT registration will be done through electronic mail. SARS will guarantee a 72-hour turnaround of VAT registration applications. Foreign e-service providers will not be required to have a South African VAT representative nor would they be required to have a South African bank account. The government does not envisage that SARS will pay VAT refunds as most supplies to foreign e-service suppliers will be subject to the zero rate VAT.
The VAT registration threshold remains at R50,000 and suppliers will be required to account for VAT on a cash basis. Where foreign e-service VAT registrants’ South African VAT activities also include non-e-service activities, they would have to apply the invoice basis to these activities. Vendors would most probably also be allowed to apply for separate VAT registration of these differing activities.
The legislation, regulation and process followed by the Treasury and SARS is a step in the right direction for the South African VAT system and is commended and welcomed.
Ferdie Schneider is tax partner for value-added tax at KPMG.