VAT changes for for­eign e-ser­vice sup­pli­ers

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - Ferdie Sch­nei­der

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.

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