Clarity required on VAT for electronic services

In 2019 the finance minister announced updated regulations for electronic services for the Value-Added Tax Act 89 of 1991 (VAT Act). The regulations (read with the relevant provisions of the VAT Act) deal with the VAT consequences of electronic or digital content supplied by electronic means, for example, via the internet or other telecommunications service.

At the same time, the SA Revenue Service (Sars) published a frequently asked questions document as general guidance on how the regulations must be interpreted and applied in practice.

The regulations are relevant for foreign suppliers of electronic services. In appropriate circumstances, those foreign persons are regarded as conducting a VAT enterprise in SA and be liable for local registration as a vendor.

Sars’ recent interpretation of the regulations has left many tax practitioners confused, mainly since the purpose of the regulations is “to assist foreign electronic services suppliers, intermediaries, vendors and the public at large to obtain clarity and to ensure consistency on certain practical and technical aspects relating to the updated regulations and amendments”.

Of particular concern is Sars’ view that any information or document delivered using email constitutes the provision of an electronic service and that a person who provides such an email, is regarded as conducting an enterprise in SA. Why the concern? This is twofold. First, Sars states specifically in the FAQ document:

● “If research was done outside of the republic by a nonresident business, then the service concerned does not become an electronic service merely because the final report was sent to the South African client by email.”

And

● “Q: I am an architect in an export country. I design a plan for a house and email it to a person in SA. Am I supplying electronic services?

A: No, the service involves substantial human intervention carried out in an export country and the product is supplied from an export country. The supply is therefore not dependant on information technology or automated. The email is merely the means of communication.”

Sars’ current interpretation is a complete turnaround on their previously published view. This is baffling, given that their intention with the document is to provide clarity and consistency.

Admittedly, Sars is not bound by its published document. Still, any reasonable person (and, for that matter, presiding officer) would argue that, without the withdrawal of previously published views, a legitimate expectation is created on how Sars will apply the law.

Another concern is that Sars’ interpretation is completely unbusinesslike and irrational. Moreover, such an interpretation is not directed at the original purpose of the legislation governing electronic services, which was to introduce a mechanism to address noncompliance of VAT reverse charge mechanisms due to some customers not complying out of sheer ignorance and a perception that the tax is voluntary.

That lack of compliance left local e-commerce suppliers in an uncompetitive position compared to foreign suppliers. They were not required to charge VAT on their sales to South African customers, and customers simply didn’t pay the VAT. It is difficult to see how the current interpretation addresses the perceived mischief of the time.

What, then is the remedy? It appears as though Sars has taken a view (rational or not) that each sender of an inbound email is an electronic service provider. It is unlikely they will be persuaded otherwise. The call must, therefore, be that exclusion is introduced into the regulations that provide for a business-to-business exception.

Such exclusion will leave SA in a tax-neutral position. Rather than having the foreign supplier register locally, charging VAT and the local recipient being entitled to a corresponding claim, the provided service will not be regarded as an “imported service” where the local entity uses it to make taxable supplies and in that case not having to account for tax. The business-to-business exclusion will keep SA fiscally neutral and remove complexities from an already overregulated system.

Can common sense please prevail?