New South African tax could see you paying more for Netflix and other internet services

The National Treasury recently published an amended regulation for electronic services.

The regulation – which has an effective date of 1 April 2019 – will impact international suppliers of services to South African customers, who must now evaluate whether their supply of services qualifies as ‘electronic services’ and whether this will create a liability to register for VAT in South Africa.

According to Baker & McKenzie, the impact of the amended regulation is that all services that are supplied from abroad by an ‘electronic agent’, ‘electronic communication’ or the ‘internet’ are now electronic services for the purposes of VAT.

“What is envisaged by the definition is that the services being supplied are essentially automated and involve minimal human intervention and are impossible to ensure in the absence of information technology,” it said.

“Only a limited number of services that may be provided by the above means are excluded from the definition of electronic services, namely educational services regulated in the export country of the foreign service provider, and telecommunication services.”

It added that the reach of the new regulation is staggering and may include the supply of the following services:

  • Software subscription services;
  • The use of software by an entity in South Africa provided electronically by its holding company situated abroad (unless the exclusion applies);
  • Broadcasting;
  • Cloud computing;
  • Advertising services;
  • Gaming;
  • Any reservation services made via an online platform, etc.

What it means for you

Speaking to BusinessTech Seelan Moonsamy, a VAT expert at Baker & McKenzie, said that the regulations will likely lead to companies such as Netflix, Facebook and Google having to register for VAT.

“If these companies deliver its services by electronic means i.e. by electronic agent, electronic communication or via the internet and the total value of its services exceed R1 million on a rolling 12 month period they will have to register.”

He added that this extra tax will likely be passed on South African consumers through increased prices.

“The customer would ultimately bear the value-added tax in the form of higher prices as VAT is – in economic parlance – a consumption tax,” he said.

“I imagine that behemoths, like Amazon and Google would still remain very competitive based on their ability to price discount, so their likely VAT registration for electronic services would not have any major impact on their ability to attract customers and their revenues.”

Baker & McKenzie warned that all foreign businesses that supply electronic services in South Africa should now determine if their services are supplied by means of an electronic agent, electronic communication or via the internet.

“Failure to register for VAT in a timeous manner may have a huge financial impact for these foreign service providers, as SARS would levy penalties and interest and this may also lead to reputational damage,” it said.

Read: The cost of Netflix in South Africa vs the rest of the world

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New South African tax could see you paying more for Netflix and other internet services