SARS has set up a specific division to go after this type of tax

The South African Revenue Service (SARS) has identified the electronic services sector as an area of focus and established a specific division to review the sector and ensure compliance, says professional services firm PwC.

The division is actively pursuing foreign electronic services suppliers that failed to register for VAT in South Africa by approaching the South African Reserve Bank (SARB) and local businesses for information relating to foreign payments made from South Africa to identify suppliers, PwC said.

“Where payments made to non-registered electronic services suppliers are identified, SARS would issue requests for information and reasons as to why no VAT registration was obtained.

“Following this, SARS will register the foreign electronic services supplier for VAT and assess it for all VAT due on the past supplies of electronic services to South African recipients.”

VAT on electronic services 

The National Treasury first introduced VAT regulations on electronic services supplied by foreign suppliers in 2014.

The application of these regulations was limited to a specific prescribed list of electronic services, which predominantly focused on electronic services acquired by private individuals, PwC said.

“When the regulations were amended with effect from 1 April 2019, it became clear that there was a policy shift within National Treasury to include as many foreign electronic service suppliers in the South African VAT net as possible.

“These amendments broadened the scope of electronic services by defining ‘electronic services’ as any service supplied by means of an electronic agent, electronic communication or the internet for any consideration.”

The amendments also introduced intermediary rules and allowed a concession for intercompany supplies, amongst others, PwC said.

However, the amendments did not distinguish between business-to-business (B2B) and business-to-customer (B2C) supplies, which aligned the South African VAT treatment of B2B and B2C supplies with many other international jurisdictions, the firm said.

“As a result, the South African VAT rules are applicable to all electronic services supplied by a foreign service provider, regardless of the status of the recipient of those services.”

Who needs to register? 

Currently, a foreign electronic services supplier will be required to register for VAT in South Africa if at least two out of the following three requirements are met, and the registration threshold (R1 million) has been exceeded:

  • The recipient of the services is a South African resident;
  • Payment for the service originates from a South African bank account;
  • The recipient of the services has a business, residential or postal address in South Africa.

The following services are, however, excluded from the definition of electronic services:

  • Educational services provided by a person regulated by an educational authority;
  • Telecommunications services; and
  • Certain intercompany services.

“As SARS is now actively engaged in identifying non-compliance amongst foreign electronic services suppliers, it has become imperative for such suppliers to determine whether the services they supply to South African recipients fall within the
‘electronic services’ definition and whether they have met the VAT registration requirements,” PwC said.

“Any delays by the foreign services provider to register for VAT and regularise its tax position may be costly due to additional penalties and interest arising.”

Read: SARS makes good on its promise to come down hard on non-compliant taxpayers

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SARS has set up a specific division to go after this type of tax