Foreign Entities Supplying Electronic Services in South Africa (“SA”)

With the age and advent of the internet, the way of doing business has significantly been altered over the last decade(s). Businesses are now able to reach much wider markets, with innovations to even deliver without being physically present in the jurisdictions of their clients. With all the innovative measures, other unintended consequences get to be triggered; such as taxation considerations.

With Revenue Authorities as the guardians of their respective fiscus, conflicts/issues often arise between traders and revenue authorities, in particular, questions on the following:

• Risk of creating a permanent establishment;
• Direct tax registration requirements; or/and
• The creation of VAT registration obligations.

Taking into account these potential issues, traders that provide Electronic Services (in particular subscription related), have to navigate the South African Revenue Service’s (“SARS”) recent focus on electronic services.

Value-Added Tax Consideration

On the question of potential VAT obligations in SA, one of the key starting points is section 23(1) of the Value-Added Tax Act, No. 89 of 1991 (“the VAT Act”). The section provides for VAT registration obligations if a person carries on an enterprise and makes taxable supplies of goods or services in excess of ZAR1 million during a 12-month period.

For an entity to have a VAT registration liability, it needs to be determined whether:

• the entity meets the definition of ‘enterprise’ as defined in the VAT Act and
• makes supplies exceeding the ZAR1 million threshold in any consecutive 12-month period.

The key requirement of ‘enterprise’ is defined in section 1(a) of the VAT Act, and requires the presence of four key elements:

a)???There must be an enterprise or activity. The location of where such supply is affected is irrelevant.

b)??The activity must be carried on continuously or regularly. Continuously” is generally interpreted as ongoing, (i.e. the duration of the activity has neither ceased in a permanent sense nor has it been interrupted in a substantial way).

c)???The activity must be carried on in SA or partly in SA. The SA VAT system is not limited to supplies made or deemed to be made in SA. The South African VAT legislation also does not have a specific place of supply rules.

d)??Goods or services must be supplied in the course or furtherance of the activities that are carried out in or partly in SA. Effectively, the ‘test’, (i.e. the place of a supplier’s business activities) is not reliant on a fixed or permanent place in SA from where the business activities are conducted.

Taking into account the requirements of the definition of ‘enterprise’, where services are performed 100% online by a foreign-based entity, such services are not considered to be carrying on any business activity in or partly in SA. As such, the normal ‘enterprise’ definition as set out in section 1(1) of the VAT Act will not apply and the ‘enterprise’ definition specific to electronic services will have to be considered, as noted below.

Enterprise of Electronic Services

In terms of section 23(1A) of the VAT Act, a person will be required to register as a vendor to the extent that the person carries on an ‘enterprise’ as contemplated in paragraph (b)(iv) of the VAT Act.

Paragraph (b)(vi) of section 1 of the VAT Act defines the term ‘enterprise’ as follows:

“…. (vi)??the supply of electronic services by a person from a place in an export country, where at least two of the following circumstances are present:

(aa)?????the recipient of those electronic services is a resident of the Republic;

(bb)????any payment to that person in respect of such electronic services originates from a bank registered or authorised in terms of the Banks Act, 1990 (Act No.?94 of 1990);

(cc)??????the recipient of those electronic services has a business address, residential address or postal address in the Republic…”

In addition to the above requirements, the services supplied must qualify as ‘electronic services’ as defined in section 1 of the VAT Act and the value of the electronic services supplied must exceed the VAT registration threshold (ZAR1 million in any consecutive 12-month period).

The supply of ‘electronic services

The term ‘electronic services’ is defined in section 1 of the VAT Act to mean those electronic services as prescribed by the Minister of Finance in the Regulation (“the Regulation”).

In 2019, the Minister of Finance published Updated Regulations in Government Notice 429, prescribing electronic services for the purposes of the definition of ‘electronic services’ in section 1(1) of the VAT Act. The Updated Regulations provide that ‘electronic services’ is defined as any services supplied by means of any electronic agent, electronic communication, or the internet for a consideration (with some exceptions).

Taking into account the set Regulations on electronic services, services linked to items such as subscription services to a database, information system service or website qualifies as electronic services; i.e. if supplied by means of an electronic agent, electronic communication, or the internet for a consideration. As such, foreign entities that provide users with access to online platforms, and for which there is payment-based subscription plans, such entities are providing subscription services that fall within the ambit of the Regulations and constitute the supply of ‘electronic services’ as defined. Therefore, those services are considered to be electronic services as contained in the Regulations.

Effectively, if an entity operates in SA, it would have met the requirements to register for VAT as an electronic services supplier and should register at the end of the 12-month period where the total value of its supplies exceeded ZAR1 million. Once registered for VAT, the foreign entity will be required to levy and account for VAT at the standard rate of 15% on its supplies of electronic services.

Yamani heads the Tax and Commercial division at Mketsu & Associates Inc. Attorneys .

An Admitted Attorney under the Legal Practice Council and Tax Practitioner affiliated with the South African Institute of Tax Professionals.

060?944 3149 / 012?321 0149

[email protected]

[email protected]