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tax | 21 May 2019
BY Annelie Giles

Extended scope of “electronic services”: new VAT frontier or Pandora’s box?

On 18 March 2019, South Africa’s National Treasury published revised Electronic Services Regulations, significantly expanding the scope of electronically supplied services that are subject to value-added tax (“VAT”). The publication follows the Minister of Finance’s announcement in the 2017 Budget Review that the regulations defining electronic services would be broadened.

South Africa introduced e-services legislation with effect from 1 June 2014, which shifted the VAT liability from the domestic recipient to the non-resident supplier of electronic services. This replaced the e-services recipient’s obligation to self-assess VAT on imported services (an existing taxation framework similar to the reverse charge mechanism).

Essentially, a foreign supplier is regarded as carrying on an “enterprise” for South African VAT purposes if it supplies “electronic services”, as prescribed in the regulations, to a recipient where at least two of the following circumstances are present:

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

The 2014 e-services regulations prescribed various categories of electronic services that were subject to VAT. These categories intentionally limited the scope of electronic services at the time and included non-regulated educational services, games and games of chance, internet-based auction services, subscription services to websites and web applications, as well as various miscellaneous services entailing the supply of digitised content, such as music and e-books.

New regulations

Effective 1 April 2019, the various categories of electronic services have been removed from the new regulations and “electronic services” is now defined to mean “any services supplied by means of an ‘electronic agent’, ‘electronic communication’ or the ‘Internet’ for any consideration”. Each of these terms are defined in the Electronic Communications and Transactions Act, 2002.

Services that are specifically excluded from the ambit of the new regulations are limited to the following:

  • transactions between group companies with a shareholding of at least 70%;
  • telecommunication services (but not the content thereof); and
  • educational services supplied by foreign-regulated educational institutions.

The extensive scope of the new regulations now includes any electronic or digital content that is supplied by electronic means, such as cloud computing, data warehousing, software applications (apps), downloading of digitised products, web-based broadcasting services and online training.

Business-to-business transactions

What is interesting, is that the new regulations do not provide for any distinction between business-to-business and business-to-consumer supplies. The lack of such distinction is contrary to the recommendations of the Davis Tax Committee (March 2018), as well as international best practice advocated by the Organisation for Economic Co-operation and Development.

National Treasury indicated that this outcome was intentional to avoid an unfair cash-flow advantage for non-resident suppliers on the basis that the same distinction does not exist for domestic supplies between businesses.

VAT registration threshold

On a positive note, the e-services registration threshold was also increased with effect from 1 April 2019, from the previous ZAR50 000 per annum, to bring it on par with the domestic compulsory threshold and thereby offering relief to some of the smaller e-service providers.

Foreign suppliers of electronic services are therefore required to register for VAT in South Africa if the total value of their e-services has exceeded ZAR1-million in any consecutive 12-month period.


Where a foreign supplier supplies e-services via an intermediary (eg, by using an intermediary’s platform or electronic marketplace), the intermediary will be deemed to be the supplier of the services and will be required to register and account for VAT in South Africa on these supplies. Such administrative relief is applicable in circumstances where the intermediary facilitates the supply of the electronic services and is responsible for issuing the invoices and collecting payment for the supplies.

Short time frame

Notwithstanding that draft regulations were in circulation for just over a year, the final new regulations were published only two weeks before becoming effective, which provided a short time frame in which to ensure compliance by 1 April 2019.

Besides getting to grips with their new VAT reporting obligations, foreign e-services suppliers will urgently need to update their systems to allow for VAT to be charged on their South African supplies, and to accommodate the necessary invoicing and exchange rate requirements prescribed in Binding General Ruling (VAT): No. 28 (Issue 2).

Foreign suppliers are no longer able to rely on VAT rulings on electronic services and these will need to be reconfirmed. In addition, all e-commerce contracts will need to be reviewed from a pricing perspective to identify South African VAT exposure and to ensure competitiveness.

Since e-services were first taxed in this manner, a streamlined VAT registration and administrative process has served to reduce the compliance burden for affected foreign businesses. One can only hope that the South African Revenue Service is fully prepared for the influx of VAT registrations.

Reviewed by Peter Dachs, head of ENSafrica’s tax department.