Further amendments to VAT e-services regulations input into force

by Marie Rodriguez

Revised policies clarifying the e-services supplied by means of foreign suppliers to South African clients that are concern to price delivered tax (VAT) have been proposed in 2018, which notably broadened the scope of e-services. In the 2019 Budget Review, the minister of finance introduced that similarly amendments could be made to the e-offerings policies to deal with sure oversights.

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On 18 March 2019 the revised very last policies were published within the Government Gazette, prescribing what constitutes ‘electronic services’ as contemplated inside the VAT Act. The revised rules got here into effect on 1 April 2019.

Background

South Africa does no longer have any location-of-deliver guidelines to aid within the willpower of which jurisdiction has taxing rights in recognize of elements made by overseas providers to South African customers. South Africa consequently delivered regulation supplying an area-of-deliver rule unique to e-trade transactions for the first time with impact from 1 June 2014, which required overseas providers of e-services to sign up as VAT vendors in South Africa.

Entry necessities

Foreign providers of e-services are deemed to be sporting on an agency in South Africa if at the least of the subsequent requirements are met:

The recipient of the services is a South African resident;
The payment for services originates from a South African financial institution account; or
The recipient has a enterprise, residential or postal address in South Africa.
Foreign suppliers of e-offerings will be required to register as VAT carriers in South Africa to the quantity that they make taxable supplies of e-offerings in extra of the VAT registration threshold. With effect from 1 April 2019, the registration threshold for supplies of e-services become accelerated from R50,000 in a 12-month period to R1 million in a 12-month period.

Revised guidelines

The revised regulations put off the numerous precise classes of e-offerings listed in the current guidelines and widen the scope of the guidelines to use to any offerings provided by means of an ‘digital agent’, ‘digital communication’ or the ‘Internet’ for any attention. These phrases are in flip defined close to the Electronic Communications and Transactions Act (25/2002) (ECTA).

Under the amendment, sincerely all offerings which are supplied by way of electronic method (eg, cloud computing, computer software program and any online services) are now blanketed as ‘digital services’.

Specifically excluded from the scope of the policies are resources of:

regulated instructional services;
telecommunication services; and
positive supplies between ‘organization organizations’ as that time period is defined.
Further, components which might normally be exempt from VAT if supplied in South Africa (eg, financial services) will not fall inside the scope of the e-offerings policies, although furnished by means of electronic approach.

The preceding draft guidelines posted in November 2018 furnished a detailed definition of what constituted ‘telecommunication services’. However, this definition has been eliminated and the revised rules now simply define ‘telecommunication offerings’ on the subject of the ECTA. This is alternatively abnormal as the term ‘telecommunication services’ isn’t always defined inside the ECTA. It seems that this can have been an oversight by means of the National Treasury, and it’s miles anticipated that this may be amended in due route.

Considering the broad definition of ‘e-services’ (ie, any services supplied by using an digital agent, electronic conversation or the Internet), it isn’t clean whether or not information or recommendation that’s communicated thru an email transmitted electronically falls inside the ambit of the regulation. ‘Electronic communique’ is defined inside the ECTA to mean a communication through statistics messages, and ‘information messages’ is described to mean facts generated, sent, acquired or saved by means of digital method. On the face of it, evidently facts or recommendation communicated via electronic mail will consequently fall in the scope of e-services. However, the explanatory memorandum stipulates that one of the coverage intentions at the back of the amendments is to issue to VAT the ones services which can be provided the usage of minimum human intervention. For instance, criminal advice prepared outdoor of South Africa by using a non-resident and sent to a recipient in South Africa thru email will not be problem to the policies. Notwithstanding the statement made in the memorandum, it remains that it does not have any criminal fame and the South African Revenue Service (SARS) have to clarify and verify this coverage purpose via a binding widespread ruling to be able to avoid any future disputes on this regard.

Intra-organization transactions

A welcome revision of the guidelines is the rest of the regulations referring to intra-institution components. In terms of the policies, e-services furnished between organization groups are excluded from the scope of the guidelines. However, in phrases of the preliminary proposed definition of the term ‘institution of businesses’ contained within the preceding draft guidelines, the nearby recipient employer was required to be the wholly owned subsidiary of the foreign group business enterprise for the exclusion to apply. Consequently, if the neighborhood business enterprise has minority shareholders, along with Black Economic Empowerment or employee incentive scheme shareholders, the exclusion could now not have carried out. This problem become recognized and the definition of ‘institution of companies’ turned into amended and comfy to require a 70% shareholding inside the local recipient corporation by the overseas protecting agency. It is essential to be aware that to qualify for the exclusion, the foreign organization must supply the e-services to the local recipient agency itself.

B2B transactions

At the time of introducing the e-services guidelines in June 2014, the National Treasury said that the guidelines did not impose a new tax, but merely shifted the tax liability from the local recipient of the e-services to the foreign dealer thereof to deal with worries about non-compliance with the reverse fee mechanism and to level the playing subject among neighborhood and foreign suppliers of e-offerings.

The regulations had been therefore first added to deal with concerns approximately non-compliance via recipients of imported services. The idea of ‘imported services’ mainly excludes services acquired for purposes of making taxable elements. By which include commercial enterprise-to-business (B2B) transactions, the policies create a disparity between resources of e-offerings and resources of every other services by means of foreign providers. The supplies of another offerings are taxed as imported offerings most effective if they’re received for purposes aside from making taxable materials. The reasoning furnished by way of the National Treasury inside the explanatory memorandum is that the exclusion of B2B transactions might create an unfair coins-glide advantage for foreign providers. However, this reasoning does not appear to have any foundation due to the fact offerings rendered by means of overseas providers to agencies using the offerings for taxable components are not subject to VAT below the imported offerings provisions within the first location.

The inclusion of B2B transactions inside the scope of the e-services policies consequently deviates from the preliminary aim expressed with the aid of the National Treasury. The inclusion of B2B transactions brings foreign providers who deliver electronic services to neighborhood organizations for purposes of creating taxable resources into the South African VAT net.

It is questionable as to what advantage could accrue to the fiscus on B2B transactions if the net impact at the fiscus is nil, as any VAT charged by means of the provider might be deductible as input tax via the recipient, coupled with the elevated administration for both SARS and the overseas dealer, who will now want to sign in as a vendor and put up monthly VAT returns to SARS.

The inclusion of B2B transactions is also contrary to the hints of the Davis Tax Committee (DTC). The DTC advocated that the remedy of e-services must be aligned with global treatment and specifically harmonised with the Organisation for Economic Cooperation and Development (OECD) principles. The OECD’s International VAT/Goods and Services Tax Guidelines (2017) endorse that:

a difference be drawn among B2B and business-to-customer transactions; and
a consumer need to be susceptible to account for any tax due beneath the reverse rate mechanism in which that is consistent with the overall layout of the countrywide VAT device.
The OECD similarly states that the software of the reverse price mechanism has numerous benefits, which include, among other matters, lowering the executive prices for the tax authority due to the fact the dealer will no longer be required to conform with tax obligations within the purchaser’s jurisdiction (eg, VAT identity, audits and the costs associated with administering language obstacles). Notwithstanding the DTC’s and the OECD’s recommendation that B2B transactions be excluded to make certain international harmonisation of the VAT concepts, it appears that evidently the National Treasury has chosen to brush aside these tips.

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