The scope of regulation pertaining to the value-added tax (Vat) treatment of electronic services supplied by a foreign company to a South African company or individual has widened.
Amended regulations released by National Treasury on Monday (March 18) state that “all services” that are provided by means of an electronic agent, electronic communication or the internet could now fall into the Vat net.
Rodney Govender, tax director at PwC, says foreign companies will have to look at the services they are supplying in SA.
Multiple Vat registrations for multinationals
“Multinationals who operate in global structures and supply their products to South African companies or individuals from various offices around the world could end up having multiple [Vat] registrations in SA.”
He gives the example of a software group supplying services to South Africa from its different companies around the world. Because each of these companies is a separate entity, each one will have to register for Vat in South Africa if the value of their taxable supplies exceed R1 million in any 12-month period.
Des Kruger, tax consultant at Webber Wentzel, says South Africa led the way in 2014 when it introduced new rules to tax cross-border electronic services.
The widening of the scope of e-commerce transactions that may be subject to Vat is, however, “profound” because it will affect “most cross-border” transactions between a foreign company and a South African resident.
Govender says there has been a change to the definition of a group of companies in an effort to exclude most intra-group transactions.
Initially a “group of companies” was defined as companies where there was 100% common shareholding. It has now been defined as companies where the common shareholding is 70%.
In the South African context there are a number of companies who may fall below the 70% common shareholding because of the black economic shareholding they had to comply with. These companies will have to register for Vat.
“A lot of businesses who are affected by the regulations have been asking about the significance of the South African market to them.”
However, while Govender says they are aware of these discussions, they have not seen any movement.
Kruger points out that most foreign jurisdictions adopted a distinction between supplies made from business-to-business and business-to-consumer.
All cross-border e-commerce potentially affected
Unfortunately, South Africa has decided not to draw a distinction between B2B and B2C transactions and all cross-border e-commerce will potentially be affected.
“While this intra-group exclusion [70% common shareholding] is to be welcomed, it may not be enough to accommodate those group transactions where the common shareholding threshold of 70% will not be met,” says Kruger, a member of the Vat work group of the South African Institute of Tax Professionals (Sait).
Govender questions the reasoning behind Vat registration for companies doing business with other companies since the transaction would be tax-neutral.
There is not much to gain from a revenue perspective, so why pursue this? If a company provides software to a mine – it will charge the Vat to the mine and the mine will claim it back.
“All this means is that you are creating an administrative obligation for companies, and the cost of compliance just gets that much more,” says Govender.
“I know it is a principle of Vat, but when you think about cross-border transactions you have to think differently. Do you really want non-residents in your [tax] base? They have no presence in South Africa and you cannot interact with them, apart from online. This is not ideal.”
Treasury says in the explanatory memorandum that neither the Vat Act nor the regulations make any distinction between business-to-business transactions and business-to-consumer transactions: “This is intentional. This distinction does not exist for domestic suppliers and in the interest of fairness and equity, the distinction will not be introduced for the purposes of these regulations.”
The amendments to the regulations come into effect on April 1.
Kruger says foreign suppliers who render electronic services into South Africa need to “urgently consider” to what extent they are affected by the new rules.