Indirect Tax Alert | 24 January 2014
South Africa requires VAT registration for nonresidents who supply electronic services
Effective 1 April 2014, nonresidents who supply electronic services to recipients in South Africa will be required to register for VAT and charge South African VAT. The new provisions, which were signed into law in December 2013, are likely to affect most nonresident suppliers of electronic services with customers in South Africa, including providers that supply services to business customers and South African subsidiaries.
Outline of the new rules
The rate of VAT in South Africa is 14%. Suppliers may need to adjust prices for services supplied to South African customers to account for the addition of VAT. In some cases, this may require a change to contracts or to prices advertised on public websites.
What services are covered?
The South African Revenue Service (SARS) will determine exactly what activities are covered by the term “electronic services” in a forthcoming regulation. The likely date of the regulation is not yet known. Although SARS has not yet specified which “electronic services” are covered by the new provision, it has indicated that the criteria will be in line with international standards (e.g., e-books, games, music, movies, software and e-learning).
Who are South African “recipients”?
The term “recipients” includes private individuals resident in South Africa, businesses with a South African VAT registration and any company that conducts an “enterprise” in South Africa, as well as payments from specified South African bank accounts. Therefore, unlike in many other jurisdictions around the world (such as the European Union), the provision applies to business-to-business (B2B) transactions as well as business-to-consumer (B2C) transactions, including intercompany transactions.
VAT registration of non-established providers
The new law says that vendors of electronic services must register for VAT at the end of the month when they reach ZAR50,000 (roughly €3,500) turnover to South African residents. Effectively, this could mean that vendors who will exceed the turnover limit must be registered for VAT by the end of April 2014 and that the first month of trading would be free of VAT. However, SARS is expected to clarify this point.
The VAT registration process applied to nonresident suppliers in these circumstances is expected to follow the normal process for VAT registration by foreign suppliers. This means, among other things, that the foreign taxpayer must have a South African bank account and must appoint a fiscal representative. SARS has not yet indicated whether any simplified form of VAT registration will be permitted for nonresident suppliers of electronic services.
In principle, simplified invoicing will be allowed for sales of electronic services. However, in practice, such invoices may not allow B2B recipients to obtain a refund of the related input VAT; therefore, foreign suppliers with business customers may prefer to issue full tax invoices for these supplies.
What should service suppliers do now?
Suppliers of electronic services to customers in South Africa should consider the possible impact of the new rules on their business now, including how to comply with any VAT registration and compliance obligations they may have in South Africa and the possible impact on customer contracts, pricing and invoicing.
1. Identify whether electronic-services are supplied to South African residents that are covered by the new rules (including supplies to individuals, intercompany charges, B2B and B2C supplies).
2. Quantify supplies to South African recipients. Is the threshold exceeded?
3. Prepare to file for a VAT registration as soon as possible, including complying with any local requirements (e.g., for a local bank account or representative).
4. Identify VAT reporting obligations going forward and how they will be met (e.g., be able to identify affected sales, submit reports on time, supply the information required and comply with invoicing rules).
5. Consider the impact of the new rules on reporting systems, contracts and pricing (e.g., Can VAT be added to prices? Does the website have to be updated?).
6. Consider the impact of the new rules on any other activities currently undertaken in South Africa (e.g. sales of goods).
7. Stay connected to developments as more details are released about the new provisions.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Advisory Services Ltd, Johannesburg, South Africa
- • Folkert Gaarlandt
+27 11 772 5220
- • Leon Oosthuizen
+27 11 772 3612
- • Redge De Swardt
+27 11 772 3544
Ernst & Young (China) Advisory Services Limited, Pan African Tax Desk, Beijing
- • Rendani Neluvhalani
+86 10 5815 2831
Ernst & Young LLP, Pan African Tax Desk, New York
- • Dele A. Olaogun
+1 212 773 2546
- • Mzukisi Ndzipo
+1 212 773 9917
Ernst & Young LLP (United Kingdom), Pan African Tax Desk, London
- • Leon Steenkamp
+44 20 7951 1976
EYG no. CM4129