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27 February 2018 South Africa amends definition of e-services for VAT purposes In South Africa's 2018 National Budget Speech, released on 21 February 2018,1 the Minister of Finance announced that the regulation defining "electronic services" for Value Added Tax (VAT) purposes would be updated. An amended draft regulation was published on the same date. Foreign suppliers of "electronic services" into South Africa are required to register and account for VAT in South Africa as of 1 June 2014. The current regulation defining electronic services, includes a specific list of services and only foreign suppliers of these services fall within the ambit of the South African VAT regime. To minimize the administrative burden on global suppliers of electronic services, most jurisdictions differentiate between Business to Business (B2B) and Business to Consumer (B2C) supplies. The reason behind this differentiation is that in most instances where it is a B2B supply the recipient of the service will be allowed to claim the VAT charged as an input tax deduction. The regulation currently in effect, as well as the draft regulation, does not make this differentiation thereby subjecting B2B supplies to South African VAT. In the previous year's Budget Speech, the Minister of Finance announced that specific guidance would be given to provide more clarity on the current services which fall within the regulation and also mentioned that the intention was to expand the specific electronic services subject to VAT in South Africa. In the draft regulation published on 21 February 2018, the Minister of Finance has proposed the deletion of the specific types of services currently regarded as electronic services and with effect 1 October 2018 include any type of service supplied electronically. The only exclusions provided under the draft regulation are educational services supplied by a person regulated by an educational authority in an export country and telecommunications services. The impact of this proposed amendment stretches widely and will include most services provided by a nonresident. Among others, any multinational group of companies with a cost sharing structure will need to analyze whether its inter-group transactions subjects a nonresident supplier to South African VAT. The validity of any private binding rulings issued to VAT vendors based on the current definition of "electronic services" will have to be reconsidered under the new definition. 1 See EY Global Tax Alert, South Africa's Finance Minister delivers 2018 Budget Review, dated 23 February 2018. Document ID: 2018-5347 |
