This applies even if companies are not operating in this country. As long as they earn more than R1-million in a 12 month period, they are liable for VAT.
The regulations define electronic services as ‘any services supplied by means of an electronic agent, electronic communication or the Internet for any consideration’. This effectively means that software subscription services, the use of software by an entity in South Africa provided electronically by its holding company situated abroad (unless a specific exclusion applies), broadcasting; cloud computing, advertising services, gaming, and any reservation services made via an online platform will be subject to the 15% tax.
In a country where the exchange rate with the Dollar is less than ideal, the regulations equate to a 15% hike in the price of services procured from international suppliers. Unfortunately, they apply across the board, and include services like Netflix and purchases through Amazon – if those companies make more than R1-million in a year. In light of the exchange rate, that threshold is all too easy to reach, so companies that want to remain compliant with the regulations will in all likelihood start passing the tax cost on to consumers.
E-books, audio visual content, still images, music and films, blogs, journals, magazines, newspapers, games, publications, social networking, webcasts, webinars, websites, web applications and web series, software applications allowing users to provide sharing services such as ridesharing and accommodation (think Uber and AirBnB), and online booking services are all included in the regulations. Businesses will be subject to the same, with website hosting, data warehousing and application hosting, downloads of or access to software, software applications downloaded by users on mobile devices, and online automated maintenance of programmes being included.
Foreign intermediaries that facilitate the supply of electronic services (on behalf of the foreign service provider) and who are responsible for invoicing and collecting payment for the electronic services, are also required to register for VAT. In essence, where a foreign service provider uses an intermediary to supply services to customers located in South Africa, and the platform is responsible for issuing the invoice and collecting the payment in respect of the supply of the services, the platform is “deemed” to be the provider of the electronic services. It is the platform and not the foreign service provider that would be liable to register as a VAT vendor in South Africa.
On the surface, these regulations mean that every single web-based service South Africans pay for – in expensive Rands – will become 15% more expensive. However, experts say that they will be extremely hard to enforce.
Gerhard Badenhorst, a director at Cliffe Dekker Hofmeyr (CDH), says cross border services are notoriously difficult to tax. “The implication is that basically everything that can be supplied electronically, even to businesses, is now subject to VAT,” he says.
“Collecting VAT on imported services from the consumer has always been difficult. Compliance with the amended regulations is also hard to enforce. Foreign suppliers will have to register for VAT and be saddled with the additional burden of having to collect and pay over VAT to the South African Revenue Service. Naturally, you can’t compel them to do this, so it’s more a matter of voluntary compliance. There is also the risk that the foreign supplier may collect the VAT and not pay it over. Although non-compliance will attract penalties and may even lead to criminal prosecution, I just can’t see how they are going to enforce this.”
In a world where non-compliance with regulations costs far more than breaking the rules, the probability that international suppliers won’t build the 15% VAT rate into their prices is low. Instead, South Africans can bank on price hikes from 1 April 2020 (when the 12 month period first comes into effect) for everything from Uber, to Netflix, to Amazon Web services.