Big e-commerce VAT change in South Africa on the cards

National Treasury, in collaboration with SARS, is considering changing value-added tax (VAT) on some electronic services.

PwC said the government is considering changing VAT on cross-border electronic services, foreign donor-funded projects, and the period for tax deductions.

Of particular interest to the South African IT community is the proposed changes to VAT on cross-border electronic services.

On 1 April 2014, South Africa changed its mechanism for collecting VAT due to increased supply of cross-border electronic services.

Before 2014, VAT collection on foreign electronic services was inefficient due to low customer compliance with the “reverse charge” mechanism.

The 2014 changes were a step towards fairness, effectively ending the unfair advantage foreign providers enjoyed by not collecting VAT.

In April 2019, South Africa broadened its VAT net to capture a wider range of foreign electronic service providers.

This change exceeded international guidelines and aimed to maximise VAT collection on business-to-business (B2B) and business-to-consumer (B2C) services.

While many international suppliers complied with the new regulations, others were unaware of their VAT obligations. This resulted in penalties and interest on historic liabilities.

On 21 February 2024, the Minister of Finance published the National Budget 2024, containing the proposed changes to the electronic services regime in South Africa.

The government proposed revising and updating the Electronic Services Regulations and relevant sections of the VAT Act.

The minister said the update was needed to keep up with changes in the digital economy and ease the administrative burden.

“The scope of the regulations should be limited to only non-resident vendors supplying electronic services to non-vendors or end consumers,” he said.

National Treasury seemed to propose limiting the regulations’ application to a non-resident supplier who makes supplies to non-vendor recipients in South Africa. Basically, B2C suppliers.

Enoch Godongwana, South African Minister of Finance

At this stage, this is merely a proposal to be considered further by the National Treasury and SARS. It is not clear how the law will be amended.

However, it is expected that a non-resident will only be regarded as conducting an enterprise in South Africa if it provides B2C supplies.

The IT industry welcomed the proposal, which would ease vendor administration and encourage non-residents to transact in South Africa.

The new changes effectively revert to the 2014 tax policy intent. However, it has consequences.

• Electronic suppliers that were not required to register under the 2014 Regulations but were forced to register under the 2019 Regulations may now have to deregister for VAT.
• B2B suppliers of electronic services were forced to register under the 2019 Regulations, and some incurred penalties and interest for late submission of returns.

This increases the cost of compliance for vendors in terms of system changes and advisory costs to comply with South African law.

This could have been reduced if the National Treasury had consistently followed the OECD guidelines.

“One wonders what SARS’s approach will be towards non-resident electronic service providers that did not register when required to do so under the 2019 Regulations,” PwC asked.

PwC highlighted that it is not guaranteed that the proposed legislative changes will be made in the next cycle.

However, they will likely be contained in the draft tax laws amendment bill expected to be released in July 2024.