Big VAT change for electronic services in South Africa

The South African government has updated how value-added tax (VAT) is calculated on electronic services, eliminating a requirement that has frustrated foreign suppliers and local distributors.

The updated regulations came into effect on 1 April 2025, after being published in the National Treasury’s Draft Taxation Laws Amendment Bill for 2024.

The original regulations on electronic services came into effect on 1 April 2014, but were considered ineffective and inefficient.

One big issue was a “reverse” charge mechanism that resulted in an unfair advantage for foreign electronic services suppliers who did not collect VAT,

To fix this, the regulations were revised in 2019 to widen the scope of services that qualify as electronic services and are subject to VAT at the standard rate.

The new regulations determined that nearly all services supplied for a consideration, provided by means of an electronic agent, electronic communication or the Internet, were subject to VAT.

The definition of electronic services was expanded to extend beyond “digital goods or services” and focuses on how the supply is delivered.

For example, if a legal opinion is obtained from a foreign legal specialist and is e-mailed to the person in South Africa, the supply of the legal opinion falls within the ambit of electronic services.

It did not matter whether the service was supplied directly by the foreign business or via an intermediary or third party contracted to deliver it electronically.

Three types of services are specifically excluded from the new regulations:

• Telecommunications services, including Internet access and video and voice calling, but excluding digital content platforms like video and music streaming services
• Educational services supplied from another country, which are regulated by an education authority under the laws of that country. This includes online learning courses provided by a foreign university
• Certain supplies of services where the supplier and recipient belong to the same group of companies

The regulations went a long way to levelling the tax playing field between local and foreign companies, but also came with a big problem.

Big problem for local distributors

The regulations made no distinction between business-to-business (B2B) and business-to-consumer (B2C) suppliers, which meant services sold to upstream distributors were also subject to 15% VAT.

In effect, Sars received double the VAT on goods and services imported from overseas before a distributor got their VAT refund.

“This outcome was intentional at the time as the South African VAT system did not fully subscribe to the B2B and B2C concepts,” Sars said.

The latest regulations effectively reverse this requirement by introducing a form of B2B exclusion for foreign businesses that supply services solely to VAT-registered vendors, including local distributors.

That means that goods or services from a foreign supplier that are only sold to VAT-registered vendors before reaching consumers will no longer need to include VAT in their prices.

“Such suppliers are therefore not required to register as vendors, unless they make other taxable supplies in carrying on any other enterprise,” Sars said.

A foreign electronic services supplier that made supplies to both VAT-registered vendors and non-vendors (like consumers) was still liable to register and account for VAT on all those supplies.

The change will be good news for South African goods distributors, including tech suppliers, who have needed to pay VAT on stock bought from foreign suppliers for the past six years.

Sources in the industry have informed MyBroadband that the requirement made it substantially more expensive to ensure a healthy stock supply.

While they could claim back the VAT paid to the foreign suppliers, the requirement introduced cashflow problems and effectively increased operating costs.

That made them less competitive with some foreign online stores, which only sell directly to consumers and non-VAT registered customers in South Africa.