• Measures aimed at providing clarity on the definition of electronic services to alleviate the difficulties in distinguishing between ESS and imported services.
• An exception that caters for certain ESS that may be zero rated for VAT.
• Exclusion of foreign suppliers of ESS from registration as vendors where an intermediary is liable to account for the VAT.
• Alignment of the educational services provisions, to ensure that services normally exempt in South Africa, do not fall into the ambit of ESS instead.

If a service is supplied by a non-resident supplier to a local recipient, the service would need to be evaluated to determine  whether it may fall within the ambit of an electronic service or that of an imported service. The Regulations Prescribing Electronic Services changed the manner in which ESS is taxed and shifted the onus of the VAT from the local recipient to the supplierof the electronic service situated outside of South Africa.

The classification of a service as an ESS or imported service is therefore critical to establish whether it is the responsibility of the non-resident supplier or the local recipient to declare the VAT respectively. However, the definition of electronic services is very broad and seeks to tax all services supplied by means of electronic agent, electronic communication or the internet. SARS has also been applying a very broad interpretation of ESS, even if human intervention is present in the service. 

The broadening scope of interpretations in the definition of electronic services may have unintended consequences, where uncertainties could arise, resulting in local recipients not accounting for VAT on imported services, where appropriate. Further clarity around the intricacies in the definition of electronic services, will aid to ensure that there is a clear distinction between ESS and imported services, which will serve to improve the compliance and reporting of VAT.

In accordance with the VAT legislation, a supply of services comprising of the arranging of international transport of passengers can be zero rated if certain conditions are met. However, the Regulations Prescribing Electronic Services disqualifies non-resident ESS vendors from applying the zero rate of VAT, when suppling international travel booking services or travel insurance. A non-resident ESS supplier could be caught in the VAT net without a similar provision in which to zero rate, creating disparity in the VAT treatment of these services. By addressing this disparity it will help to ensure that the supply of these services is treated fairly and consistently.

The Regulations Prescribing Electronic Services provides for an “intermediary” to be the principal supplier of the electronic service when certain conditions are met. The intermediary would facilitate the supply, issue the invoice, collect the payments and would have an obligation to account for the VAT.

However, this does not absolve the foreign supplier of electronic services from a requirement to register as a VAT vendor in South Africa when the registration requirements are met, irrespective of whether the intermediary is accounting for the VAT. This means that caution must be exercised to ensure that the intermediary and foreign supplier continue to manage any VAT risks in this regard. 

Further clarity is needed to address whether it is necessary for a foreign supplier of electronic services to register as a VAT vendor when the intermediary accounts for the VAT or if an exclusion may be required. This would enhance the reporting of VAT and mitigate risks of double taxation.

The supply of educational services is exempt from VAT in the legislation if certain conditions are met. However, the Regulations Prescribing Electronic Services disqualifies non-resident ESS vendors from applying an exemption of VAT to an educational service if the educational institute is not regulated by an educational authority in the export country. A disparity will ultimately arise because many overseas educational institutions are not regulated and therefore will not be exempt from ESS VAT. 

Consequently, a non-resident educational institute would be caught in the VAT net without a similar provision in which to exempt the VAT on the service for learners in South Africa. By addressing this disparity it will ensure that the VAT treatment is aligned for the supply of educational services.

It is important to keep abreast of the changes and recognise developments in this area.