[FAQ] Electronic services supplied to non-residents

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[FAQ] Electronic services supplied to non-residents

• 30 April 2021
• VAT
• The Tax Faculty Tax Specialist

This article is based on tax law for the year ending 28 February 2021.

Background

With the regulations on electronic services that came into effect from 1 April 2019, where a South African VAT vendor supplies online advertising, advertising space via Google, Facebook or online shopping portals, does the vendor have to charge 15% VAT instead of the service being zero-rated to non-resident companies?

Answer

The VAT Act

The general charging sections

Section 7(1)(a) of the VAT Act imposes VAT on the supply of goods or services made by a vendor in the course or furtherance of the VAT enterprise carried on by the vendor. VAT is imposed at the standard rate of (currently 15%), unless the supply qualifies to be supplied at the zero-rate in terms of section 11 of the VAT Act or is exempt from VAT in terms of section 12 of the VAT Act.

Sections dealing with zero-rated supplies

Section 11(2)(l) of the VAT Act zero-rates services supplied to non-residents, subject to certain limitations. Section 11(2)(l)(iii) of the VAT Act determines that the zero-rating does not apply where the services are supplied directly to the non-resident or any other person where the non-resident or other person is in South Africa at the time that the services are rendered.

Section 11(3) of the VAT Act provides that the correct documentation must be obtained in order to support the vendor’s entitlement to apply the zero rate of VAT. The documentation that must be obtained and retained is set out in VAT Interpretation Note 31 (Issue 4) (“IN 31”).

IN 31 determines that the following documentation must be obtained and retained to supply services at the zero rate of VAT in terms of section 11(2)(l) of the VAT Act.

(a) The zero-rated tax invoice;

(b) Written confirmation from the recipient of the supply that it is not a resident of South Africa and not a VAT vendor;

(c) Proof of payment; and

(d) A statement from the non-resident that the non-resident or any other person who is a direct beneficiary of the services, is not present in South Africa at the time that the services are rendered.

Application of the principles

Kindly note that the regulation dealing with the supply of electronic services only deals with non-residents supplying electronic services to South African consumers. It does not deal with South African suppliers supplying electronic services to non-residents. The normal VAT rules apply to such supplies.

The supplies of electronic services to non-residents will qualify to be made at the zero-rate of VAT in terms of section 11(2)(l) of the VAT Act, subject to compliance with the documentary retention requirements.

With regards to obtaining written confirmation from the recipient of the supply that it is not a resident of South Africa and not a VAT vendor, and a statement from the non-resident that the non-resident or any other person who is a direct beneficiary of the services, is/will not be present in South Africa at the time that the services are rendered, we recommend that the relevant disclosure requirements be integrated in the website login process (tick the box). This will comply with the requirements of section 11(3) of the VAT Act read with VAT Interpretation Note 31 (Issue 4).

Webinar Commentary

Refer to webinar commentary on the Risks and rewards of VAT governance here.

FAQs

1. What are electronic services for VAT purposes in South Africa?

Electronic services generally include digital products and online services supplied over the internet, such as software, streaming services, online courses, cloud computing, and digital subscriptions.

2. Are electronic services supplied to non-residents subject to VAT in South Africa?

It depends on the circumstances. Certain electronic services supplied to non-residents may qualify for zero-rating, while others may still be subject to VAT under South African VAT rules.

3. Can electronic services supplied to foreign customers be zero-rated?

Yes. Electronic services supplied to non-residents may qualify for VAT at 0% if the requirements of the VAT Act are met and the recipient is outside South Africa at the time of supply.

4. What proof is required to apply zero-rated VAT to electronic services?

Suppliers must keep sufficient evidence, such as customer location details, payment records, contracts, and IP address information, to prove the customer is a non-resident.

5. Do foreign businesses supplying electronic services to South African customers need to register for VAT?

Yes. Foreign suppliers of electronic services may be required to register for VAT in South Africa if their taxable supplies exceed the SARS registration threshold.

6. What happens if electronic services are incorrectly zero-rated?

Incorrectly applying zero-rated VAT may result in SARS penalties, interest, and additional VAT liabilities for the supplier.

7. How does SARS determine whether a customer is a non-resident?

SARS considers factors such as the customer’s residential address, payment information, business location, and where the service is consumed.

8. Are online consulting and digital training considered electronic services?

Yes. Depending on how the service is delivered, online consulting, webinars, digital training, and other internet-based services may qualify as electronic services.

9. Must VAT invoices be issued for electronic services supplied internationally?

Yes. Suppliers should issue compliant tax invoices and maintain accurate records for all electronic service transactions, including cross-border supplies.

10. Why is professional tax advice important for electronic services VAT compliance?

Electronic services and cross-border VAT rules are complex, and professional advice helps businesses apply the correct VAT treatment, avoid penalties, and remain compliant with SARS regulations.

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