This article is based on tax law for the year ending 28 February 2021.
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?
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.
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).
Refer to webinar commentary on the Risks and rewards of VAT governance here.