Over recent years, various articles on “imported services” and “electronic services” have been published in VAT Connect as follows:
- VAT Connect Issue 13 (November 2021) – dealing with rulings previously issued in relation to the original (2014) Electronic Services Regulations.
- VAT Connect Issue 12 (June 2021) – dealing with certain amendments pertaining to the completion and retention of documents and mentioning that guidance in that regard can be found in the publication External Guide: Manage Value Added Tax on Imported Services.
- VAT Connect Issue 11 (September 2020) – dealing with various matters concerning the identification of “imported services” and declaration of said services, as distinct from “electronic services” and the associated VAT consequences of making such supplies. This article was in relation to the updated (2019) Electronic Services Regulations and mentioned that guidance in the form of the documents Manage Imported Services – External Guide and the Frequently Asked Questions: Supplies of Electronic Services is available on the SARS website.
- VAT Connect Issue 10 (March 2020) – dealing with various administrative matters concerning deregistration of certain entities that were previously registered under the original (2014) Electronic Services Regulations and the closure of the mailbox in connection with enquiries regarding the introduction of the updated (2019) Electronic Services Regulations. Also mentioning that the Frequently Asked Questions: Supplies of Electronic Services were updated accordingly.
- VAT Connect Issue 9 (February 2019) – which explains in some detail the application of the law relating to the introduction of the updated (2019) Electronic Services Regulations.
Although we have written about imported services and electronic services several times and issued various publications, we still receive some questions on how to distinguish between the two concepts so that the correct VAT treatment can be applied.
As a general background, to making the distinction, one should keep in mind the reason why the electronic services regulations were introduced, namely –
- to deal with the difficulties involved in administering and enforcing the collection of VAT on imported services as it relies on a self-declaration by the recipient so that in many cases, the transaction will not be subject to scrutiny by SARS; and
- to keep the VAT system in tune with modern commercial realities which recognises the worldwide trend that, increasingly, the nature of cross-border supplies into South Africa consists of digital content or access to facilities is granted by electronic means, for example, over the internet. As a result, it is considered that the VAT on those supplies could more easily be collected and administered under a separate electronic services regime which requires the VAT registration of the non-resident supplier.
Following from the above rationale, the implementation of the 2019 Electronic Services Regulations resulted in a major part of the tax base being shifted from the imported services regime into the electronic services regime. The effect being that the recipient would no longer be liable for VAT on imported services under section 7(1)(c) in respect of supplies of electronic services acquired from non-residents. Instead, the non-resident supplier would be liable to register for VAT and to collect and pay the tax to SARS on such supplies under section 7(1)(a) in the same manner as any other local vendor.
As a result, with effect from 1 April 2019, there are only a few instances where the imported services provisions will continue to apply. As a rule of thumb, if a South African resident contracts with a non-resident supplier to acquire services for non-taxable use or consumption in South Africa, the imported services provisions will only apply if the services are of the type mentioned in the 2019 Electronic Services Regulations and the value of the supplies does not exceed the R1 million VAT registration threshold. In other words, the non-resident supplier is not liable to register and account for VAT under the 2019 Electronic Services Regulations and has also opted not to register voluntarily. The effect is that the supplier will not charge VAT on this supply, but the recipient of the supply may potentially be required to pay VAT on this supply to SARS under the imported services provisions.
In regard to the explanation above, it should be noted that –
- VAT on imported services is only applicable to the extent that the recipient acquires the services for private, exempt, or other non-taxable purposes. Therefore, if the recipient acquired those services wholly for taxable purposes, then there would be no liability to pay VAT on imported services. There are also certain exemptions in section 14(5);
- in determining whether the contract involves the supply of “electronic services” or not, the key factors to consider are the characteristics or nature of the supplies, and how they are delivered, for example, over the internet. If the services require physical performance in South Africa, then they are unlikely to be electronic services unless there is a mixed package of services (including electronic services) which require different forms of delivery;
- neither the supplier nor the recipient can choose whether a supply by a non-resident should be charged with VAT under the normal rules (section 7(1)(a)) as opposed to applying the imported services provisions (section 7(1)(c)). For example, if a non-resident supplier is liable to register, charge and account for VAT on electronic services, the parties cannot choose to pay VAT on imported services instead. See the tax court case VAT 144 dated 13 March 2006 for further explanation in this regard;
- the recipient of services supplied by a non-resident may have to ask the supplier a few questions to establish if that person is liable to register for VAT or not. This is important because the non-resident supplier (being a vendor) is liable to account for VAT on any electronic services to SARS, whereas, in the case of imported services, the recipient must self-declare the VAT and pay it over to SARS.
For further guidance in regard to distinguishing between electronic services and imported services and the associated liability to account for VAT, please refer to the Frequently Asked Questions: Supplies of Electronic Services. In particular refer to questions 66 to 68 that specifically deal with imported services.
Source: gov.za
