There seems to be an increased focus from SARS recently on non-VAT registered entities who enlist services from foreign suppliers. The reason for this is likely that, in most cases, there may be some VAT to be collected by SARS from these South African entities. It appears though, few people, especially those who are not VAT registered, are aware of their obligation to pay VAT on imported services.
Subject only to a handful of exceptions, any person who is not VAT registered (or in some cases even those who are VAT registered but who also make exempt supplies) and who acquires services from foreign suppliers is in most cases supposed to pay VAT on the service to SARS. Let me explain by way of basic example:
Entity XYZ is not registered for VAT. XYZ enlists a foreign supplier of services to render services to it. The foreign supplier invoices XYZ R1 000 for the services rendered. No VAT is charged by the supplier. Subject to the exceptions, XYZ is required by law to pay R150 to SARS in addition to the R1 000 paid to the foreign supplier.
The rationale, in part, for this so-called “reverse charge” VAT mechanism is to level the playing field, so to speak, for South African service suppliers who are required to add VAT to their price. If it were not for this reverse charge, non-VAT registered entities would possibly be more inclined to acquire services from foreign suppliers who are not required to charge VAT and which could possibly make such foreign procured services cheaper compared to acquiring the service from a local supplier who must charge VAT.
Probably one of the most relevant exceptions to the requirement to account for VAT on imported services is where the services being supplied by the foreign supplier constitute electronic services as defined in the VAT Act. In the modern age and especially now also given the current conditions in South Africa and indeed around the word with Covid-19, most foreign services are procured electronically. If the services being supplied are supplied electronically, there is a good chance the service constitutes electronic services as defined which in turn would mean that the recipient of those foreign services is not required to pay VAT on the imported service. Rather, the foreign supplier of that service is required to charge VAT on the service. The fact that the foreign supplier may not have charged VAT does not mean they are not supposed to – some foreign suppliers may simply not be aware of their obligations towards SARS.
The application of this exemption to the need for South African entities to pay VAT to SARS on imported services does not, however, really mean much for the South African recipient of those services from a cashflow perspective – whether the recipient is required to pay the VAT on the service to SARS or to the foreign supplier, at the end of the day the recipient picks up the VAT bill. The important difference however lies in this:
- if the service being supplied is electronic services as defined, the obligation and exposure towards SARS rest with the foreign supplier and not the recipient of the service. Suffice it to state that failure to report to SARS as required and to pay the VAT to SARS as required carries quite significant consequences. Therefore, establishing if the exception to the obligation to pay VAT to SARS on imported services applies is extremely important.
Whilst it would indeed be very helpful to explain here what exactly the definition of electronic services encapsulates, suffice it here simply to say that it is extremely wide and includes, for example, “any service supplied by means of … the internet” subject to few exclusions not mentioned here.
Entities who are approached by SARS expressing an intention to collect VAT from them on their imported services would be well advised to make contact with us immediately so that we can assist and guide you through the process to make sure you are treated fairly and in line with law and to ensure that you meet your obligations towards SARS. We can also, fact-dependent, assist in ensuring that you do not, in trying to clear yourself of any wrongdoing, inadvertently throw your foreign supplier under the bus, so to speak.
Contact us here.
 Whilst indeed an explanatory memorandum was released with the updated definition of “electronic services” which indicated the intention is not to apply the definition as widely as it reads, that does not appear to be the case in practice.