In October 2018, the National Treasury (Treasury) proposed amendments to the electronic services (e-services) Regulations.
The amendments widened the scope of e-services applicable to all services provided by means of an electronic agent, electronic communication, or the internet for any consideration.
Treasury published the final updated e-services Regulation on 18 March 2019, with an effective date of 1 April 2019.
Despite the delay in publishing the e-services Regulations, Treasury only amended the definition of group of companies. In the earlier draft of the e-services Regulations, the exclusion for e-services between companies in the same group was limited in its application to situations where the South African company was 100% owned by the foreign-based company. This raised an issue with regard to South Africa’s Broad-Based Black Economic Empowerment (B-BBEE) policy. The B-BBEE policy aims to help previously disadvantaged South Africans to participate in the economy through South African business ownership. This policy has various advantages, such as preferential supplier status in respect of government contracts.
Under the group of companies definition set out in the October 2018 draft, where a local subsidiary of the foreign-based company has B-BBEE shareholding, the intra-group transactions involving e-services did not qualify for the exclusion.
The VAT exclusion for e-services between companies is the same group is only applicable where the e-services are provided by the foreign-based company and the services are for purposes of consumption of the resident companies. For example, where the non-resident company supplies IT services to its wholly-owned subsidiaries situated in South Africa.
The foreign-based company will not benefit from the VAT exclusion if the foreign-based company procures IT services from a third party and on-supplies the services to the local subsidiary. In such a case the foreign-based company would need to register for VAT if it meets all the requirements for registration.
The definition of group of companies included in the final Regulation reduced the shareholding requirement by the foreign-based company in the local subsidiary from 100% to 70%.
This definition ensures that the foreign-based company will benefit: