Big VAT changes on the cards

National Treasury, in collaboration with SARS, is considering changing VAT on cross-border electronic services, foreign donor-funded projects, and the period for tax deductions. 

In the financial services firm’s latest monthly Synopsis on current developments in the tax arena in South Africa, PwC explained some of the VAT changes the government is considering. 

The Tax Matters and Revenue Laws section of the National Budget includes various VAT proposals for the National Treasury and SARS to consider in more depth. 

PwC outlined the main VAT proposals, which will require careful consideration and taxpayer input to ensure the final legislation is relevant and practical.

Annexure C and Chapter 4 of the National Budget 2024 contain tax matters proposed for consideration in the next fiscal year. 

These included some matters relating to VAT that the National Treasury intends to review in the near future. 

“This year’s VAT proposals for further consideration are significant and can have far-reaching implications,” PwC said. 

If these proposals are navigated properly, the final amendments that become law can have a meaningful impact on vendors. 

According to the firm, the following are the most important and notable proposals –

• Changes to the electronic services regime
• Changes to the tax period for permissible input tax deductions
• A review of the VAT treatment of foreign donor-funded projects

Electronic services regime 

The global growth of electronic commerce necessitated a revised approach to VAT collection on cross-border electronic services, with changes being implemented on April 1, 2014.

Before 2014, VAT collection on foreign electronic services was inefficient due to low customer compliance with the “reverse charge” mechanism. 

This resulted in lost revenue and an unfair advantage for foreign providers who didn’t collect VAT. The 2014 changes effectively ended this advantage. 

In April 2019, South Africa broadened its VAT net to capture a wider range of foreign electronic service providers. This change exceeded international guidelines and aimed to maximize VAT collection on B2B and B2C services. 

While many non-resident suppliers complied with the new regulations, others were unaware of their VAT obligations, leading to penalties and interest on historic liabilities.

South Africa’s 2024 Budget proposes significant changes to how the government taxes electronic services. The main focus is simplifying administration by limiting VAT collection to situations where foreign suppliers sell directly to consumers (B2C). 

This represents a reversal of the policy implemented in 2019. Businesses that previously registered to collect VAT on B2B transactions may no longer need to do so, but there are concerns about the fairness of this change. 

Input tax deductions

South Africa’s Value Added Tax (VAT) system offers vendors a mechanism to recoup VAT paid on business purchases through input tax deductions. 

This essentially reduces the overall VAT burden for businesses. However, the VAT must have been incurred on goods or services used for taxable supplies, meaning those subject to VAT themselves. 

Additionally, vendors must possess proper documentation for the purchase to qualify for the deduction. While claiming the deduction in the same tax period during which the supply occurred is ideal, the system offers some flexibility.

If documentation is unavailable at that time, a five-year grace period allows vendors to claim the input tax deduction later. This helps businesses manage their VAT obligations and cash flow more effectively.

However, the 2024 Budget proposal seeks to limit this flexibility by requiring deductions to be made in the original tax period in which they arise. 

While this simplifies tax administration, it raises practical concerns. Businesses may encounter difficulties if they receive non-compliant invoices or need to make multiple adjustments.

Additionally, the current eFiling system might not be fully equipped to handle these changes smoothly. 

Foreign donor-funded projects

South Africa’s VAT treatment for Foreign Donor Funded Projects (FDFPs) aims to refund VAT incurred on project expenses. 

However, implementing agencies managing these projects face challenges due to changes introduced in 2020. 

Obtaining FDFP approval can be lengthy, delaying project execution. Additionally, complex procedures and administrative burdens discourage foreign donors from participating. 

The need for tax experts to navigate the system further increases costs for both donors and implementing agencies. Frequent changes and inconsistent application of the FDFP VAT legislation create further uncertainty. 

These issues hinder the intended benefit of the legislation and potentially discourage foreign aid that uplifts South Africa.

National Treasury and SARS have proposed reviewing the FDFP VAT registration process to simplify and improve its efficiency. 

Currently, each FDFP requires a separate VAT registration, creating administrative complexity. 

The proposed solution involves allowing implementing agencies to register all their FDFPs under a single VAT number. This would significantly reduce their administrative burden.