Deloitte SA Blog


Understanding global tax exposure for businesses selling or distributing digital products in South Africa

As consumers worldwide shift their media consumption from the tangible to the digital, they are taking their books, movies and music with them on one device, and leaving behind a tangle of tax implications – particularly when it comes to VAT in South Africa. That is why businesses that sell or distribute electronic products to overseas consumers via the Internet would benefit from a clear understanding of their increasing regulatory and financial exposure, as well as a strategy to turn these changes into a competitive advantage.

If you have any questions or require a more detailed discussion, contact Severus Smuts (Director – Value Added Tax at Deloitte South Africa) at

European countries have been slowly clarifying their position in relation to this type of service.  In November 2011, Iceland became the latest country to tax the electronic supply of services by non-resident businesses to domestic consumers. Norway introduced a similar rule in July 2011 and Switzerland at the beginning of 2010, as did the European Union (“EU”) in 2003. Additionally, tax authorities in other jurisdictions with a VAT or Goods and Services Tax system are looking to Europe with a keen eye on whether such steps would be practical in their own jurisdiction. Financial executives of global businesses, regardless of where they are based, should understand the compliance and planning implications of these new rules or suffer adverse financial consequences.

South Africa is one of those countries looking at what Europe is doing.  The present position in South Africa is one of uncertainty because there are no clearly defined rules and promises of clarity have been made but not fulfilled for a number of years. However, the legislation is so unclear that it is not possible to make any definitive statements for these global businesses except to say that they are likely to have a VAT liability in South Africa. It may be possible to obtain a ruling in certain circumstances that says otherwise.  One of the main issues for the tax authority in South Africa (SARS) is how to enforce the payment of VAT when the consumer is an individual not registered for VAT.   Strictly speaking under the terms of the present legislation, the individual should voluntarily pay the VAT owing where the purchase exceeds ZAR 100.  It is easier for the authorities to say that the global business should register and pay the VAT, which means that the ZAR 100 threshold will not apply.

Defining electronically supplies services

In South Africa there is no legislative definition of electronically supplied services for VAT purposes.  In South Africa it is clear that intangible goods are defined as services for the purpose of the VAT Act but that is as far as it goes.

In the EU, electronically supplied services include those which are delivered over the Internet or an electronic network and the nature of which renders their supply essentially automated and involving minimal human intervention, and impossible to ensure in the absence of information technology. The definition of services is wider than an ordinary definition and includes digitized products and what may be referred to as “intangible goods,” such as electronic publications, applications (or “apps”), and software.

The South African definition of services will cover the following affected businesses within the media and entertainment industries which include, but are not limited to:

  • Publishers or distributors of electronic publications such as books, magazines or video content
  • Suppliers of visual or audio media over the Internet

VAT and online gaming

Business scenario:

Video game suppliers regularly fall under the provisions of the electronically supplied services rules, even when supplying the actual game free of charge. While the games are free to play, players are often given the option to purchase additional credits – often referred to as “in-app purchases”– virtual currency or items that are supplied to continue game play.

Activity in this area has increased exponentially with the surge in sales of tablet devices such as the Apple iPad and the countless apps that market content directly to consumers.

VAT implications:

While the original supply of the game may not be subject to VAT, it is likely that for the purposes of South African legislation these are “imported services” and the unregistered individual is liable for the VAT.  However, the distributor could possibly also be liable for VAT registration and VAT at 14% if the business is carrying on an “enterprise” in South Africa.  The reasoning behind this is that the services are consumed in South Africa and VAT is a tax on consumption.  However, it could be argued that the services are not performed in South Africa (unless the server is here) and the activity is a passive one.  In that instance perhaps the liability should only fall on the individual.  It is important to determine who was liable to account for the VAT as the recipient may as a defence argue that the supplier was liable to collect the VAT.  While specific place of supplies are not forthcoming it would be prudent to obtain a ruling from SARS when these services are marketed to consumers in South Africa.

If there is a liability to account for the tax on these intangible goods by the business in question, it may fall on either the producer or distributor of the content depending on the distribution model – whether the distributor is acting as a disclosed agent or an undisclosed agent or commissionaire.

If you have any questions or require a more detailed discussion, contact Severus Smuts (Director – Value Added Tax at Deloitte South Africa) at

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