In brief

Most major markets, including the European Union, Japan, Korea, Australia, New Zealand, Russia and South Africa, now impose some form of extraterritorial indirect tax on electronically supplied services (ESS). While one would find similarities between ESS indirect tax regimes, each country's system has its own challenges. The main challenge faced in relation to applying an ESS indirect tax charge in most countries lies in determining where/in which country the services are consumed. The destination principle has been widely accepted as a primary means for determining how to apply value-added tax (VAT) or goods and services tax (GST) to international trade, though common approaches include taxing ESS either in the jurisdiction where the customer resides or in the jurisdiction where the supplier is established. However, the general aim has been to implement a destination-based approach for both business-to-business (B2B) and business-to-consumer (B2C) transactions, such that tax applies in the country where the service is received and consumed.


  1. ESS in South Africa
  2. Electronic services and human intervention
  3. Software-as-a-Service
  4. Services that do not qualify as ESS
  5. ESS in Kenya
  6. ESS in Nigeria
  7. In conclusion

The Organisation for Economic Co-operation and Development's (OECD) international VAT/GST guidelines address the collection of VAT on cross-border supplies of digital goods and services in B2C transactions. The guidelines state that nonresident suppliers must register for, charge, collect and remit VAT/GST in the consumer's jurisdiction. This is consistent with the 'destination principle', in that the jurisdiction of consumption is entitled to impose indirect tax on the supply. This is intended to encourage compliance with an extraterritorial obligation, and a critical issue in the coming years will be to ensure consistent implementation of the OECD's recommendation.

ESS in South Africa

South Africa (SA) applies the destination principle in that any supplies of electronic services to persons who are SA residents, have a business or residential address in SA and pay from a SA bank account would result in a foreign ESS supplier being regarded to be carrying on an enterprise for VAT purposes in SA. While SA first introduced an ESS VAT regime in 2014, the scope of services that qualified as 'electronic' was limited. An amended regulation expanding the VAT base for ESS was introduced effective April 2019. This saw all services supplied electronically for a consideration being caught in the SA VAT net and foreign suppliers of electronic services having an obligation to determine their VAT liabilities in SA.

The amended regulations define electronic services to be those services supplied by means of an electronic agent, electronic communication or the internet. In other words, all services that are dependent on information technology, that are automated and that involve minimal human intervention fall within the revised definition of electronic services (this is a similar test to that applied under EU VAT Regulations). It is important to keep this in mind when considering whether a service is regarded as ESS for purposes of the SA VAT Act. We set out below some of the key questions to be considered and the pitfalls that can arise.

Electronic services and human intervention

When considering whether a service qualifies as ESS in SA, it is clear that a legal opinion that is issued by a legal practitioner based in the EU, for example, and emailed to an SA client, is not regarded to be an ESS. This is because of the fact that the service, although transmitted by means of electronic communication (i.e., via email), is not dependent on information technology and involves substantial human intervention. On the other hand, the supply of online training programmes, which may have involved extensive human intervention during the development stages but are subsequently supplied online, qualify as electronic services because the training programmes are ultimately supplied via the internet and are not dependent on further human intervention at the time of supply.

A question that has arisen in various jurisdictions where human intervention is a test for ESS is whether the extent of human involvement in relation to certain services could lead to a particular service being completely included or disregarded as an ESS for purposes of the ESS VAT regime.

For example, with respect to the example given above regarding the supply of online training programmes, one might question whether the services would fall outside the definition of electronic services if the student has access to the course director either during or after consuming the training online.

To come to some sort of conclusion, the extent of interaction between the student and course director needs to be considered. The training programme cannot be regarded as an ESS if the course director actively presents the training programme to the student via online streaming because the supply depends heavily on human intervention. The characterisation is less clear if, for example, the course director only comes online to address any questions after the student has completed a relevant part of the training, or the student is only able to interact with the course director via email during or after attending the training. It is likely that the services would still qualify as ESS on the basis that the core service, being the training programme, is dependent on information technology and supplied by means of the internet. In other words, the human intervention does not relate to the actual supply of the programme and, accordingly, the supply of the training programme with the benefit of being able to interact with the course director could still qualify as ESS. The supply of supplementary services by the course director could, however, be regarded a separate supply that could have its own VAT implications outside of the ESS VAT regime.


Further, multinational companies with a Software-as-a-Service (SaaS) business model should be aware that SaaS would qualify as ESS in SA. SaaS is the cloud-based distribution of software through the internet based on subscription fees, and therefore meets the definition of electronic services in the SA context of ESS on the basis that it entails services that are supplied by means of an electronic agent, electronic communication or the internet. As such, businesses delivering such services in SA could have an obligation to register for VAT in SA.

While this is the case, SaaS is often supplied through intermediaries or in-country distributors. Where supplies of electronic services are made via VAT-registered intermediaries, the SA VAT Act deems those supplies to be made by the intermediary provided that the intermediary facilitates the supplies in that it is responsible for issuing invoices and collecting payment. This allows for the collection of VAT in respect of foreign ESS suppliers who supply services electronically to SA customers but who fall below the VAT registration threshold, and thus does not have an obligation to register for VAT in SA. As soon as a foreign ESS supplier exceeds the VAT registration threshold (with respect to its supplies to the intermediary of distributor), however, they have a legal obligation to register for VAT in SA.

The SA VAT regime departs from the OECD's stance on ESS VAT in that it does not distinguish between B2B and B2C transactions. This is mainly because the VAT legislation does not make a distinction between B2B and B2C for domestic supplies and the SA National Treasury is of the view that introducing this concept for foreign ESS suppliers would create an unfair cash flow advantage which domestic suppliers would not be able to benefit from. The South African Revenue Service (SARS), in turn, is of the view that not distinguishing between B2B and B2C reduces the risk of distortions in trade between foreign and domestic ESS suppliers, and that it ensures a level playing field with no VAT benefit for any parties. A foreign ESS supplier therefore has to register for ESS VAT irrespective of the nature of its transactions, i.e., B2B or B2C.

While this may seem to simplify things across the spectrum, it results in unnecessary compliance obligations for foreign ESS suppliers with a SaaS business model who supply their services only to VAT-registered intermediaries or distributors in SA for subsequent supply to the final consumer. Although we note that currently SARS seems to regard an intermediary mainly as a platform or electronic marketplace, in-country distributors who acquire SaaS services ordinarily facilitate the supply of the software by being responsible for distribution, invoicing and payment collection. Since most in-country distributors are VAT-registered, it would make sense to regard them as intermediaries and exempt the foreign ESS supplier, who currently has an obligation to register for VAT as soon as its taxable supplies exceed the VAT registration threshold, from registering for VAT. Similarly, if the SA VAT regime distinguished between B2B and B2C transactions, it would not have been necessary for foreign SaaS suppliers who supply only to VAT-registered intermediaries or in-country distributors to register for VAT in SA.

We understand various parties have raised the question with SARS as to its view on whether a distributor may be an intermediary, but there has been no clarification in this regard. One thing SARS seems to be certain on is their view that foreign ESS suppliers should register for VAT regardless if they are supplying their services through a locally registered intermediary, if it meets the current VAT registration threshold of ZAR 1 million in any consecutive 12-month period. While we do not hold the same view, we do not expect clarity in this regard until it is tested in the SA courts.

Services that do not qualify as ESS

Another matter that foreign companies that supply electronic services to SA customers need to consider is whether these services are indeed considered to be services for SA VAT purposes. The definition of services in the VAT Act specifically includes the granting, assignment or surrender of a right. Despite this, the supply of a right to use goods, or the granting of permission to use goods, is deemed by the SA VAT Act to be a supply of goods and not services. It follows that a company that grants SA customers the right to use of goods through an electronic platform, for example, would not be considered to be carrying on an enterprise as an ESS supplier. Nevertheless, it could still find itself having to register for VAT under the normal VAT regime because it carries on an enterprise (or VAT-fixed establishment) in SA through continuously or regularly supplying goods to customers in SA.

ESS in Kenya

Kenya implemented VAT on digital marketplace supplies (DMS) effective October 2020. Kenya tends to follow international trends when it comes to the taxation of foreign supplied electronic/digital services and the Kenya Revenue Authority's (KRA) approach was heavily influenced by the OECD guidelines.

Kenya defines DMS as any supplies of services made on a digital marketplace. This limits the application of VAT to specific services that, amongst others, include downloadable digital content, e.g., mobile applications; music, e-books and movies; subscription-based media; the supply of software, electronic data management services, including website hosting; and the supply of online marketplaces.

Kenya employs similar tests as the EU and SA to determine whether a foreign DMS supplier is liable for VAT in Kenya; that is, if it supplies electronic services to a customer who is located in Kenya, has a Kenyan billing or home address and pays via a Kenyan bank. Kenya, however, only requires foreign DMS suppliers to register for VAT in Kenya through a simplified tax registration framework if supplies are made on a B2C basis. In B2B transactions, the reverse VAT charge applies where relevant.

ESS in Nigeria

Nigeria first introduced rules to impose VAT on digital services provided by nonresident companies to Nigerian customers on a B2C basis through existing VAT legislation, by applying a reverse charge mechanism effective January 2020. Following a slow compliance uptake, new rules were introduced with effect from January 2021 whereby foreign-based companies that supply digital services to Nigerian customers on both a B2C and B2B basis have a technical obligation to register for VAT since, as is the case in Kenya, there is no VAT registration threshold. However, in B2B transactions, the recipient, i.e., the Nigerian customer, is required to account for the VAT charged by the foreign ESS supplier through a reverse charge mechanism while the foreign-based company has an obligation to collect and pay the VAT due on B2C transactions to the Federal Inland Revenue Service (FIRS).

In conclusion

In this article, we have discussed a few of the pitfalls multinational companies that provide electronic services to SA customers face in determining their VAT obligations in SA. While the definition of electronic services and the test for an ESS enterprise seems to be clear, companies could find themselves exposed to VAT and administrative penalties, as well as understatement penalties of up to 200% of tax payable, should they not comply with their SA VAT obligations. We have also displayed that African countries are generally following international trends, largely based on OECD guidelines, by imposing indirect tax on ESS. While this is the case, the ESS VAT regimes implemented across the continent differ from one country to the next, and companies that do not have fixed places of business in these countries may be exposed to financial and reputational risks for noncompliance.