Mitigating Tax Evasion by improving the organizational structure of VAT on Digital Imports into South Africa

Abstract

The South African Value-Added Tax (VAT) Act exhibits an illogical structure for digital imports. The complexity of digital import taxation creates uncertainty and has an impact on compliance, resulting in tax avoidance and diminished tax revenues. This study analysed the organisational structure of digital imports in the VAT Act as a legally complex element. This study established that the organisation of the VAT on digital imports complicates legislation and introduces ambiguity, leading to increased tax evasion and compliance, as well as administrative expenses. This study employed existing guidelines to simplify the VAT Act and improve the organisational structure regarding the VAT implications of digital imports. The methods used included a qualitative research technique utilising a doctrinal approach, as well as applied research. This study is the first to apply Hassan, Bornman and Sawyer’s VAT simplification framework to South African digital imports. The guidelines developed by these authors encompass section grouping, headings and subheadings, and explicit signposting, which were implemented in this article to effectively demonstrate and simplify the VAT consequences for digital imports. A logically structured VAT framework will improve clarity in digital import compliance, thereby reducing tax evasion. Therefore, this study contributes to tax compliance theory by proposing that a reduction in complexity and improvement in transparency mitigate tax evasion.

1. Introduction

“The VAT that broke The Budget.”

(Van Niekerk, 2025)

The Value-Added Tax (VAT) Act was implemented in South Africa on 30 September 1991 (Republic of South Africa, 1991). The VAT Act includes specific regulations that pertain to electronic services that are rendered by non-residents. On 1 April 2014, South Africa, as an early adopter of the Organisation for Economic Co-operation and Development (OECD) recommendations, implemented legislative changes requiring foreign suppliers of electronic services that meet the minimum VAT registration threshold to register as VAT vendors (National Treasury, 2013).

Before assessing the VAT implications of importing electronic services provided by non-residents, it is essential to understand the legislative treatment of “imported services” under the current framework. This study is guided by the hypothesis that aligning South Africa’s VAT structure with internationally recognised simplification principles can reduce non-compliance and improve the enforcement of digital imports.

The sections that pertain to “imported services” supplied by non-residents are as follows:

• Section 1 definitions: “supply”; “imported services”; “open market value”.
• Section 3: determination of “open market value”.
• Section 7(1)(c): imposition of VAT on imported services by any person.
• Section 14: collection of VAT on imported services, determination of value and exemptions; read with Section 10(2) and (3): general value of supply rule; and Section 3: determination of open market value.

The following sections must be considered when “electronic services” are supplied by non-residents:

• Section 1 definitions: “electronic services”; “enterprise”—paragraph (b)(vi); “export country”; “services”; “supply”.
• Section 7(1)(a): imposition of VAT on the sale of goods or services.
• Section 7(1)(c): imposition of VAT on imported services by any person; read with Section 14(5)(a): exceptions to imposition of VAT on imported services by any person.
• Section 23(1A): registration requirements for suppliers of electronic services.
• Section 16(2)(b), read with Section 20(7): input tax and documentary requirements.
• Government Notice No. 429 published in Government Gazette No. 4231: regulations with respect to electronic services.
• Alongside the provisions of the VAT Act, vendors must additionally refer to the following guidance papers provided by the South African Revenue Service (SARS) to thoroughly understand the VAT requirements related to the provision of electronic services in South Africa: SARS Frequently Asked Questions: Supplies of Electronic Services (South African Revenue Service, 2019a); SARS External Guide: Foreign Suppliers of Electronic Service (South African Revenue Service, 2022a); and Binding General Ruling No. 28: Electronic Services (South African Revenue Service, 2016).

The above example illustrates the fragmented structure of the VAT Act, highlighting the need to consult multiple sections and external guidance documents when evaluating the VAT treatment of electronic services supplied by non-residents. While Sections 9 and 10 of the VAT Act discuss the time and value of supply regulations, the Act does not consistently adhere to a coherent logical structure. In the assessment of imported services, the time and value of supply are located in Section 14, as opposed to Sections 9 and 10, respectively. Moreover, while Section 1 includes provisions applicable throughout the Act, Section 3 specifically defines “open market value”, which is referenced in Section 10(2) of the VAT Act.

The VAT Act does not adhere to the lifetime of a VAT vendor, as VAT registration is initially addressed in Section 23, although the criteria for registration are outlined in Section 15.

The sections do not consistently cross-reference reciprocally. The example above contains no cross-reference in Section 7(1)(c) to Section 14. Nonetheless, the cross-reference to Section 7(1)(c) is found in Section 14. Section 23(1A) includes a retrospective cross-reference to the definition of “enterprise” in Section 1, specifically paragraph (b)(vi).

External documentation must be referenced to thoroughly understand the VAT obligations associated with importing electric services. The term “electronic services” in Section 1 pertains to services designated by the Minister through regulation, namely Government Notice No. 429 (National Treasury, 2019). In addition, it is essential to review the SARS Frequently Asked Questions, Guidance and Binding General Ruling. This further exemplifies the dispersion of provisions in the VAT Act, as well as explicit citations to external Government Gazette notices and other guidance papers published by the SARS that must be referenced when assessing the VAT implications for digital imports.

SARS guides are designed to aid taxpayers in comprehending and fulfilling the legal requirements mandated by the legislation (South African Revenue Service, n.d.). The South African Revenue Service (2021, n.p.) articulates on its website that “Interpretation Notes are intended to provide guidelines to stakeholders (both internal and external) on the interpretation and application of the provisions of the legislation administered by the Commissioner.” According to Section 1 of the Tax Administration Act (No. 28 of 2011) (TAA), in conjunction with Section 5(1) of the TAA, a “practice generally prevailing” is “a practice set out in an official publication regarding the application or interpretation of a tax Act” (Republic of South Africa, 2011, n.p.). Section 1 of the TAA defines an “official publication” as explicitly encompassing an interpretation note. SARS guidelines and interpretation notes have limited or negligible relevance in conflicts when their interpretation is contested in court, as demonstrated in Marshall NO v Commissioner for the South African Revenue Service (2018) CCT 208/17 ZACC 11.

This example illustrates the research problem investigated, which is that the VAT Act lacks a logical structure in relation to the provision of “electronic services” by non-residents. The provisions relevant to digital imports are dispersed throughout the VAT Act, resulting in a comprehensive yet incoherent structure that complicates and limits understanding. A negative link exists among tax sanctions, detection probability, tax ethics, tax justice, forensic accounting, government expenditure and VAT evasion (Alshira’h et al., 2025). Complexity results in ambiguity and reduces detection, thereby adversely affecting VAT compliance, which results in tax evasion and subsequently influences collection levels.

Despite the growth of the digital trade industry, there is a lack of academic research that evaluates how the organisational structure of the VAT Act affects compliance in the context of digital imports, particularly in South Africa. Most existing studies focus on policy or economic implications, rather than legislative complexity. This study addresses this gap by applying a VAT simplification framework (developed by Hassan et al., 2024) to the South African VAT Act, specifically as it pertains to digital imports. To the author’s knowledge, this is the first study that systematically analyses and proposes structural amendments to the VAT Act using a doctrinal legal approach, with the objective of reducing complexity, enhancing legal certainty and improving tax compliance.

The following research questions were formulated to address the above research gap:

RQ1: To what extent does the organisational structure of the South African VAT Act contribute to legal complexity and tax non-compliance in the context of digital imports?

RQ2: How effectively can the VAT simplification framework proposed by Hassan et al. (2024) be applied to improve the logical structure of the VAT Act regarding electronic services?

The aim of this study was to improve the structure of the sections of the VAT Act Africa concerning “electronic services” supplied by non-residents, using the article “Guidelines for a simplified Value-Added Tax Act” by Hassan et al. (2024). The main aim was to use these guidelines to strengthen and simplify the layout, design and structure of the VAT Act, specifically the sections concerning digital imports. The methods used to answer the research question included a qualitative research technique utilising a doctrinal approach, as well as applied research.

2. Literature Review

This section sets out the theoretical foundations of tax complexity. The literature review begins with an examination of previous work related to improvements in legal complexity, focusing specifically on logical structure. Subsequently, it presents empirical findings concerning the inconsistent structure of VAT legislation, both internationally and in relation to the South African VAT Act. Finally, the review includes a thorough examination of the literature regarding guidelines for logical structure in legal drafting.

2.1. Tax Complexity

Tax legislation, like many other laws, frequently exhibits ambiguity in many contexts (Givati, 2009). There are three areas of potential ambiguity in tax law: precise interpretation of legislative text, application of the law to specific factual circumstances, and the type of evidence necessary to establish fundamental facts. Tax complexity refers to convoluted substantive tax legislation characterised by intricate interrelationships that are defined by complex statutory language and structure (Surrey, 1969). According to Richardson and Sawyer (1998), increasing the sophistication of tax legislation results in tax complexity. Tran-Nam (1999) finds that tax law complexity is determined by language (e.g., clarity of language, grammatical structure, sentence length, use of active voice and logical organisation) as well as content (e.g., ambiguity, exemptions, rebates and concessions, and annual revisions).

This study focuses on logical structure, which is a specific element of tax complexity. Legal complexity describes the challenges associated with reading, understanding, interpreting and applying a specific tax statute in various practical contexts. This definition clearly indicates that legal simplicity is of paramount importance to academic and practising tax attorneys, tax advisors, tax policymakers and the judiciary. While numerous scholars emphasise the influence of tax law complexity on compliance, it is evident that such complexity also affects the degree of legal certainty (Givati, 2009). Legal complexity necessarily produces ambiguity. Legal challenges emerge from the precision of administrative regulations, stemming from either administrative ambiguity or undue regulatory rigidity (Diver, 1983).

Legal simplicity is the antithesis of legal complexity. Epstein (1997) articulated six foundational criteria for achieving legal simplicity. These concepts comprise four rules that regulate human interactions in daily social life: individual autonomy, property, contract and tort. Furthermore, two regulations are provided for compelled swaps upon payment of equitable compensation when dictated by private or public necessity. Roberts et al. (1971) recommend that all stakeholders engaged in tax formulation prioritise the elimination of complexity and ambiguity. An empirical investigation by Al-Asfour and McGee (2024, p. 3) concluded the following: “Taxpayers weigh the certainty of tax payments against the risks and potential gains of evasion.”

Katz and Bommarito (2014) offer a structured framework for assessing the intricate characteristics of legal systems. This paradigm, rooted in “knowledge acquisition”, merges psychology and computer science, examining the structure, terminology and interrelation of legislation. It is essential to differentiate between legal terminology and colloquial language. A tax statute such as the VAT Act constitutes a legal document, and must adhere to the norms of a legal framework. Simplifying how concepts are grouped can improve comprehension; however, structure, language and dependency also need to be considered (Katz & Bommarito, 2014).

2.2. General Literature: Legal Complexity and Logical Structure

New Zealand has spearheaded projects of rewriting tax legislation. It is the closest to best practice of the three jurisdictions that have done so (namely Australia, New Zealand and the United Kingdom) (Sawyer et al., 2019). Although Australia initiated a rewrite project, it was not explored further, as the literature was not strong enough, suggesting that simplification has not been accomplished (Smith & Richardson, 1999).

The 1994 Organisational Review of Inland Revenue and the Consultative Committee on the Taxation of Income from Capital, referred to as the Valabh Committee, was the principal catalyst for the Rewrite Project in New Zealand (Sawyer, 2016). The Valabh Committee’s 1991 report proposed the reorganisation of legislation, specifically the Income Tax Act 1976 and the Inland Revenue Department Act 1974, into a more logical and consistent framework under the New Zealand rewrite project. The report addressed significant modifications to the tax legislation framework (Smaill, 2021, p. 2). Richardson and Sawyer (1998) analysed the New Zealand government’s dedication to restructuring and ultimately revising income tax legislation in 1992. Their research investigated the impact of the rearrangement on average sentence length. Although the rewrite was only partially finished, the findings from the study were promising. Prior to the conclusion of the rewrite project, Pau et al. (2007) performed an additional empirical analysis employing readability metrics to assess the rewritten segments of New Zealand’s Income Tax Act of 2004 and other tax-related documents, including tax information bulletins and binding rulings. Although the rewriting effort was incomplete, the readability indices indicated that the Income Tax Act of 2004 was significantly more accessible than the Income Tax Act of 1994 and the Income Tax Act of 1976. Saw and Sawyer (2010) assessed the efficacy of the New Zealand rewrite effort by assessing the readability levels of the New Zealand Income Tax Act and associated documents. The results of a study by Tan and Tower (1992) were compared with those of Saw and Sawyer (2010), indicating that New Zealand’s initiatives to amend tax legislation successfully improved readability (Sawyer, 2013). The New Zealand Income Tax Act experienced multiple amendments, commencing with the reformation of the Income Tax Act of 1976 and the Inland Revenue Department Act of 1974. These modifications culminated in the implementation of the Income Tax Act of 1994, alongside the Tax Administration Act of 1994 and the Taxation Review Authorities Act of 1994. Consequently, the reorganisation of the statute enhanced its readability.

The Office of Tax Simplification (OTS) was formed in the United Kingdom in 2010 for a term of five years. The primary purpose was to provide a thorough analysis of all aspects of the tax system and offer detailed recommendations for both short-term and long-term enhancements. It was explicitly directed to avoid policy issues and to propose recommendations that would not affect the total revenue produced by the tax system. The OTS was formally instituted as a permanent component of the United Kingdom’s tax framework in 2015, with full legal authority (Dodwell, 2021). The OTS was dissolved in 2022 (Office of Tax Simplification, 2022). Sawyer (2023, pp. 1–2) contends that this decision was predicated on misinformation and may be regressive, thereby jeopardising the substantial advancements made by the OTS.

The OTS developed a “complexity index” to help analyse different aspects of the tax code. They then focused their efforts on areas that provided the greatest benefit. The index was developed gradually and underwent several versions before being refined to include 10 key factors (Office of Tax Simplification, 2017). The examination of the readability of a provision focused on its independent comprehensibility vs. its possible dependence on substantial cross-referencing and validation of definitions in other sections of the code. It is argued that, if the collection of relevant information requires considerable effort, the rating should be adjusted accordingly. Consequently, the OTS evaluated the arrangement of parts and cross-references to definitions when establishing the complexity index. The United Kingdom initiated a reform to restructure legislation using modern language and succinct words. The project also offered clear descriptions and unambiguous cross-references to improve clarity and understanding (Budak & James, 2018). Despite efforts at simplification, including those by the OTO, the VAT Act continues to be notably complex (Institute of Chartered Accountants in England and Wales, 2024).

Singapore and Canada successfully simplified legislation for VAT/Goods and Services Tax (GST) for digital imports. Singapore modified its GST framework to more effectively capture income from digital transactions. Key measures included the reverse charge mechanism, overseas vendor registration and clarification on the place of supply rules (Hern Kuan & Ooi, 2019). On 30 June 2025, three subsidiary legislative measures were published that implemented significant revisions to Singapore’s GST framework (O’Neill, 2025). These modifications signify ongoing progress towards enhanced regulatory consistency and compliance enforcement within Singapore’s indirect tax regime. Similarly, the Canada Revenue Agency has implemented a simplified process for verifying GST and Harmonized Sales Tax (HST) account numbers, particularly for digital businesses (Government of Canada, 2025). This helps to decrease the administrative burden, enhance transparency in tax registration and improve compliance for online and cross-border sellers.

Pinskaya et al. (2022) recognised methodological issues regarding the indirect taxation of cross-border electronic services in Russia, and proposed recommendations to ensure adherence to the principles of tax neutrality and simplicity. To ascertain the goal of VAT taxation, Pinskaya et al. (2022) suggested employing a methodology that defines services via the logical process of subtraction, encompassing any transaction involving the sale of anything other than goods. The consumer’s nationality was recommended by Pinskaya et al. (2022) as a general criterion for ascertaining the VAT location of supply for business-to-business services. Pinskaya et al. (2022) proposed the implementation of a reverse charge (tax agent) model for the payment of VAT on the importation of business-to-business services in electronic format. These recommendations seek to standardise the structure and present a logical VAT taxation system for cross-border digital and non-digital services in Russia, thereby fulfilling the stated objectives of tax policy within an international framework.

In Africa, VAT fraud is particularly challenging due to the presence of a large informal sector and the underground economy, corruption, the absence of adequate taxpayer databases, poor identity management, the challenge of limited resources, insufficient qualified personnel for tax administration and the inability to enforce compliance (De La Feria & Schoeman, 2019; Keen & Smith, 1996). De La Feria and Schoeman (2019) assert that combatting fraud in Africa necessitates a coordinated strategy that includes both legal/policy and administrative measures. Administrative procedures aimed at improving compliance are most effective when implemented alongside a legal framework specifically geared to reduce instances of fraud. In addition to tax administration measures, an examination of the legal design characteristics of the VAT system is necessary. Recent academic studies have increasingly emphasised the need for tax reform in developing economies, particularly in Africa (Caldeira et al., 2019; Eloundou et al., 2025; Kamasa et al., 2025; Onana & Mamoho, 2025). Abidar et al. (2025) propose that governments should address the tax uncertainty encountered by enterprises during tax reforms, facilitating business adaptability to mitigate the adverse effects of such uncertainty, as illustrated by Chen and Jin (2023) in the context of China.

2.3. Findings from the Literature: Scattered Sections of the VAT Act

The Davis Tax Committee (2018, p. 91) addressed the streamlining of South Africa’s corporate tax structure as follows:

One radical suggestion has been that the Act should be re-written and re-structured in its entirety. Such a rewrite would undoubtedly result in a rearrangement of the provisions of the Act into a more coherent logical sequence. This may enhance the efficiency of the compliance environment of taxpayers.

[Emphasis added.]

Only one author has demonstrated that the same legal complexity present in the Income Tax Act is also present in the VAT Act. Young (2021) examined the logical framework of the South African VAT Act and made the following comment:

Cross-references between sections also abound, making the interpretation of the sections extremely complex. Section 16(3) of the VAT Act includes fourteen subsections, some with numerous sub-subsections and provisos, each of which is cross-referenced to a different section in the Act.

2.4. The General Literature: Principles of Logical Structure

Systematic organisation of a statute enhances its clarity (Thuronyi, 1996). A well-organised statute allows a reader to easily identity relevant material. Strong organisation also eliminates extraneous parts for certain taxpayers, thereby assisting the reader in finding answers to particular questions. To maintain organisational coherence, it is essential to consolidate provisions related to the same subject. Furthermore, it is essential that each subdivision of the statute, including its individual sections, be arranged in a logical and systematic fashion (Dale, 1977; Thuronyi, 1996). The structure of a legal framework plays a critical role in the quality of legal drafting. A well-designed legislative framework presents laws in a clear and organised way, both in terms of content and layout (Crabbe, 1993). It promotes the logical progression of topics and the consistent arrangement of sections. For example, in academic writing, it is standard practice to start with the main principle and then address any exceptions or specific rules. Kimble (1996), in a review of plain English in legal writing, recommends grouping related ideas together and presenting them in a clear, logical order.

An example of poor organisation is when a significant statute is not divided into sections. This requires the reader to thoroughly explore the entire document to find relevant clauses, resulting in lost time and energy (Thuronyi, 1996). Thuronyi (1996) asserts that a well-crafted tax statute frequently includes numerous explicit and implicit cross-references. Explicit cross-references denote certain sections or provisions in the statute, whereas implicit cross-references include the use of terms that are defined in other parts of the Act.

Changing the structure of legislation can improve its visual attractiveness and therefore its readability (Hunt, 2002). Other recommendations include arranging sections in a sequential manner and sorting those with similar subjects together (Hunt, 2002, p. 25).

Petelin (2010) suggests that an effective method for improving clarity in writing is to first develop a profile of the intended audience and potential readers. Petelin (2010) presents an extensive array of rules classified under the categories of “substance and structure” and “style (verbal and visual)”. Petelin (2010) asserts that information content and structure should be organised consistently and logically by presenting broad information before delving into details and exceptions. This should be enhanced with transitional words and phrases (Petelin, 2010). Well-organised content is arranged from the reader’s perspective rather than the author’s. Cutts (2013) asserts that it is crucial for readers to easily navigate the text, find the exact information they are looking for and understand it.

Straightforward tax legislation is essential for taxpayers to understand and comply with regulations in an economically efficient manner (American Institute of Certified Public Accountants, 2001). Some recommendations to improve the logical structure in legal drafting include grouping, employing headings, using explicit cross-referencing and customising the text for the target audience.

3. Materials and Methods

This qualitative study employed a doctrinal and applied research approach. Conducting doctrinal research involves the use of secondary sources and commentary to identify the current knowledge and gaps related to the research topic. This technique entails performing a literature review (Hutchinson & Duncan, 2012). In this study, a doctrinal approach with an authoritative interpretation of the literature was used, consistent with Van Hoecke (2011). This method relies on a thorough examination of the sections of the VAT Act that relate to imported services, specifically focusing on “electronic services” supplied by non-residents. The cross-referencing structure and legal coherence of Sections 1, 3, 7, 14 and 23 of the VAT Act were assessed according to Van Hoecke’s doctrinal model. Multiple data sources were included in the literature review. Data and documents were collected via web searches using search engines such as Google Scholar and Scopus. Court cases, as well as the writings of tax specialists, were also consulted to incorporate public discourse. The websites of professional accounting firms, governmental agencies including SARS and the National Treasury, and international organisations such as the OECD were also analysed. The search terms included the keywords of this study. The validity and dependability of the findings were confirmed by the development of a strong argumentation framework. Academic articles, court judgements, tax specialists’ opinions and SARS guidelines were also used. Gathering primary data was not deemed necessary for this study, as the study by Hassan et al. (2024) was based on primary data collected through semi-structured interviews.

This article is grounded in the literature and based on criteria from the results of a qualitative survey conducted in 2023 (Hassan et al., 2024). That study involved qualitative research, a doctrinal approach and applied research. The applied research entailed utilising findings from empirical studies, such as suggestions for simplifying the VAT Act, to formulate a coherent methodology for assessing electronic services provided by non-residents, thereby addressing a real-life research issue (Brodsky et al., 2008).

“Imported services” is defined as the supply of services, made by a supplier who is not a resident of the Republic of South Africa or who carries on a business outside the Republic, to a recipient who is a resident of the Republic to the extent that such services are utilised or consumed in the Republic for non-taxable purposes (South African Revenue Service, 2019b). “Electronic services” means any services supplied by a foreign supplier for consideration by means of an electronic agent, an electronic communication or the internet.

4. Results

This section presents the results of an analysis of importation regulations on electronic services in the VAT Act, informed by the literature.

4.1. Imported Services

4.1.1. Summary of VAT Implications

The standard rate of VAT, namely 15%, applies to the supply of “imported services”, subject to any exemptions permitted under Section 14(5) (South African Revenue Service, 2019b). The recipient of imported services (i.e., any person) is responsible for declaring and paying the VAT. Only if the definition of “imported services” is met are these services subject to VAT, i.e., only to the extent that these services are used and applied for non-taxable usage.

4.1.2. The Law

The sections of the VAT Act that must be considered for “imported services” are the following:

• Section 1 definitions: “supply”; “imported services”; “open market value”.
• Section 3, determination of “open market value”.
• Section 7(1)(c).
• Section 14, read with Section 10(2) and (3), and Section 3.

4.1.3. Analysis and Interpretation

“Supply” is widely defined to include all forms of supply. Section 7(1)(c) of the VAT Act stipulates as follows:

Imposition of value-added tax.—(1) Subject to the exemptions, exceptions, deductions and adjustments provided for in this Act, there shall be levied and paid for the benefit of the National Revenue Fund a tax, to be known as the value-added tax—

(a) …

(b) …

(c) on the supply of any imported services by any person on or after the commencement date,

calculated at the rate of 15 per cent on the value of the supply concerned or the importation, as the case may be.

The importer must levy and pay VAT on the imported service into South Africa, but only to the extent that the services are used and consumed for non-taxable supplies (Section 7(1)(c), read with the definition of “supply” and “imported services” in Section 1 of the Act). To demonstrate that the VAT Act does not make use of plain English, the researcher argues that the definition of “imported services” in the VAT Act does not correspond to the literal meaning of imported services, which is to bring a service into a country from abroad (Collins online dictionary, 2023). In terms of Section 1 of the VAT Act, the definition of “imported services” means the following:

… a supply of services that is made by a supplier who is resident or carries on business outside the Republic to a recipient who is a resident of the Republic to the extent that such services are utilized or consumed in the Republic otherwise than for the purpose of making taxable supplies;

VAT on imported goods is paid by the person importing the goods into South Africa (Section 7(1)(b) of the VAT Act) and is collected by customs before clearing the goods into the country. However, VAT on imported services is paid by the person importing the services into South Africa, only to the extent that these services are used and consumed for non-taxable supplies (Section 1, definition of “imported services”). In the case of imported services, reliance is therefore placed on the importer to declare and pay the VAT to SARS. According to South African Revenue Service (2019b, p. 112),

Examples of when a resident recipient has to account for VAT on imported services are where the recipient–

• is not a registered vendor;
• is a vendor, but the services are wholly or partly for making exempt supplies; or
• is a vendor, but the services are applied for private purposes.

In order to determine when an importer must account for VAT on imported services, one must consult the SARS VAT 404 guide, because the definition of “imported services” does not correspond to the literal meaning of imported services.

Section 14 of the VAT Act deals with the collection of VAT on imported services, including how their value is determined, as well as any exemptions which may be applied. While Section 10(2) and (3) outline the general rules for valuing supplies, and Section 3 defines “open market value”, these rules are applied differently in the case of imported services. Specifically, the time of supply is considered to be earlier than the invoice date or payment, and the value of supply is greater than either the consideration paid or the open market value (as per Section 14, read with Sections 10(2), 10(3) and 3).

Although time and value rules are already set out in Sections 9 and 10 of the VAT Act, the Act places special rules for imported services in Section 14 instead. This fragmented placement raises questions about the Act’s internal logic. In practice, readers must still refer back to Section 10(2) for determining value, which creates unnecessary complexity and inconsistency in how the VAT Act is used and applied.

Further confusion arises from weak cross-referencing between related provisions. For example, Section 7(1)(c), which imposes VAT on imported services, does not reference Section 14, even though Section 14 refers back to it. This lack of forward cross-referencing can make it difficult for users to identify which sections to consult when interpreting VAT rules for imported services.

To summarise, the sections that must be considered for “imported services” are as follows:

• Section 1 definitions: “supply”; “imported services”; “open market value”.
• Section 3: determination of “open market value”.
• Section 7(1)(c): imposition of VAT on imported services by any person.
• Section 14: collection of VAT on imported services, determination of value and exemptions, read with Section 10(2) and (3) (general value of supply rule), and Section 3 (determination of open market value).

A recent case of the Supreme Court of Appeal (SCA), Consol Glass (Pty) Ltd. v The Commissioner for the South African Revenue Service (1010/2019) (2020) ZASCA 175, involving the interpretation of imported services, highlighted the complication that the scattered provisions in the VAT Act create.

An analysis of the court case is presented below.

• Facts

Consol bought Consol Limited and two of its subsidiaries as going concerns in 2007 and maintained the glassmaking operations formerly carried out by the three companies (De Wet & Moonsamy, n.d.). The Consol Group underwent a reorganisation just before this transaction. To finance the acquisition of the businesses, Consol issued Eurobonds (“debt”). The interest payments and obligation to redeem such debt were denominated in euros; Consol entered into hedging transactions in order to guard against rand vs. euro volatility.

Consol restructured its debt in 2012, basically exchanging its (foreign) debt for (local) debt/finance from a group of local banks (De Wet & Moonsamy, n.d.). It did this by procuring services from both domestic and international service providers. Consol claimed an input tax deduction for the VAT paid on the local services purchased. SARS issued assessments in July 2015, rejecting Consol’s input tax claims and levying output tax on the imported services.

b.

Issue

The SCA had to decide on the following two issues (Consol Glass (Pty) Ltd. v Commissioner for SARS, 2020):

(i)

Whether the tax court was correct in finding that SARS was entitled to disallow Consol’s claim for input tax on fees charged by local service providers;

(ii)

Whether the tax court was correct in finding that Consol was required to declare and pay VAT on fees paid by Consol to foreign service providers who supplied services to it.

c.

Arguments by SARS

The Commissioner stated that both the local and the international services were acquired in order to produce an exempt financial service supply (Besanko et al., 2021). Consol was issuing a debt security to secure loans from the consortium of banks, according to the Commissioner, which qualifies as “financial services” under Section 2(1)(c). Section 12 exempts the provision of financial services from VAT.

Consol was not entitled to claim input tax for the VAT incurred on the cost of local services because such costs were incurred in the course of producing exempt supplies, according to SARS (Besanko et al., 2021). Similarly, the foreign services fulfilled the VAT Act definition of “imported services”, and Consol was required to declare VAT on them.

d.

Arguments by Consol

The Eurobonds were initially used to acquire assets that enabled Consol to produce and sell glass containers and therefore make taxable supplies, according to Consol’s grounds for appeal (Besanko et al., 2021). Consol was correct in claiming input tax and not declaring VAT on imported services, because the refinancing transactions replaced foreign debt with local debt and allowed Consol to continue the same business it had acquired in 2007, namely the making of taxable supplies through the manufacture and sale of glass containers.

e.

Judgement

The SCA looked at the entire transaction, including the group’s reorganisation, Consol’s acquisition of the businesses, the issuance of Eurobonds and the refinancing of the restructure by swapping Eurobonds for local financing.

Consol’s enterprise is that of manufacturing and distributing glass products (Consol Glass (Pty) Ltd. v Commissioner for SARS, 2020). Consol elected to borrow money to acquire the businesses. Consol was supplied a financial service; it did not become a supplier of financial services. Neither the original issue nor the refinancing of the bonds can be seen as transforming the nature of Consol’s business to that of supplying financial services.

However, the court still had to consider whether the services were acquired in the course of making taxable supplies or not. In doing so, the court considered whether a functional link (also referred to as a “close link” or “causal link”) existed between the original issue of the Eurobonds and subsequent local financing and the making of taxable supplies.

The issuing and subsequent refinancing of the bonds had no effect on Consol’s enterprise (i.e., it was not in the furtherance of the enterprise). All three businesses were manufacturing and distributing glass products before and after the acquisition and consolidation of the businesses. There is no link between the costs incurred for restructuring advice and the furtherance of the enterprise. Therefore, VAT input on advisory services acquired from South African advisors cannot be claimed, and for services acquired from overseas consultants, VAT output should be paid over.

f.

Commentary

According to the SCA, a vendor who issues bonds to obtain funds is not providing financial services that are exempt (De Wet & Moonsamy, n.d.); instead, they are obtaining a financial service. There is a distinction to be drawn between receiving financial services and providing financial services. The provision of financial services is exempt from VAT and does not entitle the recipient to make exempt supplies. Advisory costs for financing are not considered financial services.

There must be a functional link between the incurrence of expenses and the making of a taxable supply in order for VAT input to be claimable (Besanko et al., 2021). Making taxable supplies denotes expenses incurred in the course of the enterprise.

g.

Linking the court case to the scattered sections in the VAT Act

The case dealt with tax liability under the VAT Act relating to services rendered in connection with a debt-refinancing transaction. A focal issue was the disallowance of input tax deduction claimed for fees paid to local vendors and the imposition of tax on imported services in terms of Section 7(1)(c), which must be read with Section 1. Section 1 includes the definitions of “supply”, “imported services” and “open market value,” and Section 3, regarding the determination of “open market value”, as well as Section 14, read with Section 10(2) and (3). The dispute centred on the interpretation of the terms “input tax” and “imported services”, particularly the meaning of “the purpose of consumption, use or supply in the course of making taxable supplies”. Even though the SARS assessment was correct, the basis of the assessment was wrong, i.e., according to the Commissioner, both the local and the international services were acquired in order to produce an exempt financial service supply. According to the Commissioner, Consol issued a debt security to secure loans from the consortium of banks, which qualifies as “financial services” under Section 2(1)(c). Section 12 exempts financial services from VAT.

This case, according to the researcher, further confirms the difficulty of interpreting the dispersed sections in relation to imported services. Given the complexity of the VAT Act in relation to imported services and the number of sections that must be consulted in relation to imported services, even SARS assessors got the basis of assessment wrong. The researcher contends that the structure of the VAT Act makes it more likely and more common for SARS assessors to incorrectly identify the basis for assessment.

Now that the scattered sections that must be consulted in relation to the VAT implications of an imported service have been discussed, the VAT implications of imported “electronic services” are considered.

4.2. Electronic Services

4.2.1. Summary of the VAT Implications

The South African VAT legislation requires foreign electronic service entities to register for VAT with the SARS if the total value of electronic services supplied in South Africa during a 12-month period exceeds ZAR 1 million (previously ZAR 50,000) (South African Revenue Service, 2022a).

4.2.2. The Law

In addition to the sections that must be considered for imported services, the sections that must be considered when importing “electronic services” are the following:

• Section 1 definitions: “electronic services”; “enterprise” (paragraph (b)(vi)); “export country”; “services”; “supply”.
• Section 7(1)(a).
• Section 7(1)(c) read with Section 14(5)(a).
• Section 23(1A).
• Section 16(2)(b) read with Section 20(7).
• Government Notice No 429 published in Government Gazette No. 42316 (the new rules).

In addition to the sections of the VAT Act, vendors must also consult other SARS-issued documents to fully comprehend the VAT obligations imposed on the supply of electronic services, namely SARS Frequently Asked Questions: Supplies of Electronic Services (South African Revenue Service, 2019b), SARS External Guide: Foreign Suppliers of Electronic Service (South African Revenue Service, 2022b) and Binding General Ruling No. 28: Electronic Services (South African Revenue Service, 2016).

4.2.3. Analysis and Interpretation

With effect from 1 April 2014, South Africa implemented laws requiring foreign suppliers of “electronic services” (e-services) to register as VAT vendors in South Africa if the vendor made taxable supplies of electronic services to South African recipients (Moodaley, 2020; National Treasury, 2018).

In terms of Section 23(1A) of the VAT Act, suppliers of electronic services have to register for VAT if they meet the following requirements (Republic of South Africa, 1991):

(i)

Electronic services are supplied by a person from a place in an export country (an electronic service supplier).

(ii)

Such a person is conducting an “enterprise” in the Republic, as defined in Section 1(1) of the VAT Act, and at least two of the following circumstances are present:

• The recipient of the electronic services is a resident of the Republic; or
• Any payment made to the supplier in the export country (for the supply of the electronic services) originates from a bank registered or authorised in South Africa, in terms of the Banks Act (No. 94 of 1990); or
• The recipient of those electronic services has a business, residential address or postal address in the Republic.

(iii)

The total value of the taxable supplies made by that person in the Republic has exceeded ZAR 1 million (effective from 1 April 2019, previously ZAR 50,000) within any consecutive 12-month period (Section 23 (1A) of the VAT Act). This compulsory registration threshold is consistent with the domestic compulsory registration threshold. Persons are not required to register for VAT if they have exceeded ZAR 1 million in any consecutive 12-month period solely as a result of exceptional and temporary circumstances.

The importer does not have to levy and pay VAT on “imported services” into South Africa where the foreign supplier of “electronic services” is registered as a VAT vendor in South Africa, as the foreign supplier will have to levy output tax on the supply of the service (Section 14(5)(a) of the VAT Act). Hence, in terms of Section 14(5)(a) of the VAT Act, VAT is not payable on imported services where the supply of the service is subject to VAT at the standard rate (currently 15%).

The National Treasury published a regulation in Government Notice 429, titled “Regulations Prescribing Electronic Services for the Purpose of the Definition of ‘Electronic Services’ in Section 1 of the Act”, to define “electronic services” in Section 1 of the VAT Act (National Treasury, 2019). From 1 April 2019, the regulations defining what constitutes electronic services were modified, and the scope of what constitutes electronic services was significantly expanded (Moodaley, 2020). This resulted in nearly all services provided via electronic means, such as cloud computing, computer software, music, gaming and any internet services, being classified as “electronic services”. As a result, the majority of overseas electronic services providers will be South African-registered vendors. Therefore, a recipient in South Africa who purchases electronic services from a non-resident supplier will only be required to pay VAT on imported services if the supplier is not registered as a vendor under the electronic services requirements.

SARS Frequently Asked Questions: Supplies of Electronic Services was compiled based on questions that vendors and the public are likely to have regarding the implications of the updated regulations and the amendments (South African Revenue Service, 2019b). The purpose of these Frequently Asked Questions is solely to assist foreign electronic services suppliers, intermediaries, vendors and the public in gaining clarity and maintaining consistency regarding certain practical and technical aspects of the updated regulations and amendments. The Frequently Asked Questions are therefore not intended to be used as a legally binding reference.

SARS External Guide: Foreign Suppliers of Electronic Service provides vendors with detailed instructions on how to conduct the following (South African Revenue Service, 2022b, p. 4):

• Complete the VAT101—Application for Registration for Value Added Tax—External Form (VAT Application Form);
• Complete the VAT 201—VAT Vendor Declaration (VAT201);
• File the VAT201 and make the VAT payment;
• Request a VAT registration to be cancelled, where the value of electronic services supplied has not exceeded the threshold of ZAR 1 million in a period of 12 months.

Binding General Ruling: BGR 28, dated 23 February 2016 (Issue 2) (South African Revenue Service, 2016, p. 1), sets out the information that must be contained on a tax invoice, credit note or debit note in order to satisfy the requirements of Sections 20(7) or 21(5), the exchange rate that must be applied in order to determine the amount of the VAT charged in the currency of the Republic, and the manner in which prices must be advertised or quoted for the supply of electronic services by an electronic services supplier.

In summary, the foreign supplier is compelled to register with SARS and levy “output tax” where the foreign supplier is carrying on an “enterprise” in South Africa and meets the compulsory VAT registration threshold (Section 14(5)(a), Section 7(1)(a) read with the definition of “supply” and “services”, and paragraph (b)(vi) of the definition in Section 1 of “enterprise” and “electronic services” read with the Regulation in Government Notice 429 and Section 23(1A)).

If the importer is a registered VAT vendor and uses or applies the imported services for taxable supplies, the VAT paid on importation of the services can be claimed as input tax, to the extent that such services are used or applied for taxable supplies (Section 16(2)(a) or (b), read with Section 20 of the VAT Act).

To summarise, the applicable sections and external documents that must be consulted when importing “electronic services” are the following:

• Section 1 definitions: “electronic services”; “enterprise” (paragraph (b)(vi)); “export country”; “services”; “supply”.
• Section 7(1)(a): imposition of VAT on the sale of goods or services.
• Section 7(1)(c): imposition of VAT on imported services by any person, read with Section 14(5)(a) (exceptions to imposition of VAT on imported services by any person).
• Section 23(1A): registration requirements for suppliers of electronic services.
• Section 16(2)(b) read with Section 20(7) (input tax and documentary requirements).
• Government Notice No 429 published in Government Gazette No. 42316 (the new rules) (regulations in respect of electronic services).

Section 23(1A) contains a cross-reference to the definition in Section 1 of “enterprise” (paragraph (b)(vi)). The definition of “electronic services” in Section 1 refers to the services prescribed by the Minister by regulation, namely Government Notice No. 429 (National Treasury, 2019). Therefore, the VAT Act does not follow a VAT vendor’s lifecycle, as VAT registration is first encountered in Section 23 of the VAT Act, while the basis of registration is contained in Section 15.

In addition to the sections of the VAT Act and the regulations, other documents outside of the VAT, such as the SARS Frequently Asked Questions, External Reference and Binding General Ruling, must also be consulted. Legislation does not address all issues and frequently leaves questions open to interpretation, necessitating the publication of additional documents. Similar problems also arise in other jurisdictions.

This example relating to “electronic services” supplied by non-residents exemplifies the focus of the research problem, namely the dispersed provision in the VAT Act as it pertains to a single transaction and/or event, by illustrating the number of sections and external documents that must be consulted when importing an electronic service.

Table 1. Arrangement of sections in the VAT Act.

1. Definitions

2. Financial services

3. Determination of “open market value”

PART I

Administration

4. Administration of Act

5. Exercise of powers and performance of duties

6. …

PART II

Value-added tax

7. Imposition of value-added tax

8. Certain supplies of goods or services deemed to be made or not made

8A. Shariah-compliant financing arrangements

9. Time of supply

10. Value of supply of goods or services

11. Zero rating

12. Exempt supplies

13. Collection of tax on importation of goods, determination of value thereof and exemptions from tax

14. Collection of value-added tax on imported services, determination of value thereof and exemptions from tax

15. Accounting basis

16. Calculation of tax payable

17. Permissible deductions in respect of input tax

18. Change in use adjustments

18A. Adjustments in consequence of acquisition of going concern wholly or partly for purposes other than making taxable supplies

18B. Temporary letting of residential fixed property

18C. Adjustments for leasehold improvements

18D. Temporary letting of residential property

19. Goods or services acquired before incorporation

20. Tax invoices

21. Credit and debit notes

22. Irrecoverable debts

PART III

Registration

23. Registration of persons making supplies in the course of enterprises

24. Cancellation of registration

25. Vendor to notify change of status

26. Liabilities not affected by person ceasing to be vendor

Source: Republic of South Africa (1991), with researcher’s highlighting.

displays the arrangement of sections in the VAT Act. The sections that must be evaluated in relation to imported services and electronic services are highlighted in Table 1. This further illustrates the dispersed sections.

An analysis of the table of contents of the VAT Act revealed that the Act does not adhere to a logical structure, as VAT registration is first encountered in Section 23 of the VAT Act, while the basis of registration is contained in Section 15.

In summary, a number of sections scattered throughout the VAT Act must be evaluated in relation to imported services and electronic services. In addition to the sections of the VAT Act that must be considered, as well as the regulations, one must also consider external references to other documents published by the SARS. The sections do not always contain cross-references; in some cases, they contain a reverse cross-reference, but no forward cross-reference. For example, the rules governing the time and value of supply are contained in Sections 9 and 10 of the VAT Act. When evaluating imported services, the time of supply is found in Section 14 rather than Section 9. Importantly, the VAT Act does not follow the lifecycle of a registered VAT vendor.

4.3. Guidelines to Simplify the VAT Act

Figure 1 delineates guidelines for the simplification of the VAT Act.

4.4. Implementation of the Guidelines

The researcher has categorised and presented headers with cross-referencing to transactions as an example for how to enhance section layout, design and structure (see

Table 2. Improving the logical structure of the VAT Act in relation to electronic services supplied by non-residents.

Example: Electronic Services Supplied by Non-Residents
Definitions	Section 1 definition of “electronic services”, “enterprise” paragraph (b)(vi), “export country”, “services”, “supply”
Scope (output)	Section 7(1)(c) read with Section 14(5)(a); Section 7(1)(a) read with Section 23(1A) [Binding General Ruling 28, Notice.429]
Time of supply	Section 9(1)
Value of supply	Section 10(2)
Scope (input)	Section 16(2)(b) read with Section 20(7)

). While the guidance was issued by the SARS, the primary objective of these recommendations is to aid VAT vendors in interpreting the VAT implications of “electronic services” provided by non-residents. The SARS published the subsequent guidelines:

• Frequently Asked Questions Regarding Electronic Services Supplies (South African Revenue Service, 2019a).
• SARS External Guide: International Providers of Electronic Services (South African Revenue Service, 2022a).
• Binding General Ruling No. 28: Electronic Services (South African Revenue Service, 2016).

The guidelines do not categorise the sections specific to “electronic services” provided by non-residents that must be assessed.

This method seeks to simplify the taxation intricacies related to electronic services provided by non-residents by concentrating on the breadth, duration and value of provision (i.e., utilising the concept of grouping). Moreover, it provides a systematic framework for evaluating the extent, duration and significance of supply regulations through the use of headings and subheadings. Table 2 removes ambiguity, aiding in the interpretation of VAT implications for digital imports.

In terms of administrative outcomes, Table 2 will aid the SARS with VAT implications for digital imports by systematically tracing compliance obligations. This model can inform updates to SARS guidance materials (such as the VAT 404 Guide) and be piloted in policy reform efforts. It also supports better decision-making for tax administrators, legal drafters and educators by clarifying the interpretive process around digital imports.

For educational utility, Table 2 will aid educators in teaching the VAT implications for digital imports by systematically presenting the vendor’s obligations to students.

This study offers a novel contribution by being the first to apply the VAT simplification framework by Hassan et al. (2024) specifically to the South African VAT Act for electronic services. Unlike previous research, which has often focused on economic impacts or policy-level VAT reform, this study takes a doctrinal and structural approach to the legislative text itself. It addresses the legal complexity issues that underpin non-compliance with VAT obligations for digital imports.

This study provides a foundation for further investigations into tax simplification frameworks and legal design, specifically referring to tax legislation, especially in emerging economies. It also provides a framework that can be adapted to other complex areas of VAT law, such as place-of-supply rules or VAT adjustments.

5. Discussion and Conclusions

The complexity of tax regulations creates ambiguity that affects tax evasion and revenue collection. An absence of logical organisation and consistency contributes to the overall complexity of the VAT Act, resulting in difficulties with teaching, practical application and tax administration. This study focused on analysing the incoherence in the structure of the South African VAT Act regarding “electronic services” provided by non-residents, which has not been previously investigated in the published literature.

The methods used in this study included qualitative research, a doctrinal approach and applied research. This study used guidelines to simplify the VAT Act and make practical recommendations.

This study offers a novel analysis of the scattered sections of the South African VAT Act regarding “electronic services” provided by non-residents, thereby significantly enhancing the current literature. The findings, supported by established academic sources, confirm that the absence of a coherent framework in the VAT Act contributes to its complexity. The universal standards that were applied included the utilisation of headings and subheadings, the amalgamation of complex parts and clear cross-referencing. Sections should be uniformly positioned under their respective headings, and effective signposting should be provided. This study’s findings augment the existing literature and provide fresh insights, including a practical illustration of the VAT consequences for “electronic services” offered by non-residents.

Typically, in statutory interpretation, headings are excluded from the analysis of a specific section. Nevertheless, headings cannot be entirely disregarded. This is due to their ability to ascribe meaning to the regulations at particular times. The meaning of subclauses may be influenced by headings, or subclauses may be improperly drafted, in which case headings may offer an explanation. Consequently, when headings are employed only for the purpose of categorising sections, the legislation must include a provision to that effect. The TAA is organised into chapters, which are subsequently separated into sections. The provisions table facilitates the search for pertinent sections. Moreover, sections categorised under a specific category must be organised consistently. For instance, under the heading “electronic services supplied by non-residents”, the stipulations must pertain exclusively to imported service transactions and reference other sections that influence or govern these provisions.

These findings align with international efforts to simplify indirect tax frameworks, such as those seen in New Zealand, Singapore, Canada and Russia. New Zealand’s tax reform projects have focused on readability and legislative coherence, producing improved compliance outcomes. Singapore has adopted clear place-of-supply rules and a reverse charge mechanism for digital imports, helping to streamline VAT obligations for non-resident suppliers. Canada, through its CRA initiatives, has simplified GST/HST registration and verification processes for digital businesses. In Russia, proposals to standardise the structure and establish a logical and simplified VAT taxation system for cross-border digital and non-digital services have been advanced. Recommendations emphasise the necessity of clearly defining services through a logical process of subtraction, which includes any transaction involving the sale of items other than goods. Additional recommendations stipulate that the consumption of services by the end consumer determines the place of supply rules, and a reverse charge mechanism for VAT payment should be instituted. Addressing fraud in Africa requires a coordinated approach that encompasses legal, policy and administrative measures. Administrative procedures designed to enhance compliance are most effective when executed in conjunction with a legal framework tailored to diminish occurrences of fraud. Compared to these frameworks, South Africa’s VAT Act remains structurally fragmented and legally complex. This study’s proposed reforms—especially the use of logical grouping and vendor lifecycle alignment—could help to move South Africa toward the administrative efficiency and legal simplicity achieved in the abovementioned case studies.

The main aim of this study was to improve the logical framework for “electronic services” provided by non-residents, given their prevalence in daily business activities in the digital realm. Consequently, other similarly complex transactions under the VAT Act were not included in the analysis.

The suggested improvements should be incorporated into the logical structure of the VAT Act related to “electronic services” provided by non-residents in the SARS VAT 404 Guide. The enhanced organisational structure of VAT on digital imports into South Africa will facilitate interpretation, application, administration and education, hence assisting both enterprises and the SARS in decision-making. Moreover, the proposed simplifications provide comprehensive principles for policy design and implementation amid the complexities of VAT systems. In future studies, the rules applied to this practical demonstration regarding “electronic services” provided by non-residents could be used to address other complex scenarios referenced in the VAT Act, including VAT adjustments. Incorporating these practical suggestions into SARS guides and interpretation notes is expected to improve VAT education for students, aid tax practitioners in interpreting and implementing VAT, and simplify the administration of the VAT Act by SARS officials, especially regarding complex transactions. Well-crafted, comprehensible tax legislation eliminates ambiguity and improves tax compliance, thereby decreasing tax avoidance and the costs associated with tax compliance management. It is recommended that the SARS initiate a pilot programme incorporating this framework into its next VAT 404 revision cycle. This research represents a preliminary stage in the endeavour to streamline VAT legislation.