Tax Flash - August 2011
03. VAT Update - Imports
Disclaimer: Please note that this article is at least 12 months old.
Any information herein was accurate when published on 31 August 2011
As a rule, clearing agents receive payment of import VAT from its clients upon importation of goods. By making use of the deferment scheme, clearing agents effectively have 37 days at most to pay such import VAT to SARS.
In terms of the VAT Act, a vendor may only claim the import VAT if they are in possession of amongst other documents, a receipt for the payment of the import VAT to SARS at the time that the VAT return is submitted.
In practice, this requirement poses various challenges. Enterprises are generally not aware as to when the import VAT is paid over by the clearing agent to SARS and if they do know, they are not in possession of the receipt for the payment of the import VAT to SARS. This is largely attributable to the manner that clearing agents conduct their business. Typically, clearing agents would clear goods for several clients on a daily basis and pay the import VAT to SARS as a single lump sum amount. SARS would in turn issue a receipt for the payment. As the receipt is in respect of several imports and several clients, the clearing agent is not in a position to provide enterprises with a receipt pertaining to their imports only.
However, in order for enterprises to comply with the requirements of the VAT Act, the receipt for the payment of the import VAT to SARS is a must and therefore clearing agents will have to provide enterprises with a copy of the receipt. It is also advisable for enterprises to obtain a document from their clearing agent reconciling the payment effected to SARS with their import transactions in order to prove that their transactions are indeed included in the payment so effected.
Due to the fact that the schedules contain transactions of other clients, clearing agents are generally reluctant to provide enterprises with this information. Having said that, clearing agents can still provide this information to enterprises without disclosing the information of other clients.
Business Activities of Non-Residents in South Africa
The absence of explicit place of supply rules in South Africa often creates much uncertainty as to whether the business activities of non-residents are conducted in South Africa and therefore constitutes the carrying on of an enterprise for VAT purposes in South Africa.
In VAT NEWS 13 (December 1999), SARS indicated that it is of the view that the granting by a non-resident business of the right to use any trade mark or intellectual property over a period of time in South Africa is regarded as the carrying on of a enterprise partly in South Africa. As a result, non-resident businesses were required to register for VAT purposes in South Africa in circumstances where they regularly receive income such as royalties in South Africa, which is equal to or in excess of the VAT registration threshold. However, in terms of a policy decision made by SARS, SARS noted that it would not insist that the non-resident register for VAT purposes in South Africa if the activities were completely passive and the non-resident did not have a physical presence or fixed place of business in South Africa. In VAT NEWS 37 (February 2011), this view has been reconfirmed by SARS although SARS indicated that the policy decision is currently under review.
In considering local case law (Case No. VAT 179, dated 14 March 2011), the matter for consideration was the taxability of an early termination of an exclusive right to distribute certain Scotch whiskies in Africa.
The question that arose is whether the proceeds were subject to VAT on the basis that it constituted a service as it is the surrender of a right. And if so, whether it attracted VAT at 14% or 0%.
The VAT law disqualifies the zero-rating (0% VAT) where the service is supplied directly in connection with movable property (in this case the distribution right) situated in South Africa at the time the service is rendered. Since the Court held that the right had been situated where the debtor resided, the supply was subject to 0% VAT.
As is evident, the lack of place of activity rules creates a general uncertainty insofar as non-resident activities are concerned and therefore we await, with great anticipation, the outcome of SARS' policy decision relating to non-resident businesses.
In time to come, we hope to see the introduction of place of activity rules in the South African VAT legislation. The local introduction of place of activity rules would probably eliminate most of the uncertainty that exists on non-resident activities in South Africa as it would, in all likelihood, be based on a model in place elsewhere in the world with similar principles governing their 'VAT' law.
In the interim, cognisance should, however, be taken of the fact that SARS reiterated that current policy remains in place until the review has been completed and public notice has been given as to any changes.
Discounts, rebates and incentives in the fast moving consumable goods industry
In the Fast Moving Consumable Goods industry, allowances in the form of discounts, rebates and incentives form an integral part of the way business is conducted. These allowances are generally determined at the time of the conclusion of the agreement (i.e. upfront) and may include variable and fixed allowances. The problem, however, is to determine which allowance represents payment for the supply of a service (i.e. advertising) and which allowance is an adjustment to the previously agreed consideration. Given the difficulty experienced in distinguishing a supply of a service from an adjustment to the previously agreed consideration, SARS has issued a binding general ruling (Binding General Ruling No. 6) setting out what types of allowances constitute supplies of services and what constitutes adjustments to the previously agreed consideration. Incorrect classification of transactions could be an extremely costly mistake, therefore ensure that you first correctly classify the allowance and secondly have the correct documentary evidence to substantiate the input tax claim, i.e. tax invoice or credit note, whichever is applicable.