South Africa’s economic climate is often shrouded with political unrest and stunted by poor growth. While the outlook may remain gloomy to some, there are others who remain bullish about our potential for growth. With new leadership at the helm, and an exuberant population we may begin to see glimpses of the sunshine peeping through. Regardless of our future, South Africa is and will remain a prominent gateway into Africa for foreign companies. An important consideration for these foreign companies is taxation in South Africa.
In planning, it is important to determine if your business operations will create a Permanent Establishment (“PE”) in South Africa or if these operations will trigger VAT requirements by constituting an ‘enterprise’.
A PE is created by a foreign company in South Africa due to its business activities or “presence” in the country. Generally, there are two types of PEs that may be created: a fixed place PE or an agency PE. A fixed place PE is a fixed place of business through which the business of a company is wholly or partly carried on. On the other hand, an agency PE exists where an agent signs-up clients on behalf of the foreign company. Activities that are not a significant part of the business as a whole (i.e. auxiliary or preparatory) are specifically excluded from activities that would typically create a PE.
In a nutshell, the objective of PE rules are to ensure that if a foreign company’s operations in South Africa are inherently linked to the realisation of profits for such foreign company, the Republic receives its fair share of tax. If a PE is deemed to exist for a foreign company in South Africa, the company is required to register a branch (called an external company in terms of company law) with the Companies and Intellectual Property Commission (CIPC), and register with SARS for income tax.
A person is required to register for VAT if they conduct any enterprise in South Africa, subject to certain monetary thresholds. An ‘enterprise’ for South African VAT purposes means an enterprise or activity carried on continuously or regularly in, or partly in, the Republic, in the course or furtherance of which goods or services are supplied to any person for a consideration, whether or not for profit. There is no reference that such enterprise or activity should be fixed or permanent, only regular or continuous. A reference to ‘fixed or permanent place’ is made in relation to being a South African resident for VAT purposes, however the residence of a person is of no relevance in determining whether a person is required to register for VAT. Even the use of an agent or subcontractor may create a VAT presence for that person in South Africa.
Even with a basic understanding of these principles, it’s clear that the ‘enterprise’ definition has a far wider reach than what may constitute a PE. This is emphasised by the fact that specific PE exclusions, such as activities not lasting for more than a year or activities of a preparatory or auxiliary nature may fall within the ambit of an ‘enterprise’ for VAT purposes. For example, an activity undertaken within just a few weeks, across various temporary locations within the country, and supplementary to a business may trigger a requirement to register for VAT; whereas these factors suggest that a PE may not exist in South Africa.
Logically, it is easier for SARS to prove that a company conducts an ‘enterprise’ in South Africa than it is to prove that a PE exists; put simply, enterprises are the low hanging fruit, whereas PE’s require a bit of climbing. Foreign companies should approach new business operations in South Africa with an acute awareness of the PE and ‘enterprise’ concept; and be cognisant of the fact that VAT obligations may have arisen without a PE being created in the country. Further, should a VAT presence be created it may not be long before SARS enquires about the possibility of a PE.
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International Tax and Transfer Pricing
BDO in Johannesburg
Income Tax Act 58 of 1962: Section 1
Value Added Tax Act 89 of 1991: Section 1, Section 23
OECD Model Tax Convention: Article 5, Commentary on Article 5
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