Ayanda Masina , Senior Tax Consultant
Last month National Treasury (Treasury) issued the draft Taxation Laws Amendment Bill (TLAB) with proposed amendments to the various tax legislation. One such amendment impacts certain aspects of a foreign donor funded project (FDFP) in the Value-Added Tax Act (VAT Act).
A FDFP is a project established as a result of an international donor funding agreement to supply goods or services to beneficiaries, to which the South African government is a party.
The international agreements generally stipulate that the funds donated, should only be used for specific, mutually agreed upon programmes and activities, and cannot be used to pay for any taxes imposed under South African Law.
The VAT Act has specific provisions which provide relief to a FDFP. Although the FDFP does not necessarily supply goods or services for a consideration, it is deemed to make supplies to the international donor and therefore may still register for VAT. The deemed services of the FDFP are subject to VAT at the zero rate. This will ensure that the funding the FDFP receives does not attract standard rated VAT, which would in effect reduce the amount of funding available.
The greatest benefit of being able to register for VAT is that the FDFP is entitled to deduct all VAT incurred in carrying out the project deliverables which would in certain instances be disallowed. For instance, FDFPs can claim the input tax incurred for the purchase and rental of all motor cars while generally other vendors are prohibited from claiming input tax incurred on the purchase or rental of motor cars.
The current issue with FDFP’s is that various entities may be sub-contracted for purposes of implementing different parts of the project. This has created confusion as to which entity was actually the implementing agency which must register the project as a FDFP for VAT purposes and deduct VAT incurred as input tax.
Furthermore, as it currently stands, SARS experiences delays in registering FDFP’s as it constantly has to seek clarity from Treasury regarding whether or not the project qualifies as a FDFP before it can register the FDFP as a VAT vendor.
Treasury has introduced the concept of an “implementing agency” and proposed that the “activities of an implementing agency carried on in course of implementing, operating administrating or managing a FDFP should qualify as an “enterprise” for VAT purposes”.
Furthermore, over and above the current requirements for a FDFP, the Minister of Finance now has to approve the FDFP before it can be considered a FDFP for VAT purposes.
If implemented, all the entities that qualify as implementing agencies will be able to register the activities related to the FDFP as a separate enterprise from its normal enterprise activities, essentially ring fencing the FDFP activities.
Effectively, all implementing agencies, as opposed to only the main implementing agency, may be allowed to register for VAT and deduct the VAT incurred as expenses of the FDFP. This is a welcomed proposal as it will benefit all qualifying entities that are involved in FDFP’s to get the benefits of the zero rating as well as the relevant input tax deductions.
Treasury’s reasons for introducing the approval requirement by the Minister of Finance, is to further clarify what qualifies as a FDFP for VAT purposes. SARS will issue guidelines on the requirements of a FDFP that must be met before the Minister of Finance can approve a project.
The proposal itself, although well intended, does not provide clarity as to what qualifies as a FDFP, but we eagerly await the guidelines that SARS will issue to provide certainty.
Although the proposed amendments will add additional requirements, as well as certain administrative burdens for all the implementing agencies to obtain the approval from the Minister of Finance, we are of the view that the benefits of being able to zero rate its income and deduct the VAT incurred as input tax far outweighs this burden.