e-VATline
October 2009 Issue 4
Welcome to the 4thedition of e-VATline. e-VATline is a monthly publication that provides
you with guidance on complicated VAT issues facing your business. It also highlights red
flags that you need to be aware of.
Zero-rated supplies = unlimited risks
Often, businesses only realise the critical importance of managing their zero-rated supplies once
challenged by the revenue authorities. South Africa has a destination based VAT system.
Essentially this means that the SA revenue authorities seek to tax only local consumption of goods
and services. This is primarily achieved by zero-rating cross-border transactions where consumption
of goods or services supplied takes place outside SA.
The onus to prove that the zero-rating has been applied correctly lies with the SA supplier of goods
or services. In practice this is easier said than done.
Zero-rated supplies require strict control
Zero-rating of goods and services is an integral part of all destination based VAT systems. A zerorated supply is a category of taxable supplies where VAT is charged at the rate of zero percent. As
such, vendors making zero-rated supplies are entitled to full input tax credits on costs incurred to
make such supplies.
From a regulatory perspective, zero-rated supplies represent a high tax avoidance risk. It is
therefore understandable that revenue authorities require VAT vendors to exercise strict control over
zero-rated supplies.
To zero-rate or not to zero-rate
The dilemma that the SA supplier faces is in deciding whether or not to zero-rate a supply. Often the
decision is driven by commercial pressures. For example, if the supply is not zero-rated, the
enterprise loses the business opportunity.
Logistical challenges for large organisations
Large organisations also face particular challenges in
complying with VAT legislation.
A logistical department is often not designed to deal with the
requirements of the VAT Act, as its primary function is to
facilitate the movement of goods.
Organisations need to be cautious of departments that focus
solely on their respective mandates. This can potentially
create obstacles for critical VAT information.
Are you correctly zero-rating
your supplies?
Ensure your company is compliant,
by attending a VAT seminar: Zerorated supplies presented by Grant
Thornton and LexisNexis this
November.
Visit our website more information
on this important VAT seminar.
The SA environment
In SA, zero-rated supplies consist of the export of goods and services as well as specific narrowly
defined local supplies (for example certain foodstuffs). Each category of zero-rated supply has its
own unique risk profile that needs to be understood and managed.
Challenges associated with the export of goods
Exporters of moveable goods are challenged with ensuring the correct classification of exports, managing the timing of the physical export of goods and obtaining supporting documentation
timeously.
Classification of exports
All exports of moveable goods consist of either direct or indirect exports. The essential difference
relates to when the risks and rewards of ownership in the goods pass. For direct exports, risks and
rewards pass only once the goods have left SA. For indirect exports, risks and rewards pass in SA.
The correct classification of direct and indirect exports is critical as the VAT risks associated with
each category vary significantly. Direct exports are always zero-rated while the supplier of indirect
exports may elect to apply the zero-rate. Should the supplier elect to zero-rate the supply, the full
risk rests with the supplier.
Indirect exports, for example free on board (FOB) deliveries, are often incorrectly classified as direct
exports.
Correctly timing the export of goods
An invoice in VAT terms is any document notifying an obligation to make payment. For direct
exports, the physical goods must be exported within two months from the invoice issue date.
The format of any documentation prepared prior to the physical export of goods must be carefully
considered to avoid prematurely triggering the requirement to export the goods within the stipulated
timeline. Transactions where up-front payments are required are at particular risk of noncompliance. If an extension of the period is required, an application must be lodged with SARS prior
to the expiry of the two month period.
There is no stipulated time frame for indirect exports, but the time frames for obtaining supporting
documentation are much stricter than for direct exports (three months from the date that the tax
invoice is issued). Careful planning is essential in order to comply with the timelines.
Requirements for export documentation
Export documentation for direct exports must be obtained and retained within a period of three
months from the date that an invoice is first issued (or any amount is paid to the supplier).
One of the required documents is proof of payment by the foreign purchaser. This requirement
normally cannot be complied with within the three-month period. An extension of time may be
applied for with SARS, but the application must be lodged before the original deadline expires. This
is a process that needs to be carefully monitored and managed internally.
The same principles apply for indirect exports, except that export documentation must be obtained
by the supplier within two months from the date of the tax invoice. An extension may be obtained
from SARS for the receipt of the payment requirement only. The practical implication is that if the
goods are not physically exported within a period of two months, the zero-rating cannot apply.
The risk lies entirely with the supplier even though it has no control over the goods (having
relinquished control of the goods in SA). This situation should be managed diligently to avoid
eroding of profit margins due to an unforeseen liability for VAT.
The penalty for non-compliance with the above timelines is harsh, but if properly planned and
managed, there should be no necessity to pay the tax in the first place.
Zero-rated supplies of services
Supplying services to non-residents at the zero-rate is fraught with danger. If the services are locally
consumed by a person in SA, the services may generally not be zero-rated. Disputes often arise
between SARS and taxpayers as to where services have been supplied and consumed. There are
no clear guidelines that can be followed. It is advisable that organisations consult their professional
advisors where uncertainty exists.
Other zero-rated supplies
The golden rule when applying the zero-rate to locally supplied goods (for example certain basic
foodstuffs) is that the legislation must be interpreted narrowly. If the item does not comply strictly
with the description in the VAT Act, it does not qualify to be zero-rated. Interpretation by analogy can
never be applied.
Products historically qualifying for zero-rating should be reviewed on a systematic basis to assess
whether the product still qualifies for the preferential VAT treatment. The bright side
This edition of e-VATline highlights some of the issues faced by organisations making zero-rated
supplies. It demonstrates the complexities that exporters and other suppliers of zero-rated goods
and services face.
On the bright side, the respective VAT risks are capable of identification and can be managed
effectively within VAT enterprises. The most critical ingredient necessary to address the risks in a
constructive manner is the buy-in of top management. This is often lacking due to the invisible
nature of the underlying risks.
With audit committees becoming mandatory for certain companies in the near future, awareness
and management of VAT risks will increase within organisations. In the interim, management is
encouraged to take a pro-active role in addressing the various risks.
Red flags
Does your organisation export any goods to foreign destinations? Y N
Does your organisation issue any zero-rated invoices for services rendered? Y N
Does your organisation supply any zero-rated goods to local recipients? Y N
Is your organisation involved in supplying logistical services? Y N
Should any of your answers to the above questions be ‘yes’, you need to consider acquiring
professional advice to ensure that your VAT risks have been adequately identified, addressed and
mitigated.