When it all comes to naught

General output tax provisions

Section 7(1)(a) of the Value-Added Tax Act No. 89 (1991) (“VAT Act”) imposes value-added tax (“VAT”) on the supply of goods or services made by a vendor in the course or furtherance of the VAT enterprise carried on by the vendor.

Output tax is generally imposed at the standard rate (currently 15%), unless the supply can be zero-rated in terms of section 11 of the VAT Act.

The supply of services to non-residents

Output tax may be imposed at the zero rate where services are supplied to non-residents, subject to certain limitations.

One of these limitations is contained in section 11(2)(l)(iii) of the VAT Act. This limitation determines that the zero-rating does not apply where the services are supplied directly to the non-resident or any other person, where the non-resident or the other person is in South Africa at the time that the services are rendered.

Key requirements

Section 11(2)(l)(iii) of the VAT Act, requires that:

• The services should be supplied to a non-resident:

A company will be regarded as a non-resident if the company is not a resident of South Africa. Where a company is incorporated / established or effectively managed in South Africa, the company is considered to be a resident of South Africa.

This means that if a company is incorporated / established or effectively managed in a foreign country, it will be regarded as a non-resident.

The 2024 Draft Taxation Laws Amendment Bill (“2024 draft TLAB”) has proposed to exclude those companies that are considered residents of South Africa as a result of being effectively managed in South Africa, only if such companies do not have a VAT enterprise in South Africa. This proposed change will greatly contribute to enhancing cross-border trade facilitation.

• The non-resident or other person must not be in South Africa while the supplying vendor renders the services:

The South African Revenue Service (“SARS”) is of the view that if a foreign company’s employee or director (hereinafter referred to as a “representative”) is in South Africa at the time the services are rendered, the services are rendered while the non-resident is in South Africa.

This would mean that the requirements of section 11(2)(l)(iii) of the VAT Act are not met, and that output tax cannot be imposed at the zero rate. It is noted, however, that the representative should be physically present in South Africa for reasons relating directly to the services rendered before the zero-rating of the supply is denied.

Documentary requirements

Section 11(3) of the VAT Act provides that the correct documentation must be obtained in order to support the vendor’s entitlement to apply the zero rate of VAT. The documentation that must be obtained and retained is set out in SARS VAT Interpretation Note 31 (Issue 4) (“SARS IN 31”).

SARS IN 31 determines that the following documentation must be obtained and retained to supply services at the zero rate:

• The zero-rated tax invoice;
• Written confirmation from the recipient of the supply that it is not a resident of South Africa and not a VAT vendor;
• Written confirmation from the recipient of the supply that it or any other person to whom the supply is made, will not be in South Africa at the time that the services are rendered; and
• Proof of payment.

The takeaway

Where output tax is incorrectly imposed at the zero rate or where the supplying South African vendor does not meet the documentary requirements, the SARS may impose a 10% late payment penalty, understatement penalties and interest.

Especially where a South African VAT vendor expects to regularly enter into transactions with non-residents, it is advisable to ensure that output tax is imposed at the correct VAT rate and that the documentary requirements are met.

Contact our Indirect Tax team if you need assistance with any of your indirect tax affairs. 

Author
Evádne Bronkhorst, Senior Manager: Tax Consulting