VAT registration of foreign businesses
14 March 2014
Posted by: Author: Deloitte
The VAT Act levies VAT on the importation of goods, in respect of which, for instance, border posts or the post-office serve as collecting agents for SARS.
VAT is also levied on imported services but the onus is on the recipient to declare and pay such VAT to SARS where such services are to be used for purposes other than the making of taxable supplies. This requirement is not suited to simple application and the practical result is that local consumers can buy imported digital goods or services without paying VAT.
In line with international trends, it is proposed that all foreign businesses supplying e-books, music and other digital goods and services in South Africa be required to register as VAT vendors in South Africa.
Streamlining registration and filing for businesses and individuals
A single registration process for multiple tax products will be launched to simplify registration for all businesses. VAT registration will be streamlined to ease the compliance burden, while guarding against fraud.
The VAT Act denies vendors an input tax credit in respect of the acquisition of a "motor car”. The definition of a "motor car” excludes, amongst other things, a vehicle capable of accommodating only one person. A racing car, acquired partly for recreational purposes and partly for business use (such as advertising) falls within this exclusion. A deduction of input tax would therefore potentially be allowed in respect of the acquisition of such a car. It is proposed that the law will be changed to treat these vehicles on the same basis as other "motor cars”.
Repossession of goods
A vendor makes a deemed supply of goods that were acquired under an installment credit agreement, to the creditor upon the repossession of such goods. A debtor may also voluntarily surrender goods acquired in terms of a credit installment agreement. It is proposed that the law be amended so that a similar VAT treatment applies in these instances.
Future supply of services
In the absence of a special time-of-supply rule, VAT has to be accounted for at the earlier of the issue of an invoice or the receipt of payment.
A special time-of-supply rule is proposed for services where the consideration for that service cannot be determined upfront due to a contingent future event (for example, changes in a share price and exchange rate). Aligned with an existing provision relating to the supply of goods in similar circumstances, the time-of-supply for services in these circumstances will be the earlier of when and to the extent that payments are due or received, or when an invoice is issued.
Vendors are not allowed to claim an input tax credit in respect of entertainment expenditure incurred, subject to certain exceptions. One exception relates to meals and refreshments served on flights, regarded as incidental to the provision of the flight. It is proposed that other in-flight entertainment should be added to the exclusions from the prohibition. An airline would, accordingly, be allowed to claim an input tax credit in respect of movies and video games acquired for in-flight entertainment.
Supplies between connected persons
VAT on supplies between connected persons has to be accounted for when the services are provided or the goods are removed or made available, where an invoice had not been issued nor payment received prior to this date. It is proposed that relief will be provided in the context where a transaction gives rise to an input tax credit in the hands of a purchaser in the same tax period as an output tax obligation arises for the seller.
Tax invoices issued in foreign currency
The VAT Act currently requires a valid tax invoice to be stated in Rand and does not cater specifically for transactions conducted in foreign currency. The conversion of foreign currency invoices to Rand at the spot rate agreed upon by the parties or, in the absence of such agreement, the spot rate on the day of the supply, is to be allowed in future.
This seems to be aimed at the alignment of the VAT Act to Binding General Ruling 11, dated 1 September 2012, in terms of which it is required that the daily exchange rate as published on the website of the South African Reserve Bank has to be applied for conversion purposes.
Temporary letting of residential fixed property
Developers that use the temporary relief provisions, allowing them not to account for a change-in-use adjustment in respect of the temporary letting of residential fixed property, are required to furnish SARS with a declaration containing certain information within 30 days of the supply. In future, it is proposed that vendors will only be required to retain the relevant information as part of their normal recordkeeping and need not to file this information with SARS.
Conversion of share block scheme to a sectional title
SARS considers the conversion of a share-block company to a sectional title as a "non-supply” for VAT purposes and, accordingly, no output tax is levied on this transaction. It is to be clarified that the recipient of the sectional title unit in such a case will also not be entitled to a notional input tax credit.
Whereas the supply of services by a sectional title association to its members in the course of the management of the sectional title body corporate is generally exempt from VAT, home-owners associations lack a similar exemption. (The reason for the exemption in the past was that a large portion of sectional title levies comprised property rates, whereas this was not the case with home-owners associations. Both are now billed in the same way by municipalities.) It is proposed that this discrepancy will be removed. It is to be seen whether the correction of the mismatch will entail the removal of the exemption for sectional title associations or the expansion of the exemption to include home-owners associations.
The right of use of fixed property
The VAT treatment of the supply of a share by a share block company and the supply of membership units by a property cooperative are to be aligned so that both are subject to VAT at the standard rate.
The export incentive scheme will be replaced by new export regulations. These new regulations are likely to allow the zero-rating of indirect exports to neighbouring countries by road or rail, which currently have to be standard rated, amongst other changes.
Imported goods – damaged or destroyed
The current Customs relief available where goods are destroyed, damaged or abandoned prior to being entered for home consumption will be extended to VAT. It would appear that the VAT imposed would then be claimable as input tax or the importation may be exempted from VAT.
Pooling arrangements currently apply to the agriculture and rental markets to simplify VAT administration. Following a review that is to be undertaken of all pooling arrangements, legislation is envisaged that will address the complexities arising from the "pool” being treated as a separate person for VAT purposes.
Square Kilometre Array
The Square Kilometre Array is an international project to build the world’s largest radio telescope. VAT relief for this project is proposed, either in the form of a refund mechanism or the zero-rating of consideration received by the project, as well as for any imported services.
Research projects to be undertaken by National Treasury in respect of VAT:
Reviewing the VAT treatment of financial services and VAT apportionment within the financial sector.
Especially in view of SARS’ insistence that "non-supplies” (such as dividends) have to be included in the turnover-based formula for VAT apportionment, the default turnover-based apportionment method often provides an inequitable result, due to the fact that there is little correlation between expenditure incurred and revenue generated. It is proposed that the default application of this method will be re-evaluated.
The provisions requiring a claw-back of input tax claimed where payment to a supplier has not been effected within 12 months is to be reviewed in cases where debts are relieved to help the debtor avoid potential or actual insolvency. Debt relief to assist distressed debtors (such as business rescue) is being considered.
This article first appeared on deloitte.com.