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Zero-rating of the supply of services to a non-resident – section 11(2)(l)

14 November 2014   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

Q: We have a client that is a foreign entity and is not in the business of making VAT-able supplies and are saying they are not obligated to become a VAT vendor. They are stating we must issue them a zero-rated invoice.  We asked if the client has an exemption certificate and they stated that they do not need an exemption certificate because they are usually only issued to non-profit entities, government entities and the like.  The services we are providing are in South Africa and include content creation, media relations, project management, consultancy, event conceptualization, coordination and support and reporting.

They quoted the following to us as well:

In terms of the SA VAT act, services rendered in South Africa that are rendered to a person/entity who is not a resident in the Republic and who is not a VAT vendor in the Republic are deemed to be zero rated (Section 11 (q)(ii)).

Further to that, section 11 (2)(l) goes on to further sum up the scenario clearly, saying that any services, rendered in SA, to an entity that is foreign, are zero rated as long as the services are not in connection with land, immovable property or moveable property.

Do you agree with their stance?

A: The service offered by SAIT is limited to guidance only.  The facts provided are not sufficient for us to provide the guidance required.  We don’t for instance know what you mean by ‘foreign entity’, but submit that the only possible instance where the rate of zero per cent may apply is section 11(2)(l) of the Value-Added Tax Act.  There is no ‘exemption certificate’ and we accept that the foreign entity is not registered as a vendor in the RSA.  

If we accept that services are not supplied directly in connection with land or any improvement thereto situated inside the RSA, then there are two issues which must be considered.  

The recipient must be "a person who is not a resident of the Republic” (RSA) as defined in section 1(1) of the Value-Added Tax Act.  This is a defined concept and basically requires that the non-resident must not carry on in the RSA any enterprise or other activity and from a fixed or permanent place in the RSA relating to such enterprise or other activity.  Our guidance assumes that the ‘foreign entity’ is not a resident of and does not carry on an activity in the RSA.  If this assumption is not correct the guidance may not be appropriate.  Remember the relevant treaty as well.  

The second issue then is that the said person (the non-resident) or any other person must not be in the RSA at the time the services are rendered.  In this instance the non-resident must NOT be present in the RSA at the time the services are rendered (section 11(2)(l)(iii)) for the rate of zero per cent to apply.  If the non-resident is present in the RSA at the time, the service will be standard rated (section 7(1)(a)).  Please note that if these services are for example rendered to a branch of a non-resident company, the non-resident has a presence in South Africa while the services are rendered.  

These services will qualify for the zero rate only if the documentary requirements are adhered to (as required by section 11(3) of the VAT Act). Table B of Interpretation Note No 31 (Issue 3) stipulates the documentary requirements for exported services.

Disclaimer: Nothing in this query and answer should be construed as constituting tax advice or a tax opinion. An expert should be consulted for advice based on the facts and circumstances of each transaction/case. Even though great care has been taken to ensure the accuracy of the answer, SAIT do not accept any responsibility for consequences of decisions taken based on this query and answer. It remains your own responsibility to consult the relevant primary resources when taking a decision.


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