VAT treatment of supplies to non-residents
21 April 2015
Posted by: Author: Heinrich Louw
Author: Heinrich Louw (DLA Cliffe Dekker Hofmeyr)
On 30 March 2015 the tax court delivered judgment in the matter of ABD CC v Commissioner for the South African Revenue Service. The matter concerned the Value-Added Tax (VAT) treatment of the supply of goods and services to non-residents in circumstances where such goods and services are physically supplied to and consumed by a person within South Africa.
The vendor had certain agreements in place with foreign tour operators in terms of which the vendor would arrange tours in South Africa. The foreign tour operators, in turn, sold tour packages to their customers, who were foreign tourists wishing to visit South Africa.
The tour packages would ordinarily include accommodation, meals at restaurants, guided tours and excursions. The vendor entered into agreements with local service providers (hotels, restaurants, etc.) in order to procure these services for the foreign tour operators and ultimately the foreign tour operators' customers, being the tourists.
The local service providers invoiced the vendor for their services, and the vendor paid them. The vendor, in turn, invoiced the foreign tour operators for its services, and the foreign tour operators paid the vendor. The vendor accounted for VAT at the zero rate in respect of the services that it provided to the foreign tour operators on the basis that they were non-residents, and that s11(2)(l) of the Value-added Tax Act, No 89 of 1991 (VAT Act) applied.
Section 11(2)(l) of the VAT Act provides that:
"(2) Where, but for this section, a supply of services…would be charged with tax at the rate referred to in s7(1), such supply of services shall … be charged with tax at the rate of zero per cent where –
(l) the services are supplied to a person who is not a resident of the Republic, not being services which are supplied directly –
(iii) to the said person or any other person, other than in circumstances contemplated in subparagraph (ii) (bb), if the said person or such other person is in the Republic at the time the services are rendered…”
The South African Revenue Service (SARS) did not agree that the supply of the services could be zero-rated in terms of s11(2)(l) of the VAT Act because, in its view, the vendor rendered services to the tourists while they were in South Africa, and the exclusion contained in s11(2)(l)(iii) of the VAT Act applied. SARS assessed the vendor accordingly.
The vendor objected to the assessment, but SARS disallowed the objection against the imposition of VAT and interest. The vendor then appealed to the Tax Court.
After analysing the relevant documentary and oral evidence, the court seems to suggest that the correct construction to be placed on the contractual relationships between the parties was that the local service providers supplied a service to the vendor, which enabled the vendor to supply a service to the foreign tour operators, and which in turn enabled the foreign tour operators to supply a service to its customers, being the tourists.
In other words, the foreign tour operators contracted the vendor to supply certain services, and the vendor sub-contracted the local service providers to actually render such services on behalf of the vendor. Similarly, the vendor could be seen as a sub-contractor of the foreign tour operators in respect of the foreign tour operators' obligations to its customers, being the tourists.
This is so even though the local service providers physically rendered the services to the tourists.
It was not the case that the vendor obtained a right to have services rendered from the local service providers, which it then ceded to the foreign tour operators.
It was also not the case that the vendor procured or arranged the services from the local service providers as agent for the foreign tour operators. The foreign tour operators and tourists had no direct contractual recourse against the local service providers in case of non-performance. Rather, the vendor acted in its own name when providing the services procured from the local service providers to the foreign tour operators.
The relevant service in this case is the service that is contractually rendered by the vendor to the foreign tour operators, which service is procured from the local service providers, who contractually supply services to the vendor, but physically render them to the tourists.
Generally, the supply of a service to a non-resident may be zero-rated in terms of s11(2)(l) of the VAT Act. However, the court summarised s11(2)(l)(iii) of the VAT Act to mean that "the supply of a service to a non-resident excludes the zero rating provisions if a recipient of such service or any other person to who the service is rendered is in the Republic at the time the service is actually rendered”.
The court also noted that in its view, "s11(2)(l)(iii) seems specifically to envisage a situation where the service is supplied (ie contractually) to X but is physically supplied (ie rendered) to Y”.
The argument was raised that the time of supply of a service in terms of the VAT Act is generally the earlier of when the invoice is issued or payment is received, and that at that time neither the foreign tour operators nor the tourists were in South Africa.
However, the court noted that s11(2)(l)(iii) of the VAT Act does not refer to the 'time of supply', but specifically refers to the 'time the services are rendered'. At the time that the services were physically rendered and consumed, the tourists were in South Africa.
Accordingly the court dismissed the appeal, and ruled that the services supplied by the vendor could not be zero-rated.
This case is important because it:
- reconfirms that VAT is destination based and is levied in respect of the consumption of goods and services in South Africa;
- illustrates how goods and services can legally or contractually be supplied to one party, but physically or directly be rendered to and consumed by another party; and
- makes it clear that services supplied to non-residents cannot be zero-rated where the person to whom it is legally or contractually supplied, or any other person to whom it is physically or directly rendered, is in South Africa at the time the services are actually rendered.
This article first appeared on cliffedekkerhofmeyr.com.