Proposals to improve the VAT Act
22 January 2016
Posted by: Author: Anzuette Olivier
Author: Anzuette Olivier (KPMG)
Shortcomings in VAT legislation and how they can
Each year National Treasury provides an
opportunity to taxpayers, tax practitioners and members of the public to actively
participate in the process of effecting legislative changes. They are invited
to submit technical proposals for possible inclusion in Annexure C of the 2016
Budget Review. This is a critical process and firms such as KPMG are actively
involved in the process, whether on
behalf of clients, or to achieve clarity and administrative efficiency.
The main Value Added Tax (VAT) issues that
KPMG has identified for possible inclusion in Annexure C for 2016 are detailed
Zero rate services
In terms of the VAT legislation the zero rate may be applied
where a local vendor delivers goods in South Africa to a local VAT registered
recipient, who is the client of a non-resident non-vendor. However, if
the local vendor supplies services under the same circumstances, there is
currently no provision available to provide for the zero-rating of such
services.We thus recommend that a similar provision should be
inserted for services.
We have identified an issue with the
return of goods, and the issuing of credit notes where a business has been sold
prior to the return of the goods.The problem arises when, for example, Company
A is sold to Company B, and subsequently a customer of Company A returns goods
acquired from it before the sale. The return is therefore made to Company B,
and currently the VAT Act, 1991 does not provide for Company B to raise a
credit note to account for the default goods. It only provides for Company A to
This creates an anomaly since Company B cannot issue a
credit note from a VAT perspective and will therefore not have the necessary documentary
evidence to claim the related input tax deduction.
Because the anomaly influences a number of vendors, we
recommend that the legislation be amended so that it will allow the purchaser
of an enterprise to issue a credit note in respect of goods supplied by the original
owner of the enterprise, but which were returned to the new of the enterprise.
registration of a foreign branch
A practical difficulty arises where
a foreign company has a historical VAT registration liability and subsequently
has to register a branch or company at the Companies and Intellectual Property
The foreign entity will register for
VAT historically as it had a liability to register at the time. The CIPC registration will be effective from a future date.
Once the entity has registered a branch at CIPC, SARS requires a new VAT registration
as it cannot update the foreign company registration number with the new South Africa
number on its systems.
Some foreign companies, who conduct business in South Africa,
have a VAT and CIPC registration liability. In this case, they effectively have
to register for VAT twice if they do not want to wait until the CIPC
registration has been processed and finalised.
Although this is not necessarily a
technical issue that requires legislative amendment, we recommend that SARS amends its internal systems so
that a foreign entity’s VAT registration details can be updated once it has
been registered with CIPC so that the CIPC company number is reflected instead
of the foreign company registration number.
to allow backdated apportionment rulings for five years
way in which apportionment rulings operate under the current legislation may
affect businesses that are required to apply an apportionment methodology in
order to determine the percentage of input tax claimable on expenses incurred
for the making of both taxable and non-taxable supplies.
a vendor has not applied for an alternative method, for whatever reason, the
law requires that the vendor defaults to the standard turnover-based method.
does not have the discretion to approve an alternative method retrospectively,
even when the turnover-based method blatantly yields inequitable results. As a
result SARS has to assess the vendor using the standard turnover-based
input tax apportionment occurs throughout the year with each submitted VAT
return. Apportionments are calculated by applying the apportionment ratio
calculated in respect of the previous financial year. At the end of the current
financial year, the apportionment ratio is recalculated and any over or under
recoveries of input tax is corrected in one adjustment.
it be determined that the method is inequitable; SARS is only permitted to
issue a ruling on an alternative method to be applied from a future date, or
with effect from the current year of assessment. This leaves the years in which
the inequality prevailed, unaltered.
solution is that SARS be granted the discretion to issue apportionment rulings
retrospectively for five years, in line with both the general timing rule for
input tax deduction and the general prescription period.
Interest on delayed refunds
on our experience, many taxpayers who claim refunds from SARS are requested to
provide information to verify the refunds before being paid. SARS’ requests for
information may in some instances be quite difficult to obtain, and may in
extreme cases be unreasonable for the taxpayer to provide.
the VAT Act provides that interest on delayed refunds does not accrue to the
taxpayer until the requested information has been received by SARS. We know that
on numerous occasions SARS only requests the information shortly before the
expiry of the 21 day period and the information requested rarely achieves any
results other than a delay in SARS paying the refund.
therefore recommend that interest on delayed refunds must accrue from the day
following the 21 business days as provided for (i.e. day 22), regardless of
whether or not SARS requests information from the taxpayer.
case where, after the evaluation of the said information, SARS concludes that
only a portion of the initial refund amount requested is refundable, we
recommend that interest should be calculated and paid on the said portion from
the 22nd business day after the date on which the vendor’s return in respect of
a tax period has been received by SARS.
there are no provisions contained in the Tax Administration Act, 2011 (TAA) in
terms of which SARS can remit interest where the interest resulted from an
error made by SARS, for example, incorrect allocation of payments. We recommend
that the circumstances listed be amended to also include certain acts by SARS
that results in delays such as capturing errors or processing delays.
The TAA allows a taxpayer to request the remittance of a penalty
imposed, if the non-compliance results from a first incidence of non-compliance,
and if SARS is satisfied that reasonable grounds for the non-compliance exists.
The definition of "first incidence” means an incidence of non-compliance by a
taxpayer if no penalty assessment was issued in the preceding 36 months,
whether involving an incidence of non-compliance of the same or a different
kind. The term "reasonable grounds” appears to be interpreted differently by
different SARS offices.
taxpayers are severely prejudiced when the non-compliance occurred due to legitimate,
sound or unintended (bona fide) errors
which are not interpreted as "reasonable grounds”. For example, where a
taxpayer’s internet connection is not functioning, and can be seen as
circumstances beyond his control. We recommend that the TAA be amended so that
the taxpayer is allowed to request that the Commissioner use his discretion to
remit a late payment penalty if the non-compliance resulted from a bona
fide inadvertent error and that the term "reasonable grounds” be
with regards to "first incidence”, if the non-compliance occurs more than once
within a period of 36 months, a taxpayer is without any remedy to request SARS
to remit the penalty. For tax types with several returns and assessments per
year, such as VAT and PAYE where up to 36 returns are required, testing 36
penalty assessments is excessive. We recommend that the 36 months requirement
should only apply in respect of penalties resulting from the same or
substantially similar circumstances. Any penalty imposed and paid in full by a
taxpayer, should be disregarded in the same way as penalties that were remitted
believe that the proposed changes will address inefficiencies and ultimately
assist taxpayers to streamline their VAT compliance as envisaged by the VAT Act
and the TAA.
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This article first appeared on the January/February 2016 edition on Tax Talk.