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Proposals to improve the VAT Act

22 January 2016   (0 Comments)
Posted by: Author: Anzuette Olivier
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Author: Anzuette Olivier (KPMG)

Shortcomings in VAT legislation and how they can be overcome

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 below:

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.

Credit notes

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 do so.

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.

VAT 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 Commission (CIPC). 

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.

Provisions to allow backdated apportionment rulings for five years 

The 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. 

Where 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. 

SARS then 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 method. 

Furthermore, 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. 

Should 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.

Our 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

Based 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. 

Additionally, 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.

We 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. 

In a 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.

Interest remittance

Currently, 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.

Penalty remittance

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. 

Currently, 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 deleted. 

Further, 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 in full. 

We 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.


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