Unlocking the budget speech 2012: A closer look at VAT budget proposals
31 May 2012
Posted by: SAIT Technical
Gerhard Badenhorst (TaxTalk Issue 34)
The Minister of Finance Mr Pravin Gordhan, in his Budget review on 22 February 2012, proposed anumber of value-added tax (VAT) amendments. More significant is the announcement that governmentwill seek to eliminate the application of the rate of zero rate on loans to non-residents. The motivationgiven is that it is considered to "level the playing field”.
We suspect that the South African Revenue Service (SARS) is seeking to exempt such loans from VAT in anattempt to increase VAT collections. Although the non-resident will not be required to pay VAT on the interest paidon the loan, whether it is zero-rated or exempt, the proposed amendment will have a significant impact on thefinancial institution granting the loan. If loans to non-residents in respect of their foreign operations are zero rated,the financial institution is entitled to claim the VAT incurred on its direct and indirect costs that are attributable tosuch loans. However, if the loans are exempt from VAT, no VAT may be claimed by the financial institution, whichwill increase the operating cost of the financial institution and the cost of granting the loan.
The proposed amendment is directly in contrast withthe fundamental principles of the South African VATsystem, which is a destination-based tax aimed attaxing only consumption within South Africa. It is alsocontrary to the VAT systems applied by South Africa'sbiggest trading partners, who all apply the VAT rate ofzero per cent to loans granted to foreign entities.
The objective of the application of the zero rate isprincipally to avoid double taxation, i.e. the taxingof goods or services in the country of origin and inthe country of destination. By seeking to eliminatethe zero rating on loans to non-residents, SARS willindirectly introduce double taxation on such loansbecause the financial institution bears the VATcost on the foreign loan in South Africa, and thenon-resident is unlikely to be allowed a deduction ofVAT on its operating expenses in the foreign country.
In addition, the non-deductible VAT cost to SouthAfrican financial institutions is much higher thanthat of foreign financial institutions due to the factthat South Africa introduced VAT on all fee-basedfinancial services in 1995 and 1996, whereassuch fees are exempt from VAT in most foreignjurisdictions. By increasing the VAT cost to SouthAfrican financial institutions, they will become evenless competitive in an international market.
Review of indirect exports andtemporary imports
The Budget review stated that the policy, legislationand administration of the VAT treatment of indirectexports of goods by road will be reviewed to ensurethat exporters are not prejudiced and that the fiscus continues to be protected against potential abuses.Currently, where a non-resident takes possession ofgoods in South Africa and pays for the transport costto export the goods from South Africa, the supplier is obliged to levy VAT at the standard rate of 14% onthe sale of the goods. An exception applies to exportsby air or ship, where the supplier has an option toapply the rate of zero per cent, at its own risk. Nosuch option exists for exports by road or rail.
Where a foreign purchaser therefore pays for thetransport cost for exports by road or rail, he is obligedto pay VAT at 14% for the goods, and must apply fora refund of the VAT via the VAT refund administrator;a very long-winded and onerous process.The current regulations in respect of these exportswere introduced in 1998 mainly to combat round-trippingof goods which were supposedly exported,but were sold locally at great loss of VAT andexcise duties to the fiscus. The question is whetherthese regulations are required at the expense oflocal suppliers and South Africa's foreign trade, orwhether SARS officials should rather tighten up itsenforcement to reduce or eliminate the round-trippingof goods.
The review of these regulations is welcomed as itwill certainly assist to reduce the trade barriers withneighbouring countries. Hopefully the review will notbe restricted to exports by road, as there does not seem to be any reason as to why exports by railshould be excluded.
The review of the VAT treatment of temporaryimports to promote local processing andbeneficiation has been considered for a numberof years, but no significant progress has yetbeen made in this regard. Although the VATlegislation provides for the exemption from VAT ongoods temporarily imported into South Africa forprocessing, the exemption is not applied due toonerous SARS customs processes and procedures.Hopefully more progress will be made this time.
Other VAT proposals
The Budget review stipulated that the date whena person that has applied for VAT registrationbecomes liable for VAT will be clarified. Thesignificant delays in the VAT registration processand the application of retrospective registrationdates cause a VAT cost, penalties and interestcharges for the applicant between the date ofapplication and the date of registration. One wouldhave thought that a streamlining of the registrationprocess to eliminate delays would be a better wayof dealing with the issue as opposed to a legislationamendment.
The double VAT charge on goods sold within SouthAfrican territorial waters before entry into SouthAfrica, i.e. the charge of VAT on the sale of thegoods and again on the importation of the samegoods into South Africa, will also be reviewed.
The receipts and accruals of political parties andbargaining councils will be clarified as beingexempt from VAT. The conditions under which avendor can issue a debit or a credit note to rectifyan incorrect tax invoice issued will be extended.