Unlocking The Budget Speech 2012
06 May 2012
Posted by: Author: Gerhard Badenhorst
Unlocking The Budget Speech 2012
A closer look at VAT budget proposals
The Minister of Finance Mr Pravin Gordhan, in his Budget review on 22 February 2012, proposed a number of value-added tax (VAT) amendments.More significant is the announcement that government will seek to eliminate the application of the rate of zero rate on loans to non-residents.The motivation given 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 an attempt to increase VAT collections.Although the non-resident will not be required to pay VAT on the interest paid on the loan, whether it is zero-rated or exempt, the proposed amendment will have a significant impact on the financial 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 to such loans.However, if the loans are exempt from VAT, no VAT may be claimed by the financial institution, which will increase the operating cost of the financial institution and the cost of granting the loan.
The proposed amendment is directly in contrast with the fundamental principles of the South African VAT system, which is a destination-based tax aimed at taxing only consumption within South Africa.It is also contrary to the VAT systems applied by South Africa’s biggest trading partners, who all apply the VAT rate of zero per cent to loans granted to foreign entities.The objective of the application of the zero rate is principally to avoid double taxation, i.e. the taxing of goods or services in the country of origin and in the country of destination.By seeking to eliminate the zero rating on loans to non-residents, SARS will indirectly introduce double taxation on such loans because the financial institution bears the VAT cost on the foreign loan in South Africa, and the non-resident is unlikely to be allowed a deduction of VAT on its operating expenses in the foreign country.
In addition, the non-deductible VAT cost to South African financial institutions is much higher than that of foreign financial institutions due to the fact that South Africa introduced VAT on all fee-based financial services in 1995 and 1996, whereas such fees are exempt from VAT in most foreign jurisdictions.By increasing the VAT cost to South African financial institutions, they will become even less competitive in an international market.
Review of indirect exports and temporary imports
The Budget review stated that the policy, legislation and administration of the VAT treatment of indirect exports of goods by road will be reviewed to ensure that exporters are not prejudiced and that the fiscus continues to be protected against potential abuses.Currently, where a non-resident takes possession of goods in South Africa and pays for the transport cost to export the goods from South Africa, the supplier is obliged to levy VAT at the standard rate of 14% on the sale of the goods.An exception applies to exports by air or ship, where the supplier has an option to apply the rate of zero per cent, at its own risk. No such option exists for exports by road or rail.
Where a foreign purchaser therefore pays for the transport cost for exports by road or rail, he is obliged to pay VAT at 14% for the goods, and must apply for a refund of the VAT via the VAT refund administrator; a very long-winded and onerous process.
The current regulations in respect of these exports were introduced in 1998 mainly to combat round tripping of goods which were supposedly exported, but were sold locally at great loss of VAT and excise duties to the fiscus.The question is whether these regulations are required at the expense of local suppliers and South Africa’s foreign trade, or whether SARS officials should rather tighten up its enforcement to reduce or eliminate the round-tripping of goods.
The review of these regulations is welcomed as it will certainly assist to reduce the trade barriers with neighbouring countries.Hopefully the review will not be restricted to exports by road, as there does not seem to be any reason as to why exports by rail should be excluded.
The review of the VAT treatment of temporary imports to promote local processing and beneficiation has been considered for a number of years, but no significant progress has yet been made in this regard.Although the VAT legislation provides for the exemption from VAT on goods temporarily imported into South Africa for processing, the exemption is not applied due to onerous SARS customs processes and procedures.Hopefully more progress will be made this time.
Other VAT proposals
The Budget review stipulated that the date when a person that has applied for VAT registration becomes liable for VAT will be clarified.The significant delays in the VAT registration process and the application of retrospective registration dates cause a VAT cost, penalties and interest charges for the applicant between the date of application and the date of registration.One would have thought that a streamlining of the registration process to eliminate delays would be a better way of dealing with the issue as opposed to a legislation amendment.
The double VAT charge on goods sold within South African territorial waters before entry into South Africa, i.e. the charge of VAT on the sale of the goods and again on the importation of the same goods into South Africa, will also be reviewed.The receipts and accruals of political parties and bargaining councils will be clarified as being exempt from VAT.The conditions under which a vendor can issue a debit or a credit note to rectify an incorrect tax invoice issued will be extended.
Source: By Gerhard Badenhorst (TaxTALK)