Author: Diane Seccombe (Mazars)
South African VAT vendors involved in the export of goods will warmly welcome new VAT regulations, which became effective on the 2nd of May 2014.
South African legislation seeks to increase exports by incentivising exporters in many forms, and the Value-Added Tax Act (the Vat Act) is no exception. Where goods have been “exported” (as defined in section 1 of the Vat Act) by a vendor the supply is regarded as zero rated. A zero rated supply is beneficial as, despite attracting no output VAT, the vendor may still claim all the input VAT to which they are entitled, often placing the vendor in a VAT refund position. Vendors are well aware that due to the scrutiny placed by SARS on VAT refunds, vendors must ensure they obtain all relevant documentation timeously (as set out in Interpretation Notes 30 or 31) to substantiate that the goods were exported as required.
The above analysis is made slightly more complicated when we examine the definition of “exported” in more detail. The definition provides that when a vendor opts to export the goods by physically delivering the goods to the foreign recipient at an address in the export country, either personally or by way of the vendor appointing a cartage contractor, the supply is automatically zero rated. This is often referred to as a direct export.
Should the vendor choose not to assume the cost and risk of delivering the goods to the foreign recipient, the situation changes. Where the goods are supplied by the vendor to a foreign recipient in the Republic and then removed from the Republic by the foreign recipient this is often referred to as an indirect export. Goods supplied in terms of an indirect export, are for the most part no longer regarded as “exported” for the purposes of the Vat Act and the supply is standard rated leaving the vendor to account for the output VAT at 14%. The foreign recipient, on removal of the goods from the Republic may obtain a refund of the 14% VAT paid by way of the VAT Refund Administrator (VRA).
The exception in terms of which goods could be indirectly exported at a zero rate arose if the vendor elected to utilise the now defunct export incentive scheme. The scheme laid down specific requirements and if met by the vendor the indirect export of goods could be zero rated at the outset. One of the more limiting factors of the export incentive scheme, particularly for trade into Africa, was that it did not encompass the foreign purchaser removing the goods purchased from the Republic by road or rail, only by sea or air. This left indirect exports into Africa at a distinct disadvantage due to the fact that goods are often transported by road or rail.
Many foreigner purchasers have proved unwilling to pay the 14% VAT triggered by an indirect export of goods by road or rail, and suffer the administrative inconvenience of obtaining a VAT refund from the VRA. Fears over possible cash-flow consequences should the refund be delayed are often cited as a further reason despite proven efficiency by the VRA. This unwillingness has translated into lost sales for supplying vendors.
The new VAT regulations have provided a welcome solution. The regulations are divided into two parts. Part one deals with the requirements to obtain a VAT refund via the VRA. Part two is further divided into section A and section B. Section A replaces, and to a limited degree mirrors, the old export incentive scheme whereby the indirect export of goods by sea or air could be zero rated. As with all regulations, the definitions and requirements set out must be studied in detail. This article will focus only on section B of part two whereby for the first time, an indirect export of goods via road or rail can be zero rated.
The regulations define a “qualifying purchaser”, essentially the foreign purchaser, and an “agent”. The “agent” is essentially a South African vendor who is nominated and appointed by the qualifying purchaser, to “collect, consolidate and deliver movable goods” to the qualifying purchaser at an address in the export country. The regulations detail the various registration requirements for all parties and the legislation in terms of which the registration must take place, one example being the Customs and Excise Act.
Once all parties are in place and registered as required, the supplying vendor will make a supply of movable goods to the qualifying purchaser in the Republic, and the goods will be exported from the Republic by the qualifying purchaser’s agent. The supplying vendor can elect to supply the goods at a zero rate, provided the supplying vendor is able to show that the goods were consigned or delivered to the agent’s premises (in the Republic), and once the myriad of paperwork has been obtained and finalised as required by the regulations. Most importantly the South African vendor must ensure that the qualifying purchaser’s agent removes the goods from South Africa within ninety days of the earlier of; the time the invoice is issued by the supplying vendor, or the payment of any consideration has been made to the supplying vendor. Both the supplying vendor and the qualifying agent can make use of a cartage contractor in respect of the physical transfer of the goods.
The qualifying purchaser’s agent must ensure that the goods leave the country via one of the designated commercial ports listed in the regulations. It is to be welcomed that, despite not being listed in the draft form of the regulations, Beit Bridge (between South Africa and Zimbabwe) and Lebombo (between South Africa and Mozambique) have now been added to the list and are thankfully recognised designated commercial ports.
It cannot be over-emphasised that parties wishing to make use of this new opportunity to zero rate the indirect export of goods by road or rail, must carefully study the regulations and ensure they are completely familiar with all the obligations, documentation and time limits prescribed. Should a supplying vendor elect to zero rate the supply of goods as permitted and all the requirements set out in the regulations are not fulfilled timeously, the supplying vendor will be deemed to have made a standard rated supply in respect of the export and have to account to SARS for output VAT calculated as the VAT fraction (14/114) multiplied by the cost of goods supplied. It is highly unlikely that the foreign purchaser will be amendable to compensating any supplying vendor for the output VAT liability triggered by non-compliance with the regulations.
This article first appeared on the May/June edition of Tax Talk.