South Africa still does not have specific “place of supply” rules to guide foreign companies on their value-added tax (VAT) obligations in South Africa. This continues to create uncertainty, particularly with the increase in digital cross-border transactions.
In the absence of these rules, there is always a possibility of a cross-border transaction being taxed twice: in the supplier’s country and in the recipient’s country. It can also result in non-taxation in both countries.
Place of supply rules identify the place where supplies are to be taxed for VAT purposes, as well as the rate of VAT applicable to the supplies. In South Africa, it is either 15% or 0%, says Annelie Giles, tax executive at ENSafrica.
The VAT Act was introduced in 1991, when the South African economy was still very much isolated, with only limited cross-border trade. This may explain why place of supply rules were not originally implemented, adds Gerhard Badenhorst, tax director at Cliffe Dekker Hofmeyr.
However, the Davis Tax Committee emphasised the importance of clear and decisive place of supply rules as far back as March 2018 in its final report to the Minister of Finance.
The committee recommended an amendment to the VAT Act “as a matter of urgency” to ensure the inclusion of clearly stated place of supply rules in line with the VAT guidelines provided by the Organisation for Economic Co-operation and Development.
Enterprise for VAT purposes
In June 2014, some place of supply rules were introduced, mainly applicable to foreign suppliers of electronic services that are deemed to carry on an enterprise in South Africa.
The concept of what constitutes an enterprise for VAT purposes was discussed in depth during the recent Tax Indaba in Sandton, and it is complicated.
The definition of an “enterprise” includes any activity carried on continuously or regularly by any person in or partly in South Africa where goods or services are supplied to another person for a consideration, whether or not for profit. Badenhorst says the problem is the “in or partly in South Africa” because of the absence of place of supply rules.
He provides the example of a foreign company performing a specific part of construction activities in South Africa for two months, and it is unlikely that it will again conduct another activity in this country.
However, it is conducting its activity in South Africa, and it has a presence in the form of staff. The question is whether that makes it an enterprise for VAT purposes.
Badenhorst says the only way around this grey area is to approach the South African Revenue Service (Sars) for a private binding ruling. This comes at a cost to the company that can range between R20 000 and R80 000, depending on the complexity of the transaction.
If the company simply decides not to register and Sars believes otherwise, it is in breach of the Tax Administration Act and could face stiff penalties.
Giles agrees that when a supplier conducts some, but not all, of its business activities in South Africa, uncertainty exists to determine which of its activities form part of its South African VAT enterprise.
“Only enterprise activities would be subject to VAT, whereas non-enterprise activities, such as business activities conducted entirely offshore, would be out-of-scope from a South African VAT perspective.”
Passive income and lease agreements
She adds that uncertainty also exists whether a non-resident, without any physical presence in South Africa, must register for VAT if it receives only passive income in the form of royalties, franchise, or agency fees from South Africa.
Sars previously followed a practical approach whereby it would not insist on these entities having to register for VAT.
According to Badenhorst, there were issues in the past relating to foreign entities supplying ships, aircraft, or rolling stock under a lease agreement to a South African recipient for use in South Africa.
These companies were generally based in the Isle of Man or Ireland and had to rely on rulings from Sars to ensure they were compliant in terms of the Act. Again, the VAT Act was amended, and these entities are now deemed not be carrying on an enterprise in South Africa.
The Act was amended again for foreign entities that only obtain ownership for a moment in time (on a flash title basis) of goods in South Africa before on-selling them to their foreign customers. This is quite common with cross-border commodity transactions, Badenhorst says.
“Place of supply rules are becoming more important as transactions become increasingly digital and supply chains become more complex,” Giles says.
As staff and management teams are becoming more dispersed globally, this creates more uncertainty where there is limited place of supply rules. She adds that a sensible approach is preferred whereby a VAT registration obligation is limited to those businesses with a substantial in-country presence.
Uncertainty remains
Badenhorst says it is unfortunate that the Davis Tax Committee’s recommendations have not been implemented.
“We have the legislation of numerous other countries which we can use as a basis, and significant research in this regard in a South African context has already been done.”
Approached for comment, National Treasury said: “We introduced very specific rules with regard to cross-border supplies of services. The definition of ‘enterprise’ in section 1(1) of the VAT Act makes the place of supply of cross-border services very clear. The fact that we have over 750 multinationals that have registered for VAT due to our VAT Act and Regulations relating to the cross-border supplies of services is proof that our place of supply rules in this regard are quite clear.”
Amanda Visser is a freelance journalist who specialises in tax and has written about trade law, competition law and regulatory issues.
Disclaimer: The views expressed in this article are those of the writer and are not necessarily shared by Moonstone Information Refinery or its sister companies. The information in this article does not constitute financial planning, legal or tax advice that is appropriate to every individual’s needs and circumstances.
