Anomalies in the VAT system
by Peter Maxwell and Dinisha Munien
ANNUALLY the finance minister includes tax amendments to eliminate legislative anomalies. One such case deserving attention is the value-added tax (VAT) treatment of fees charged by vendors to foreign companies effectively managed in SA.
The VAT Act provides for VAT to be levied at the zero rate on fees charged for supplying services to non residents subject to certain exclusions. The Act defines a South African resident in line with the Income Tax Act – namely someone other than a natural person incorporated, established or formed in the country or which has its place of effective management here. It is the latter that creates the anomaly. By linking “resident” to its Income Tax Act definition, the VAT zero-rate cannot apply to services supplied to a foreign company effectively managed in SA. The local vendor must levy VAT at the standard rate, essentially imposing an additional cost to the foreign company as it is unlikely to be locally VAT registered.
This costly situation can be avoided if the foreign operations are conducted via a separate branch. Services then supplied by the main South African business to its branch are deemed to be supplied in the course of the South African vendor’s enterprise. The zero rate can be applied to any fees charged for services by the South African vendor to its foreign branch.
It is not always possible to operate via a branch in a foreign country. Operating through a company in the foreign country effectively managed in SA has a hidden cost of which local vendors should be aware. The time has come to lobby national treasury to remove this anomaly.