Benefits for foreign donor funded projects
In July 2019, the South African National Treasury (Treasury) issued the draft Taxation Laws Amendment Bill (TLAB). The TLAB includes proposed amendments to the Value Added Tax Act (VAT Act) with respect to certain aspects of foreign donor funded projects (FDFPs).
A FDFP is a project funded by a foreign government or international development agency under the terms of an international donor funding agreement entered into with the South African government. The purpose of an FDFP is to supply goods or services to beneficiaries.
The agreements establishing FDFPs normally provide that the funds must be donated and used only for specific, mutually agreed upon programmes and activities. As well, the funds cannot be used to pay for any taxes imposed under South African Law.
The VAT Act has specific provisions that provide relief to FDFPs. Though an FDFP does not necessarily supply goods or services for a consideration, the FDFP is deemed to make supplies to the international donor and therefore may register for VAT in South Africa. The deemed services of the FDFP are subject to VAT at the zero rate. This ensures that the funding the FDFP receives does not attract standard rated VAT because if it did, that would reduce the amount of funding available.
The benefit of being able to register for VAT, even though the deemed supplies are zero-rated, is that the FDFP is entitled to deduct all VAT incurred in carrying out the project deliverables. For example, generally the VAT incurred on the purchase or rental of motor cars cannot be claimed by vendors. But, FDFP’s can claim such VAT as input tax.
The issue with the current provisions for FDFPs is that FDFPs sometimes sub-contact out different parts of their project to other entities. This has led to confusion about which entity is actually the implementing agency that must register the project as a FDFP for VAT purposes and who can claim VAT incurred as input tax.
To address these questions, Treasury has proposed that the foreign government or funding agency appoint an “implementing agency” to implement, operate, or manage the FDFP. This implementing agency will then qualify as an “enterprise” for VAT purposes.
The proposal, if implemented, will effectively result in all implementing agencies, as opposed to only the main implementing agency, being able to register for VAT and deduct the VAT incurred as expenses of the FDFP.
This is a welcomed proposal as it will benefit entities that work, for example, as subcontractors, on FDFPs to get the benefits of the zero rating as well as the relevant input tax deductions.