Indirect Tax News - December 2020

Taxation Law Amendment Bill and other changes in Value Added Tax for 2020

After consultation and feedback from various stakeholders, the National Treasury has published the 2020 Taxation Laws Amendment Bill (TLAB). The proposed amendments are set to take effect on 1 April 2021.

Registration of lessors of foreign-owned ships, aircrafts, and other equipment

Historically, the South African Revenue Service (SARS) issued rulings on an independent basis in situations where foreign-owned ships, aircraft, or other equipment are leased for use in South Africa (the Republic) and the lessor of such goods has no physical or business presence in the Republic. The rulings were issued to confirm whether lessors of cross border rentals had a VAT registration liability in South Africa. However, uncertainties arose as to whether the foreign lessor was conducting an enterprise in South Africa.

The new amendment excludes foreign lessors from the definition of “enterprise” in the VAT Act. As a result, based on the amended version of the definition, the lessor will not be carrying on an enterprise in the Republic and will therefore not be required to register as a VAT vendor.

We are not in favour of this amendment as it contradicts the basic consumption/destination principles of the VAT legislation. We are of the view that it is just a mechanism to overcome practical issues with the registration of foreign vendors.

In addition, the amendment is only applicable to lessors of certain movable goods and not applicable to all lessors of movable goods in South Africa. This creates an anomaly based on specific industries and is not a fair and just application of the VAT provisions for all lessors with similar supplies.

The sale of a going concern

The VAT Act provides relief for restructuring within corporate organisations. To achieve the relief, the supplier and the recipient of the goods or services are treated as the same person, provided that the relevant rollover relief provisions of the Income Tax Act are met.

The reason for the amendment is that not all organisations’ assets meet the requirements to qualify for the rollover relief and consequently the rollover provisions do not apply. The proposed amendment will now allow the supply to be subject to VAT at the zero rate if the supplier and recipient agree in writing that the supply qualifies as a going concern.

Zero rating of telecommunication services

According to the International Telecommunications Regulations (ITR), South African (SA) vendors supplying roaming and other services to non-resident telecommunications suppliers are obliged to zero-rate the charges levied to their non-resident counterparts.

To adhere to the ITR, the amendment will enable SA vendors supplying roaming and other services to non-resident telecommunications suppliers to zero-rate these charges.

Payment basis versus Invoice basis

The majority of electronic service suppliers were allowed to account for VAT on the payment basis. However, with the implementation of intermediaries that are able to account for VAT on behalf of these electronic service suppliers, the VAT Act unfortunately did not afford these intermediaries the same benefit and they were required to account for VAT on the invoice basis. This resulted in inconsistencies due to the different VAT treatment for suppliers of electronic services.

The amendment will enable intermediaries that are deemed to be suppliers for the purposes of supplying electronic services to be able to apply to the Commissioner of SARS to account for VAT on the payment basis. This will mean that these vendors will now account for output tax only and to the extent that they receive payment for their supplies, they will only be entitled to claim input tax credits when, and to the extent that, they make payments to suppliers.

VAT Binding General Ruling (BGR) 55: Sale of dwellings of fixed property by developers following a change-in-use adjustment

Property developers are required to account for an output tax adjustment when they let out a property on a temporary basis if the property was previously intended for a taxable supply by way of sale. This treatment generally came about due to the economic climate of the last few years. The letting of residential accommodation in a dwelling is exempt from VAT and the change in use creates the liability for the output tax adjustment. The VAT treatment of the sale of the relevant property subsequent to the residential letting was not clear and created uncertainty.

Ruling 55 provides clarity on the VAT consequences of the sale of dwellings of the fixed property by a developer. SARS has ruled that the sale of dwellings by developers subsequent to the change in use adjustment is not subject to VAT and the purchaser shall be liable for the transfer duty on the acquisition of such dwelling.

We do not agree with this view as the property developer’s intention was always to develop and sell these units. When the economic landscape improves in the future and the property developer then actively renovates, markets, and sells these units on a continuous basis, the developer will not be able to claim the input tax it will incur in this process because such activity is not in the course of making taxable supplies, that is, the non-taxable supply of the property as per BGR 55.

Purveyors South Africa Mine Services (Pty) Ltd v Commissioner for the South African Revenue Service

In 2015 Purveyors Mines (the taxpayer) cleared an aircraft for home consumption into South Africa without paying the VAT on importation due thereon. In early 2017, Purveyors approached SARS to obtain its view regarding the potential VAT liability.

SARS informed the taxpayer that VAT is indeed payable and that penalties and interest would be applicable. The taxpayer did not immediately correct this default and SARS followed-up on several occasions regarding when the taxpayer was going to pay these amounts to SARS.

It was only after various consultations with SARS that in 2018 the taxpayer relied on the Voluntary Disclosure Program (VDP) for relief of the penalties payable. The major requirements of the VDP program are that the disclosure must be voluntary and it must be full and complete. SARS took the position that the disclosure was not voluntary since SARS knew about the default and pursued the taxpayer for payment. The court ruled in favour of SARS, concluding that the VDP application was not voluntary on the basis that Purveyors did not disclose any additional information or facts that SARS was not already aware of. The court then ordered the taxpayer to pay the VAT, penalties, and interest.

The case demonstrates the importance of seeking advice from qualified tax professionals when deciding to apply for VDP relief.

Khanyisile Maumela

Cliff Watson