Foreign residents doing business in South Africa often neglect to register as a value added tax ("VAT") vendor in circumstances where services are rendered to South African enterprises. The misunderstanding generally arises because the foreign resident is under the impression that it does not need to register as a vendor for VAT purposes in view of the fact that the transaction may be once-off and that it would therefore not be conducting business in South Africa on a continuous basis.
In terms of the South African value added tax legislation, however, all persons are obliged to register as a vendor to the extent that an enterprise is carried on in South Africa. An enterprise includes any activity that is carried on by any person –
- continuously or regularly;
- partly or wholly in South Africa;
- in the course of furtherance of which goods or services are supplied to any other person for the consideration, whether or not for profit.
It follows from the aforegoing that foreign residents will be obliged to register in circumstances where the activity is seen to be carried on continuously or regularly. Generally once-off transactions will not qualify as the conducting of an enterprise. However, if the once-off activity is preceded by a continuous sequence of acts, an enterprise will most probably be seen to be conducted at least partly in South Africa. For instance, in the well known 4664 Mandela Benefit Concert, it was indicated by the Revenue Authorities that it did constitute the carrying on of an enterprise even though the actual event took place on a single day.
The same risk arises in circumstances where the foreign resident sends employees or individuals to South Africa to consult or render certain services. By virtue of their activities, the individuals may be present in South Africa for substantial periods. The question then arises at which stage an enterprise will be deemed to be conducted in South Africa by virtue of the presence of the individuals in South Africa. The Revenue Authorities have indicated that one should consider the presence of the individuals on an aggregate basis relating to man days per period.
Traditionally it was thought that the non-registration of a foreign resident as a vendor would not have serious implications in circumstances where the recipient of the services would otherwise have been entitled to claim the VAT that should have been charged by the non-resident as an input credit. In other words, if the non-resident rendered services in an amount of 100 and should have charged VAT at the standard rate of 14% (being 14) and failed to do so, the argument was always that the recipient of the services in South Africa would otherwise be entitled to claim the 14 as an input credit and there would thus be no loss to the fiscus. Recently the Revenue Authorities have changed their views and indicated that, irrespective whether or not the recipient of the services would be entitled to claim an input credit, separate submissions should be lodged as to why penalties and/or interest should not be imposed in the circumstances. In other words, even though there is no net cash downside to the fiscus, there may potentially be an imposition of interest and penalties.
In circumstances where the foreign resident is not otherwise required to register as a vendor (in circumstances where the turnover for any 12 month period is expected to be less than R300 000 in the aggregate), the recipient of the services may otherwise have to account for output VAT to the extent that the services are seen to be imported services. In other words, should the services not be used by the recipient in turn to make taxable supplies from a VAT perspective, the recipient will have to account for the output tax on the receipt of the services from the foreign resident. To the extent that the services are rendered outside South Africa, there is an argument that the services can otherwise be zero-rated.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.