VAT principles for principals: Clarity needed to enhance compliance

The legal construct where a South African entity is engaged by foreign suppliers to facilitate supplies into South Africa, but also into other African jurisdictions, are now very familiar. The intermediary or agent increasingly has the relationship with the end customer and is often responsible for facilitating the supply, issuing the invoices, collecting payments; and has sight of the detail behind the supply. The intermediary or agent is therefore ideally positioned to collect and pay over any value-added tax (VAT) due to the South Africa Revenue Service (SARS).

For this reason, there has historically been special dispensation rulings to VAT vendors effectively acting as intermediaries or agents, allowing them to account for VAT as principal, regardless of the registration status of the person on whose behalf the intermediary or agent acts. In addition, this allows for the intermediary or agent to claim VAT on the expenses attributable to these taxable supplies.

These rulings have been withdrawn with effect from 31 December 2021.  The concessions are therefore no longer valid and have not been enacted, which means that the intermediaries or agents will no longer fulfil this function and it is up to the principal supplier(s) to account for the VAT, of which there may be several different suppliers compared to the one agent previously.

The VAT Act has provisions which allow the agent to account for the VAT in respect of supplies made by the principal e.g, auctioneers, pooling arrangements, and agents importing on behalf of a foreign principal. These provisions are, however, very specific and can only be employed in limited circumstances.

Although section 54(2B) of the VAT Act provides for “intermediaries” to be deemed the principal supplier of electronic services in specific circumstances, this section has limited application. This creates difficulties for intermediaries or agents required to be registered for VAT and to issue tax invoices on behalf of multiple principals, some of whom are registered, some not, and some required to be registered. This requires very sophisticated and expensive system capabilities in order to isolate transactions and account for the VAT accurately. This also creates significant room for error where only some transactions are accounted for, while others need to be excluded.

To this end, several proposals were made requesting that the ambit of the VAT Act be widened, allowing the intermediary or agent to account for transactions on behalf of the foreign principal.  Where the intermediary or agent facilitates a supply, issues the invoice and collects the payment for supplies made by its principal, that intermediary or agent should be deemed to make this supply as well as be held liable for, and entitled to, the output and input tax in relation to this supply:

• Whether or not the principal is a resident of the republic
• Whether or not the principal is a registered vendor or should be registered for VAT
• Whether the supply takes place within or outside the republic, and
• Whether this constitutes a supply of goods or services.

An amendment to this effect, will limit the risk should the foreign principal not account for the correct amount of VAT in respect of supplies effectively facilitated by the local intermediary or agent.  It also addresses the risk that any imported services VAT is not accounted for accurately.  Any provisions in this regard should be subject to the parties electing to utilise this concession. It should also be based on a requirement that the principal and intermediary or agent enter into a written agreement whereby the foreign principal undertakes not to account for transactions dealt with by such intermediary/agent.

A number of uncertainties in the interpretation of the electronic services legislation, specifically with regards to intermediaries, can also be addressed should the above amendment be considered. Addressing the above would provide clarity to foreign principal suppliers and their intermediaries or agents, which in turn is likely to enhance voluntary compliance.