Article

VAT obligations for non-residents - The complexities of the “enterprise” definition

Published: 5 February 2021

Growing anticipation is placed on whether or not further changes can be expected for the definition of “enterprise”. Over the years, a number of amendments or publications have been issued or proposed to clarify the intent of legislature; including those changes for electronic services, passive income, insurance contracts and telecommunications services.
Complexities surrounding the definition
For various reasons, it is important to determine whether an activity performed by a business may constitute an “enterprise” in South Africa.  The definition of “enterprise” is no dependent on place of residence. Therefore, foreign businesses must consider the impact of their activities in South Africa, whether a person is conducting an enterprise in South Africa and what other requirements must be met. 
How has this impacted foreign businesses?
1. The branch of a main business wishes to register for value-added tax (VAT) on the basis of certain activities performed to or for the benefit of its main business outside of South Africa
An amendment was inserted as proviso (ii) to the definition of “enterprise” and promulgated on 24 January 2005, which deemed the branch and main business to be regarded as separate persons for VAT purposes, in order to deem whether supplies between the local enterprise and the foreign main business are taxable, and thus unlocking input tax deductions. The wording of the legislation indicates that the supplies made by a branch be treated the same as if the foreign business incorporated a subsidiary in South Africa.
In recent times, there has been some doubt as to whether a foreign business with a branch in South Africa that performs certain functions for its main business outside of South Africa, may register as an enterprise for VAT.  A VAT registration means that the transfer of goods or provision of services to or for the purposes of the main business outside of South Africa, are deemed to be taxable for supplies that qualify for input tax deductions.
However, current experiences now suggest that there has been a change in policy where the branch in South Africa only makes “supplies” to its main business situated outside South Africa. Where this is the case, SARS is of the view that such a branch may not register for VAT as it
is not conducting an enterprise.  
Where the South African branch supplies to third parties, such a branch may register for VAT in South Africa, and provided it meets certain requirements, will be regarded as a person separate from its main business for VAT purposes. The effect of this is that any supplies made by the South African branch to its main business will be deemed to be taxable and any VAT incurred in making these supplies will be deductible. 
This treatment seems contrary to the intention of the definition of “enterprise” since VAT treatment will depend on the legal structure adopted by a foreign business. We don’t think the structure adopted should impact the entitlement to register for VAT or the ability to deduct
input tax.
2. The foreign business makes staff available to the local operations in South Africa
Even if employees retain their home country employment contracts, in some cases, they can for the duration of their secondment, if under the control and supervision of the operations in South Africa be regarded as employees for the purposes of local Pay-As-You-Earn (PAYE) withholding requirements. Where the employment costs are recharged to the local business as an intercompany cost, it is not clear that the foreign business will be viewed as having conducted an enterprise in South Africa.
The debate lies in the fact of whether the seconded employees are furthering the enterprise of the foreign business or that of its local operations. No guidelines are provided to clearly interpret who is responsible for accounting for VAT on these transactions.
The added complexity to this issue is that of whether an obligation to remit VAT on imported services arises. This obligation falls away if the non-resident business is required to register for VAT in South Africa. Therefore, any decision not to remit VAT on imported services must be supported by a conclusive position that the foreign business was required to charge local VAT.
3.  Foreign business takes flash title of movable goods before they are immediately sold to another recipient outside of South Africa
Flash title occurs where a local supplier sells goods to a recipient and ownership of the movable goods vests for a moment, before the goods are immediately sold to another recipient outside of South Africa.
Interpretation Note 30 (Issue 3) was issued by the South African Revenue Service (SARS) and provides an example of where both the supplier and first-mentioned recipient are vendors and permitted to zero rate the supply, where the goods are acquired on a flash title basis, and if the necessary export documentary requirements are met.
It would appear - based on the current policy - that where the recipient is a non-resident, there is an obligation to register based purely on the fact that a non-resident enters into a flash title transaction before the goods leave South Africa.  
That impact for foreign businesses is the uncertainty of whether there is a requirement to register and account for VAT in South Africa. Where it turns out that there was a requirement to register and therefore be required to substantiate its zero rated transactions, it means that any retrospective obligation of having to do so may result in assessment of tax, penalties and interest on the basis that the foreign business will not be in a position to support the zero rate.
In this case, where it transpires that there was a requirement to register, it means that the non-resident vendor will effectively submit nil VAT returns with the added responsibility of having to rely on the documents obtained by the supplier to substantiate its entitlement to apply the zero rate.
What is the impact on local businesses?
Given the number of rulings in this specific area, and challenges faced by foreign businesses to ascertain whether or not activities in South Africa have given rise to an obligation to register, points to a vacuum in the law and a need for certainty.
In the interest of applying the rules equally to all foreign businesses operating in South Africa, clear guidelines or amendments to the law may be needed to gain insight as to the intention of
legislature. This will also provide much needed certainty as to whether the non-resident business or local South African recipient should account for the VAT. 
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