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Foreign businesses transacting with South African businesses

Budget 2018/19 - Deloitte Expectations

The Organisation for Economic Co-operation and Development (“OECD”) advocates that double taxation, i.e. tax cascading, must be eliminated in order to achieve the underlying principles of neutrality and equality in a VAT system.

Despite South Africa’s implementation of certain mechanisms to reduce the risk of double taxation on international trade services, experience has shown that foreign businesses still continue to bear the burden of excessive VAT costs. For instance, a film company making a movie in South Africa incurs local VAT which it may not be able to claim. The unintended VAT cost is unequivocally a deterrent for future investors.

Given our recent economy, South Africa cannot favour a VAT system which seeks to undermine international trade. Consequently, National Treasury is now considering an alternative mechanism which would allow foreign businesses to claim VAT refunds similar to the 13th Directive adopted by the European Union. This grants businesses established outside the EU the right to recover VAT incurred in one of the 28 member states provided certain requirements are met.

Qualifying businesses must not be registered, liable or eligible to be registered for VAT in the EU. The organisation must not have a place of business in the EU and should not make any supplies in the EU (other than transport services related to the international carriage of goods, or services where VAT is payable by the person in the EU to whom the supply is made).

Typically, a VAT refund is permitted where:

  • Expenses are incurred by businesses that are engaged in activities which would be subject to VAT if carried out in the EU. For example, if a foreign business only makes supplies which are considered to be exempt activities in the EU, such business will not be entitled to a VAT refund under EU legislation.
  • Only VAT paid on business-related expenses will be refunded. No refunds on private expenditure are allowed.
  • Further, if local EU businesses are not entitled to claim a VAT deduction on certain expenditure for e.g. entertainment, the non-EU business cannot lodge a VAT refund application for business entertainment expenses incurred in that country.

If South Africa were to adopt a similar system to the EU’s 13th Directive, such system would align with the OECD principles of eliminating tax cascading on international trade services.

Given that New Zealand, Australia and more recently the Gulf Cooperation Council have implemented a similar set of rules, we are hopeful that South Africa will be next to follow suit.

In another step to eliminate unintended VAT costs, Treasury is also considering the zero rating of so-called “loop supplies” where services are supplied by a local vendor to a foreigner who on-supplies such services to another SA vendor.

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