VAT Connect Issue 12 (June 2021)

Recent amendments

Recently the following Acts containing amendments to the VAT Act were published. These documents can be accessed on the SARS website by clicking on the links below.

The Explanatory Memoranda to the above acts can be accessed by clicking on the links below:

Refer also to the Rates and Monetary Amounts and Amendment of Revenue Laws Act 22 of 2020 that sets out the updated transfer duty rates which came into effect on 1 March 2020.

The above acts were all promulgated on 20 January 2021 as per Government Gazettes 44083, 44080 and 44082 respectively. The amendments came into effect on 1 April 2021 unless otherwise stated.

A brief summary of some of the more important VAT amendments is provided below:

Cross border leases of ships, aircraft and rolling stock – Proviso (xiii) to the definition of “enterprise” was inserted to clarify that a non-resident lessor is not regarded as carrying on an enterprise in the Republic where foreign-owned ships, aircraft or rolling stock are leased for use in the Republic, subject to certain conditions being met. See the article below “Non-resident lessors of ships, aircraft and rolling stock under a rental agreement” for more information.
Refining the VAT corporate reorganisation rules – A further proviso to section 8(25) was introduced to address the situation where, under the Income Tax Act, certain assets may not qualify for the roll-over relief even though the asset forms part of the entire transaction. The amendment now allows for the parties to agree that the provisions of section 7 and 11(1)(e) apply to a supply contemplated in section 42 or 45 of the Income Tax Act, instead of section 8(25).
Zero-rating of telecommunication services – The zero-rating of services contemplated in the International Telecommunication Regulations that were concluded at the World Conference on International Telecommunications held in Dubai in 2012, between resident and non-resident telecommunication services providers was introduced, under section 11(2)(y), limited to international roaming services.
Accounting basis for an intermediary – Section 15(2)(a)(vii) was amended to allow an “intermediary” supplying “electronic services” to account for VAT on the payments basis.
Management of superannuation schemes – The special valuation rule in section 10(22A) was deleted.
Imported services – Section 14(1)(a) was amended to require the recipient of imported services to obtain, complete and retain form VAT215. The effect of this amendment is that the recipient no longer has to furnish the VAT215 form to SARS, but is only required to keep the completed form as documentary evidence. See External Guide Manage Value Added Tax on Imported Services for more details.
Second-hand goods – Section 20(8) prescribes information and documentation that must be retained by a vendor in respect of second-hand goods acquired in order to claim a notional input tax deduction. The law has now been amended to refer to “identity card” instead of “identity document”. This aligns with the terminology contained in the Identification Act 68 of 1997.

Section 72 decisions

Legislative amendment and transitional rules

The background to the amendments to section 72 of the VAT Act, new requirements when applying for a decision under section 72 as well as transitional rules and reconfirmations were communicated in VAT Connect 10 (March 2020) (VAT Connect 10). As mentioned in VAT Connect 10, the changes to the wording of section 72 only apply to new applications made on or after 21 July 2019. Therefore, any arrangement or decision made by the Commissioner before that date, remains valid until the earlier of the following dates:

The stated expiry date of that decision (as contained in VAT Class Rulings, VAT Rulings and Binding General Rulings (BGRs));
31 December 2021; or
The effective date of any amendment in the legislation that affects the previous arrangement or decision. Refer for example to the article below “Non-resident lessors of ships, aircraft and rolling stock under a rental agreement”.

New process

As communicated in VAT Connect 10, certain provisions of the Tax Administration Act 28 of 2011 (TA Act) were inserted into section 72 to align the process of applying and the issuing of decisions under that section to those of Advance Tax Rulings (ATR). The ATR eFiling system is now used to facilitate the administrative process of receiving applications for a decision under section 72, including the charging of the R2 500 application fee and receipt thereof (see Public Notice 299).

BGR 56 “Application for a Decision under Section 72”, (BGR 56) published on 6 April 2021, sets out the details that is required in the application. More comprehensive information on the process of applying for a decision under section 72 and related administrative matters can also be found in the VAT Section 72 Decisions Process Reference Guide, which was also published on 6 April 2021.

See also VAT Notice 300, which specifies the matters in respect of which a section 72 application will be rejected. Any application for a decision under section 72 included in a request for a VAT class ruling or a VAT ruling under section 41B of the VAT Act, will not be accepted.

Expiry of existing section 72 decisions

All decisions under section 72 that do not have a stated expiry date before 31 December 2021, will cease to apply. This includes VAT Class Rulings, VAT Rulings and BGRs containing decisions under section 72 (Rulings).

The effect of the above is that affected vendors or classes of vendors will no longer be able to rely on these Rulings to the extent they contain a decision under section 72. Vendors or classes of vendors must timeously apply for these decisions to be considered under the new process explained above. Amongst other requirements, when a vendor or class of vendors applies for a decision under section 72, that application must specify the relevant provisions in the VAT Act that result in the difficulties, anomalies or incongruities. The applicant must also provide a concise description of the difficulties, anomalies or incongruities that have arisen or that may arise when applying the provisions of the VAT Act concerned. The implication in these cases is that an amendment to the VAT Act will be required to overcome the difficulties, anomalies or incongruities.

National Treasury is responsible for considering amendments to the VAT Act. Affected vendors or classes of vendors are therefore encouraged to make timeous submissions to National Treasury to consider amending the relevant provisions of the VAT Act accordingly, or when requested. Also refer to “Legislative amendment and transitional rules” in this article.

The following BGR’s will expire on 31 December 2021:

Vendors or classes of vendors operating in these industries that rely on these rulings are encouraged to make submissions to SARS and to National Treasury.

Non-resident lessors of ships, aircraft and rolling stock under a rental agreement

Legislative amendment

As mentioned in the article “Recent Amendments”, with effect from 1 April 2021, the supply by a non-resident of the right of use of ships, aircraft and rolling stock (for example, locomotives and carriages), will no longer be regarded as an “enterprise” conducted in the Republic by that person. This exclusion will apply, even though the goods are supplied for use in the Republic, but is subject to the following conditions:

The lessee (recipient) must be a resident of the Republic;
The lessor (supplier) must be a non-resident and must not be a registered vendor in the Republic;
The goods must be for use wholly or partly in the Republic; and
The contracting parties must agree in writing that the recipient will –
enter the goods for home consumption and be liable to pay the VAT on importation; and
not be reimbursed by the lessor for such VAT payable upon importation.

The amendment does not extend to separate agreements relating to any parts or spares, for example, aircraft engines.

Impact of the amendment on decisions under section 72

As mentioned in the article “Section 72 decisions”, any decisions that were previously issued under section 72 to allow non-resident lessors of movable goods not to register as vendors, will expire at the earlier of the date indicated in the letter, 31 December 2021 or the effective date of any amendment in the legislation that affects the previous arrangement or decision. Therefore, decisions granted under section 72 to non-resident lessors falling within the scope of the above amendment, expired 31 March 2021, whilst those relating to rental agreements not covered under the above amendment, remain valid until 31 December 2021. Non-resident lessors that entered into agreements falling within the scope of the amendment on or after 1 April 2021 need not apply for a decision under section 72. This also applies to extended leases or cessions of leases on or after 1 April 2021. Where a decision was granted under section 72, or the transaction falls within the scope of the above amendment, the subsequent sale of the ships, aircraft or rolling stock concerned is not considered to constitute a taxable supply. Non-resident lessors that entered into agreements before 1 April 2021, and that meet the conditions of the above amendment, may apply for a decision under section 72. However, the process described above needs to be followed.

Financial services and the apportionment of input tax

Section 2(1) contains a list of activities that are deemed to be “financial services”. The supply of “financial services” is exempt from VAT under section 12(a). However, under the proviso to section 2(1), certain of those activities listed are deemed not to be financial services, to the extent that the consideration in respect thereof is a fee, commission, merchant’s discount or similar charge (excluding any discount cost).

In the Supreme Court of Appeal (SCA) judgment of Commissioner for the South African Revenue Services v Tourvest Financial Services (Pty) Ltd (Tourvest) (Case no 435/2020) [2021] ZASCA 61 (25 May 2021), the SCA found that the purpose of the proviso to section 2(1) was to carve out (that is, to separate) the taxable element of what would otherwise be an exempt supply of financial services, to the extent that a fee or similar charge is payable in respect thereof.

Tourvest, a licensed dealer in foreign exchange, supplies foreign exchange services in 52 branches nationally. It has a head office with a centralised treasury division that sources foreign currency and sets the daily buy and sell rates at which the branches transact with customers. Tourvest is one legal person and the activities of its head office and branches are conducted under one VAT registration number. Tourvest sells foreign currency to its customers at a rate that is higher than the rate at which it buys that foreign currency (the margin). In addition to the margin, Tourvest charges customers a percentage-based commission for the exchange of currency based on the transaction value.

Tourvest initially apportioned the VAT incurred on goods or services acquired for purposes of running its branches under section 17(1), that is, only a portion of the mixed-used expenses were claimed as input tax. Tourvest therefore treated the goods and services acquired in that regard, as being partly for making taxable supplies and partly for making exempt supplies. However, after taking advice, Tourvest concluded that no apportionment was required as all goods or services acquired at the branches were used wholly in the course of making taxable supplies. Tourvest subsequently claimed a refund in respect of the previous five years on the basis that it had overpaid VAT and incorrectly apportioned its input tax. SARS issued assessments adding back the additional input tax claimed on the basis that the VAT on goods and services acquired for the activities conducted at the branches was correctly apportioned in the previous returns.

Tourvest’s appeal regarding these assessments in the Tax Court of South Africa (VAT 1626) was successful, but the appeal by SARS to the SCA was upheld. As a result, Tourvest was only entitled to deduct part of the VAT incurred on goods or services acquired for use partly in making taxable supplies and partly in making exempt supplies as “input tax”.

For further details, refer to the Media Summary of the Judgment.

Special shops for diplomats

Paragraph 8 of Schedule 1 to the VAT Act and Item 406.00 of that Schedule, have been amended as a consequence of the substitution of the notes to rebate item 406.00 in Schedule 4 to the Customs and Excise Act 91 of 1964 (the Customs and Excise Act). The amendment follows concerns raised in the 2019 Budget Review regarding the risk of abuse in the tax treatment of duty-free shops. In line with the amendments to the Customs and Excise Act, the VAT Act was also amended with effect from 1 August 2021, to regulate purchases made by diplomats at “special shops for diplomats” as defined in the rules to the Customs and Excise Act. (See VAT Notices R. 369 in Government Gazette 44473 dated 23 April 2021 and R. 526 in Government Gazette no. 44705 dated 14 June 2021 for more details.)

Publications

Since the last issue of VAT Connect, the following VAT documents have been published on the SARS website (Refer to the “Legal Counsel” page).

Binding General Rulings (BGRs)

BGR 56 “Application for a decision under section 72” – issued 6 April 2021

Guides

VAT 409 – Guide for Fixed Property and Construction – issued 11 December 2020
VAT Section 72 Decisions Process Reference Guide – issued 6 April 2021
Transfer duty guide (Issue 5) – issued 30 March 2021

Disclaimer

VAT Connect is an information guide and not an “official publication” as defined in section 1 of the TA Act and accordingly does not create a practice generally prevailing under section 5 of that Act. It is also not a binding general ruling (BGR) under section 89 of Chapter 7 of the TA Act nor a ruling under section 41B of the VAT Act. For general enquiries regarding VAT call the SARS Contact Centre on 0800 00 7277. Should there be any aspects relating to VAT on which a specific VAT ruling is required, you may apply for a ruling by completing form VAT301 and sending it together with all the necessary information to SARS by facsimile on +27 86 540 9390 or by e-mail to [email protected]. Refer also to the Quick Reference Guide on VAT Ruling Application Procedure for more details on how to apply for a ruling.