Section 72 decisions
The background to the amendments to section 72, namely, the 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) and VAT Connect 12 (June 2021) (VAT Connect 12).
As indicated in VAT Connect 12, all decisions under section 72 that do not have a stated expiry date will cease to apply from 1 January 2022. Vendors or classes of vendors that still require a decision to be considered under section 72 in this regard, must apply timeously under the new process. The requirements and conditions that must be met in making an application for a section 72 decision are set out in BGR 56 “Application for a Decision under Section 72” (BGR 56). Clarity has also been provided on how to apply for a section 72 decision in the VAT Section 72 Decisions Process Reference Guide (the section 72 Guide) which was published on 6 April 2021.
Based on applications received, it is noted that some uncertainties still remain relating to applications for decisions under section 72. The most prevalent issues are discussed and clarified below.
Difference between VAT Class Rulings, VAT Rulings and section 72 decisions
VAT Class Rulings and VAT Rulings (collectively referred to as VAT Rulings) are issued under section 41B. VAT Rulings are issued to provide certainty on the interpretation or the application of the VAT Act to a class of persons, or a person, in respect of a transaction.
On the other hand, section 72 involves a decision made by the Commissioner to overcome certain difficulties, anomalies or incongruities which may arise when vendors apply the VAT law to their business circumstances. In this case, the interpretation or application of the law is clear, but certain difficulties, anomalies or incongruities need to be overcome so that the vendor or class of vendors can comply with the law. An amendment to the law may be required to address the issue. Decisions under section 72 are therefore only considered under very exceptional circumstances and subject to the requirements thereof.
No fee is payable in respect of an application for a VAT Ruling, whereas a fee of R2 500 is payable in respect of an application for a decision under section 72. Applications for VAT Rulings must be lodged via the dedicated email address, whereas applications for decisions under section 72 must be lodged via the ATR eFiling system. Refer to the VAT Rulings Process Reference Guide (the VAT Rulings Guide) and the section 72 Guide respectively for further details.
A VAT Ruling application which also includes, as the alternative, an application for the Commissioner to make a decision under section 72 will be rejected to the extent of the request under section 72. Similarly, an application made under section 72 will be rejected to the extent that it contains an application for a VAT Ruling to confirm the interpretation or the application of the VAT Act in respect of a transaction under section 41B.
Both section 72 decisions and section 41B VAT Rulings are only issued for a limited period of time with a specified end date. The period for which the ruling or decision is granted will be determined on a case-by-case basis, depending on the circumstances of the case, but will generally not exceed five years.
Legislative requirements for section 72 applications
Before a request for a decision under section 72 can be considered, the Commissioner must be satisfied that there are difficulties, anomalies or incongruities that –
- resulted as a consequence of the manner in which a vendor or class of vendors, conducts its business;
- have arisen or may arise with regard to the application of the VAT Act; and
- are the same, or similar to, those experienced by another vendor of class of vendors.
Any application for a decision under section 72 must therefore contain a very clear and detailed explanation of the transactions concerned, and associated business circumstances of the vendor or class of vendors which demonstrates the nature of the difficulties, anomalies or incongruities experienced.
In addition, the Commissioner cannot grant a decision under section 72 if it –
- alters the liability for tax levied under the VAT Act; or
- is contrary to the construct and policy intent of the VAT Act as a whole, or any specific provision of the VAT Act.
Applications not dealing with these points in detail are regarded as incomplete and cannot be considered. In order to avoid delays in obtaining a decision, it is important to review the application thoroughly, before submission.
The quick check list below can be used to assist the applicant in reviewing its applications:
- Clear description of the transaction
- The vendor or class of vendors applying
- Details or description of vendors or classes of vendors having similar difficulties, anomalies or incongruities
- Illustrate that the difficulty arises as a consequence of the manner in which the business is conducted
- Specify the sections of the VAT Act resulting in difficulties, anomalies or incongruities
- Details of the specific difficulties, anomalies and incongruities experienced or which will arise
- The impact the decision will have on the VAT liability of the applicant, or connected persons
- Indicate a clear link between the difficulty, anomaly or incongruity, and the decision sought from the Commissioner
- Relevant statutory provisions or authorities, and how these support the applicant’s case
- Illustrate the decision will not be contrary to the policy intent of the VAT Act (as a whole, or any specific provision thereof).
The above checklist should be read in conjunction with the requirements as set out in BGR 56 and the section 72 Guide.
Effect of section 72 decisions expiring on 31 December 2021
In addition to the requirements for an application under section 72 as discussed above, a number of governance steps are followed in issuing such decisions. These include a detailed technical review and consultation with stakeholders. Having regard to the procedures and timelines involved in issuing decisions under section 72, it may not be possible to respond to all applicants by 31 December 2021, particularly, those applications received after 31 July 2021.
Section 72 decisions are categorised as complex and have a standard 90-business-day turn-around time. In the process of dealing with the application, certain days are suspended in calculating the 90 days. For example, the business days will be suspended during the time that work on the application cannot continue because an engagement with the applicant is required, or SARS is awaiting relevant information requested from the applicant. Also, the business days from 17 December to 15 January are suspended each year.
The following should therefore be noted regarding new applications under section 72 having regard to the above:
- Applications received and accepted on or before 31 December 2021 are unlikely to be finalised before 1 January 2022. However, if a positive decision is granted, it will apply from 1 January 2022.
- In respect of applications received and accepted after 31 December 2021, the positive decision, if granted, can only apply from date of application.
- A negative decision made in respect of any application, whether made before or after 31 December 2021, will affect the relevant transactions from 1 January 2022. This is on the basis that the original positive decision expires on 31 December 2021. Vendors falling in this category are required to comply with the relevant legislation and should seek solutions to regularise their VAT affairs.
Backdating of alternative methods of apportionment
When goods or services are acquired by a vendor partly for the purposes of making taxable supplies and partly for the purposes of making exempt supplies (mixed expenses), the VAT incurred by the vendor must be apportioned. The mixed expenses in that case are only deductible as input tax to the extent that they relate to the making of taxable supplies. Section 17(1) provides that the extent to which such mixed expenses may be deducted is determined by means of a ratio issued by the Commissioner in terms of a Binding General Ruling or a VAT Ruling. SARS issued Binding General Ruling 16 (BGR 16) on 25 March 2013 (re-issued on 30 March 2015) which prescribed the standard turnover-based method of apportionment (STB) as the default method for determining the apportionment ratio for mixed expenses.
BGR 16 also provides that a vendor may only use the STB if it is fair and reasonable, failing which the vendor must apply for a VAT Ruling to use an alternative apportionment method. In terms of proviso (iii) to section 17(1), when such an alternative method is approved by the Commissioner, it may only be applied by that vendor from –
- a future tax period; or
- a date within the “year of assessment” (as defined in the Income Tax Act 58 of 1962) in which the application for the alternative apportionment method was submitted.
In Mukuru Africa (Pty) Ltd v Commissioner for the South African Revenue Service  ZASCA 116, the Appellant applied for approval of an alternative apportionment method. The Commissioner approved this method by issuing a VAT Ruling but only with effect from 1 March 2016 which was the first day of the year of assessment in which the Appellant applied for the VAT Ruling. The Appellant objected and appealed against this decision, insisting that the Commissioner should allow the Appellant to use the method from the commencement of its business on 1 February 2014. The Appellant argued that the STB method was not fair and reasonable and hence BGR 16 did not apply to it. For this reason, the Appellant submitted that it was not changing its existing apportionment method, because proviso (iii) to section 17(1) did not apply in its situation.
In its judgement, the Supreme Court of Appeal (SCA) found that the Appellant could not simply ignore BGR 16 or unilaterally apply its own apportionment method. Furthermore, if the Appellant was of the opinion that the STB was not fair and reasonable, it was required under BGR 16 to apply for an alternative apportionment method. The purpose of BGR 16 requiring the vendor to apply to the Commissioner for an alternative apportionment method was to enable the Commissioner to evaluate whether the STB was in fact unfair or unreasonable and then to approve an appropriate alternative apportionment method.
The effect of this judgment for vendors is that the STB must be regarded as the default apportionment method unless or until a VAT Ruling has been issued to the vendor allowing an alternative method. Under proviso (iii) to section 17(1) this alternative apportionment method may only be applied by the vendor (being a “taxpayer” under the Income Tax Act) with effect from a date within the year of assessment in which the vendor applied to the Commissioner for such a ruling. A further effect is that vendors that have not apportioned their input tax in previous years when they were required to do so, cannot overcome the consequences of their non-compliance by applying for a VAT Ruling for an alternative method of apportionment to apply from a date in the past which goes beyond what the law allows.
Incomplete applications for alternative methods of apportionment
As mentioned in VAT Connect 10 and the VAT Rulings Guide, certain information must be submitted when applying for approval to use an alternative method of apportionment under section 17(1). It is noted that many applications do not contain all the information, resulting in delays in finalising the matter. Please ensure that applications contain all the information listed in the aforementioned documents. This also applies when requesting an extension to an alternative method of apportionment previously granted.
For ease of administration, the applicant can attach the information submitted with the original application, including a copy of the previous VAT Ruling issued. However, updated calculations and Annual Financial Statements for the last three years must be submitted. Also, a recent list of expenses must be submitted which indicates how the expenses are attributed respectively to taxable supplies, exempt supplies or non-taxable purposes, as well as mixed expenses. Lastly, please note the decision of the SCA in the article “Backdating of alternative methods of apportionment” above.
Rulings on electronic services issued under the 2014 Regulations
Regulations were published in Government Gazette 37489 on 28 March 2014 (the 2014 Regulations) to introduce a very limited list of taxable services supplied by electronic means by non-residents to South African residents. These are referred to as “electronic services” and such supplies became taxable with effect from 1 June 2014. The Regulations on electronic services were subsequently amended, updated and published in Government Gazette 42316 of 18 March 2019 (the 2019 Regulations). The 2019 Regulations extended the scope of electronic services to any services provided by electronic means, subject to a few exclusions.
After the 2014 Regulations were introduced, SARS issued a number of VAT Rulings to certain non-resident suppliers of electronic services confirming the scope of taxable electronic services and whether the applicants were liable to register and account for VAT in South Africa or not. At the time of issue, those VAT Rulings may have indicated that the non-resident suppliers did not fall within the ambit of the 2014 Regulations. As the VAT law has now been amended including the introduction of the 2019 Regulations, it is important to note that such old VAT Rulings relating to the 2014 Regulations are no longer valid when considering the current law and can no longer be relied upon.
Under section 85 of the Tax Administration Act, 2011, read with section 41B, a VAT Ruling ceases to be effective if a provision of a Tax Act that was the subject of that ruling is repealed or amended in a manner that materially affects that ruling. The broadening of the scope of “electronic services” under the 2019 Regulations will therefore result in any VAT Ruling issued in respect of electronic services supplied before 1 April 2019, ceasing to be effective from 1 April 2019. Refer to VAT Connect 9 (February 2019), VAT Connect 10 (March 2020), the Frequently Asked Questions: Supplies of Electronic Services and the relevant Regulations for more details.
In order to register as a vendor, a non-resident supplier of electronic services is required to download the VAT101 application form and email the completed and signed form to [email protected]. Refer to the External Guide: Foreign Suppliers of Electronic Services as well as the External Guide: Guide for Completion of VAT Application for further details.
Supply of a going concern
Interpretation Note 57 “Sale of an enterprise or part thereof as a going concern” discusses the detailed requirements for a supply to be zero-rated under section 11(1)(e). In terms of that provision, it is a specific requirement that certain aspects must be agreed upon in writing. Applicants should therefore not apply for a VAT Ruling merely to confirm that the agreement meets the necessary requirements in order to treat the supply as a going concern. This is because it is a question of fact whether or not the agreement meets the requirements, as opposed to the interpretation or application of the law based on a set of facts. Also, as SARS has provided comprehensive guidance on the interpretation of the law in respect of a supply of a going concern in an official publication, it is generally not considered necessary to issue a VAT Ruling in this regard, and applications in this regard may be rejected. However, should there be uncertainty about the interpretation or application of section 11(1)(e) in respect of a specific transaction, applicants should clearly illustrate what that uncertainty is, as well as the applicant’s interpretation of the VAT Act in that regard, when an application for a VAT Ruling is submitted.
Company name changes
BGR 36 “Circumstances Prescribed by the Commissioner for the Application of Section 16(2)(g)” explains circumstances under which a vendor may, as a last resort, apply for a VAT Ruling to deduct input tax on supplies where all efforts to obtain the required tax invoice from the supplier have failed.
It has recently been noted that where a company undergoes a name change, there is a tendency to apply to SARS for a VAT Ruling to invoke the provisions of section 16(2)(g) for the purposes of obtaining permission to deduct input tax on tax invoices issued in the old company name. In such cases, a tax invoice which has been issued to reflect the old company name is not invalidated merely because of the name change. This is on condition that all the other necessary details on the tax invoice are correct. The recipient vendor in that case should not apply for a VAT Ruling, but rather, maintain the documentary proof of the name change from the Companies and Intellectual Property Commission (CIPC) as part of the VAT records.
Once the name change has been effected by the CIPC and proof thereof has been issued, all suppliers should be informed immediately to correct their customer records as soon as possible and to issue tax invoices in future in the new company name. SARS should also be informed of the change in registered particulars on eFiling within 21 business days. These steps will ensure that all future tax invoices are issued in the correct (new) company name as soon as possible and will reduce the risk of having input tax denied by SARS.
Recipient’s VAT registration number
A vendor must be in possession of a valid tax invoice before input tax on goods or services acquired may be deducted. One of the requirements for a valid full tax invoice (where the consideration in money for the supply exceeds R5 000) is that the VAT registration number of the recipient must appear on the document where such recipient is a registered vendor.
There has recently been an increase in the number of VAT Ruling applications requesting SARS to confirm that a tax invoice is valid in a situation where the tax invoice was issued before the recipient became a registered vendor. This happens, for example, where a vendor’s compulsory registration is backdated to the date of liability in the past. As the recipient was not a registered vendor at the time the tax invoice was issued, the supplier could not have inserted the recipient’s VAT number on the tax invoice. On that basis, the tax invoice concerned remains valid for the purposes of deducting input tax, as long as the tax invoice contains all the other relevant details. In such cases, a VAT Ruling is not required to confirm the validity of the document.
Intermediaries – Funeral policies
It has been noted that vendors participating in the provision of services in the funeral industry are sometimes unsure of the VAT treatment of their supplies. In particular, vendors that provide selling and administrative services in connection with funeral policies supplied by long-term insurers, may be of the view that they make exempt supplies. The VAT legislation provides that the supply of a long-term insurance policy is exempt from VAT under section 12(a) read with section 2(1)(i). However, the supply by an intermediary, of administrative services in respect of funeral policies for a long-term insurer, is taxable and is subject to VAT at the standard rate under section 7(1)(a).
This principle was illustrated in the Tax Court case of IEA Taxpayer v Commissioner for the South African Revenue Service (VAT 1908 (21 June 2021)). In this case, it was found that the services supplied by an intermediary to a long-term insurer in administering funeral polices, do not qualify for an exemption. Section 2(1) lists certain supplies that qualify as exempt financial services under section 12(a). However, the proviso to section 2(1) states that if the consideration payable in respect of those listed financial services is “any fee, commission, merchant’s discount or similar charge…” then, to that extent, the service is not deemed to be an exempt financial service.
The appellant argued that since the proviso to section 2(1) does not refer to section 2(1)(i), it should follow that the fees it charged for administering the funeral polices for the long-term insurer should be exempt and not taxable as contemplated in the proviso to section 2(1). The court found that, whilst the appellant advances the services of the long-term insurer, it does so as an independent contractor. It was agreed that the VAT consequences must be determined with reference to the agreement between the appellant and the long-term insurer. In terms of that agreement, it was clear that the appellant’s services were merely administrative in nature. The services of the intermediary did not involve the supply of long-term insurance policies as those were supplies made by the long-term insurer. The activities of the appellant could therefore not be deemed to be financial services as contemplated in section 2.
Based on the above, it is important to have regard to the relevant contractual arrangements and identify who is supplying the long-term insurance policy. Intermediaries operating in the funeral industry should take note of this decision and check that they are treating their supplies correctly for VAT purposes. Qualifying taxpayers seeking to regularise their affairs are also encouraged to apply directly to the unit responsible for the Voluntary Disclosure Programme.
Customs documentation and registration required for exports
The export of goods from South Africa is subject to VAT at the zero rate provided certain requirements are met, as follows:
- Direct exports – the requirements are set out in Interpretation Note 30 (Issue 3) dated 5 May 2014 (IN 30); and
- Indirect exports – under Part Two of the Export Regulation (published in Government Gazette (GG) 37580 on 2 May 2014) a vendor may, under certain conditions, elect to supply goods at the zero rate if those goods are contractually delivered in South Africa to the recipient or the agent of the recipient, but are ultimately destined for export.
In the case of direct exports, the vendor physically delivers the goods, or the vendor’s cartage contractor must deliver the goods to a recipient in an export country. In the case of indirect exports, the goods must be removed from South Africa by the recipient, or the recipient’s agent, for conveyance to an export country in accordance with the Export Regulation.
Part One of the Export Regulation applies where the qualifying purchaser is responsible for exporting the goods from South Africa and the vendor is obliged to levy VAT at the standard rate. In this case, the qualifying purchaser will be entitled to a refund from the VAT Refund Administrator (VRA), subject to the conditions in the Export Regulation being met.
The documentary evidence, as prescribed under IN 30 and the Export Regulation, includes the export documentation as prescribed under the Customs and Excise Act, 1964. It follows that in order to meet the requirements in IN 30 or the Export Regulation, to zero-rate a supply, or to obtain a refund from the VRA, the requirements under the Customs and Excise Act relating to the exportation of goods, must be met. Refer to the Customs and Excise Exporters Page on the SARS website for more detail on who is regarded as the exporter in different circumstances, and the procedure to register as an exporter.
Any person (whether local or foreign) wishing to export goods from South Africa, must register as an exporter under the Customs and Excise Act, and make the relevant export declarations. In the case of a foreign exporter, that person must register as an exporter and nominate a registered agent in South Africa. Limited exceptions for formal registration include a traveller who exports goods (other than scrap metal) where the value required to be declared is less than R150 000 during any calendar year, regardless of the number of consignments during that year. The following persons must register as an exporter and make the relevant declarations in respect of the export:
- Direct exports – the vendor that consigns or delivers the goods to an export country
- Indirect exports – the qualifying purchaser
The correct person must accordingly be reflected as the “exporter” on the SAD 500, in order to comply with the provisions of the Customs and Excise Act, and the relevant documentary requirements contained in IN 30 and the Export Regulation.
VAT Rulings can only be issued in respect of the application of the VAT Act in respect of a specific set of facts. On that basis, no VAT Rulings will be issued on whether the provisions of the Customs and Excise Act are met, or to confirm the documentation required under that Act.
Since the last issue of VAT Connect, the following documents impacting on VAT have been published on the SARS website (Refer to the “Legal Counsel” page).
Binding General Rulings (BGRs)
- BGR 57 “Whether the Term “Consideration” Includes an Amount of Transfer Duty for the Purposes of Calculating a Notional Input Tax Deduction on the Acquisition of Second-Hand Fixed Property” – issued 20 October 2021
Interpretation Notes (INs)
- IN 118 “Value-Added Tax Consequences of Points-Based Loyalty Programmes” – issued 4 November 2021
- IN 70 “Supplies Made for no Consideration” – issued 10 November 2021
- VAT Quick Reference Guide for Non-Executive Directors (Issue 2) – issued 28 July 2021
- VAT Rulings Process Reference Guide (Issue 3) – issued 4 November 2021
- Draft Guide to the Voluntary Disclosure Programme – issued 20 October 2021 for public comment. Comments may be submitted to [email protected] by 10 December 2021.
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.