VAT Connect Issue 14 (August 2022)

Proposed amendments emanating from the Budget 2022/23

National Treasury and SARS published the following 2022 draft tax bills on 29 July 2022, which you can access on the SARS website by clicking on the links below.

Comments on the 2022 draft tax bills can be submitted in writing by close of business on 29 August 2022 to either the National Treasury’s tax policy depository at [email protected]  or to SARS at [email protected]  See the media statement for more information.

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:

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 19 of 2021.

The above amendment acts were all promulgated on 19 January 2022 as per Government Gazettes (GGs) 45787, 45786 and 45788 respectively. The amendments came into effect on 1 April 2022 unless otherwise stated.

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

  • Life insurance / financial services – textual amendments have been made in section 2 to align the terminology used with reference to the Insurance Act, 2017. As a result, the VAT Act now refers to “life” insurance and not “long-term” insurance. The amendments take effect from 19 January 2022.
  • Temporary letting of dwellings by developers – New provisions in the form of sections 9(13), 10(29), 16(3)(o) and 18D have been introduced to deal with dwelling units that have been developed for sale by a developer and such dwellings are temporarily let for exempt residential use whilst the developer continues to pursue a taxable intention of selling the units. Section 18D applies from the date that any newly developed property held for taxable supplies is temporarily let for the first time on or after 1 April 2022. More information in this regard will be provided in a future issue of VAT Connect. Note that the 2022 Draft TLAB contains a few proposed amendments concerning the application of section 18D.

  • International telecommunications services – section 11(2)(y) was further amended to align the zero-rating of international telecommunications services with the International Telecommunication Regulations. The amendments confirm that the zero-rating will not apply if the telecommunications service is provided to any branch, main business or customer of an International Telecommunications Service Provider situated in the Republic. The only exception in this regard is the supply of international roaming services.

  • Zero-rated foodstuffs – Item 2 of Part B to Schedule 2 to the VAT Act has been extended to include super fine maize meal in the list of zero-rated foodstuffs contemplated in section 11(1)(j).
  • Estimated assessments – significant amendments were made to section 95 of the TA Act regarding certain aspects of estimated assessments with effect from 20 January 2021 and then again with effect from 19 January 2022. Section 95 of the TA Act previously allowed the Commissioner to make an estimated assessment if a taxpayer does not submit a return or submits a return or relevant material that is incorrect or inadequate. These circumstances have now been expanded to include a situation where the taxpayer does not submit a response to a request for relevant material after delivery of more than one request for such material to the taxpayer. The Commissioner bears the burden of proving that the estimated assessment is valid and reasonable.

    An estimated assessment does not detract from the obligation by a taxpayer to submit a return or the relevant material for the tax period concerned. A taxpayer may, however, within 40 business days from the date of the estimated assessment, request SARS to issue a reduced assessment or additional assessment by submitting a true and full return or the relevant material. If the taxpayer fails to do this, the assessment becomes final and will not be subject to objection or appeal. In that case, the burden of proof relating to the validity or reasonableness of the estimated assessment will move from the Commissioner to the taxpayer. The period of 40 business days cannot be extended beyond the prescription period for VAT in section 99 of the TA Act except in a case where the estimated assessment is raised within 40 days of the prescription date. A consequential amendment was made to section 99 of the TA Act in this regard to provide that the prescription periods do not apply in a case where it is necessary to give effect to a reduced or additional assessment requested within the period of 40 business days.

  • VAT Notice R.2185 was published in GG 46589 dated 24 June 2022 regarding the inclusion of licensed customs and excise storage warehouses as places where diplomats may be able to obtain new motor vehicles.

Domestic Reverse Charge Regulations

Background and introduction

In response to the ongoing fraud involving gold and goods containing gold, the National Treasury has issued the Domestic Reverse Charge Regulations (DRC Regulations) as Notice No 2140 in Government Gazette (GG) 46512 of 8 June 2022. The Explanatory Memorandum thereto and Media Statement were published on 13 June 2022. The DRC Regulations apply with effect from 1 July 2022 in respect of supplies of “valuable metal” between certain VAT-registered vendors. This means that both the supplier and the recipient of the valuable metal must be registered vendors in the Republic. The DRC Regulations shift the responsibility of the supplying vendor to account for the output tax on the supply of valuable metal  to the recipient vendor.

Amendments to the definition of “second-hand goods” to counter certain fraudulent activities (see VAT Connect Issue 7 (December 2017), VAT Connect Issue 9 (February 2019) and Binding General Ruling (BGR) 43 – Deduction of input tax in respect of second-hand gold, which was issued on 12 September 2017), had the effect of limiting the deduction of “notional input tax” in respect of second-hand gold products acquired by vendors. It has now, however, been found that certain vendors trading in gold and other valuable metals have developed a new modus operandi, directed at extracting undue VAT refunds from the fiscus. The DRC Regulations therefore seek to curb the deduction of input tax on the acquisition of gold or goods containing gold from vendors that either operate fictitious businesses and issue fictitious tax invoices, or introduce illegal gold into the supply chain. The resultant products created in the supply chain are subsequently sold locally or exported in certain forms such as jewellery or gold bars.

What is contained in the DRC Regulations?

There are nine regulations in total, which are briefly summarised below:

  • Regulation 1 defines certain terms for the purpose of the administration and implementation of the DRC Regulations. The most important term to note is “valuable metal”, which is discussed in detail below. The definition of “valuable metal” describes various forms in which gold or goods containing gold can be supplied, which are subject to the DRC Regulations. It is important to note the terms “domestic reverse charge” (as defined), “residue” (a defined term) and “ancillary goods and services”. Regulation 1 also specifies certain types of supplies of goods produced from raw materials by mines (and other holders that are licenced to extract minerals on behalf of the mines) that are excluded from the ambit of the DRC Regulations.
  • Regulation 2 sets out the duties and responsibilities of a supplier of valuable metal under the DRC Regulations.
  • Regulation 3 sets out the duties and responsibilities of the recipient of a supply of valuable metal.
  • Regulations 4 and 5 set out additional requirements for information that must be stated on tax invoices, debit notes and credit notes in respect of a supply that is subject to the domestic reverse charge.
  • Regulation 6 sets out additional requirements that must be met by suppliers and recipients in regard to transactions that are subject to the DRC Regulations. In this regulation, details are provided as to which fields on the VAT 201 return must be completed for supplies made and received under the DRC Regulations.
  • Regulation 7 provides that the supplier and recipient can be held jointly and severally liable for the VAT that should have been reported and accounted for under the DRC Regulations if the parties have failed to comply. Certain exceptions apply in this regard.
  • Regulation 8 provides for certain transitional measures.
  • Regulation 9 provides that a vendor must re-validate its VAT registration with SARS within the earlier of 21 business days of the commencement date of the DRC Regulations (that is, within 21 business days of 1 July 2022) or the date that a supply subject to the domestic reverse charge are made. See Public Notice 2200 as published in GG 46598 dated 24 June 2022 for more details in this regard. Vendors that fail to comply with this requirement either willfully, or through neglect, will be guilty of an offence.

When and to whom do the DRC Regulations apply?

There are four requirements that must be met before the domestic reverse charge applies to a specific transaction:

  • The supplier must be a registered vendor.
  • The recipient must be a registered vendor.
  • The goods and any ancillary goods or services supplied must fall within the meaning of “valuable metal” as defined in regulation 1. In short, the goods supplied must contain gold.
  • The supply must be taxable at the standard rate (currently 15%).

If any of these four requirements are not met, the supply of the goods or services are subject to the normal provisions of the VAT Act and is not subject to the domestic reverse charge.

The DRC Regulations apply to all vendors that trade in “valuable metal” as defined in regulation 1. For example, mines, manufacturing businesses, dealers in gold, dealers in second-hand goods (especially those that buy and sell jewellery), gold scrappers, manufacturing, wholesale and  retail jewellers, vendors that consume or use gold to manufacture articles containing gold, coin shops, and other vendors that buy and sell gold and goods containing gold in the specified forms as provided in the definition of “valuable metal”.

General effect of the DRC Regulations

The main purpose of the DRC Regulations is to curb the fraud discussed above by moving the obligation to pay the VAT on the supply of “valuable metal” from the supplying vendor to the recipient vendor. The application of the domestic reverse charge does not mean that the recipient will have any additional liability. The recipient will merely pay the VAT due on the supply to SARS instead of to the supplier (as is required under the normal VAT rules). The DRC Regulations also do not take away the recipient’s entitlement to deduct input tax on goods or services acquired. This means that if the valuable metal is acquired for the purpose of making taxable supplies and all the requirements regarding documentary proof are met, the recipient is still entitled to make a deduction of input tax in regard to the goods acquired.

No separate or special rules apply to the importation of a valuable metal. Should the non-resident supplier and South African (RSA) recipient both be VAT-registered vendors in the RSA, the supply of the valuable metal will fall within the ambit of the DRC Regulations. However, if the non-resident supplier is not an RSA vendor, the valuable metal is subject to VAT on importation per the normal VAT rules. Any subsequent supply of the valuable metal to a recipient that is an RSA vendor after being imported by that supplier will be subject to the domestic reverse charge.

The DRC Regulations require all existing vendors that make supplies or acquisitions of goods falling within the meaning of “valuable metal” to make a declaration to SARS. This must be done as soon as possible, but no later than 1 August 2022. Revalidation requests must be submitted to [email protected].

Valuable metal

The term “valuable metal” is defined widely in order to include the supply of gold or goods containing gold by all registered vendors in the entire production and distribution chain, with limited exclusions. Therefore, any goods containing gold (regardless of the purity level or the mass of gold relevant to other metallic elements) supplied in the form of jewellery, bars, blank coins, ingots, buttons, wire, plate, granules, whether in a solution, or “residue”, including ancillary goods or services relating thereto, is subject to the domestic reverse charge. The term “residue”, in turn, includes debris, discard, tailings, slimes, screening, slurry, waste rock, foundry sand, beneficiation plant waste or ash, and are subject to the DRC Regulations. The DRC Regulations are only applicable to the supply of goods that take the forms listed above or in similar form (but include any ancillary goods or services forming part of that supply).  

Although the term “similar forms” as used in the definition of “valuable metal” widens the scope of the definition, the term should be interpreted to refer to gold or goods containing gold in a similar form to those goods specified in the definition of “valuable metal”. This means that the supply of goods such as gold concentrate will be included in the DRC Regulations. Whether a good is in a similar form to those listed in the definition, is something that must be determined on a case-by-case basis as it is impractical to supply a complete and exhaustive list of every type of good being developed and supplied. The forms of gold or goods containing gold described in the definition of “valuable metal” are, in any event, meant to be very wide.

By way of example, consider a supply of an old computer by a registered vendor to a second-hand dealer for it to be resold for use as a computer by that dealer. As the computer is not recognised as a supply in one of the forms, or similar to the forms contemplated in the definition of “valuable metal”, the supply will not be subject to the domestic reverse charge.

The term “ancillary goods or services” is not defined, but this phrase is intended to deter the undervaluing of the charge in respect of the good containing gold while overvaluing any other associated value-added supplies of goods or services that are supplied in this regard. For example, any charges by the supplier of the valuable metal for packaging, polishing, alteration, beneficiation services or things such as storage services and other ancillary goods or services supplied together with the good containing the gold, must be included in the value that will be subject to the domestic reverse charge.

In addition, the full value of the good containing the gold is subject to the domestic reverse charge, and not only the gold content. As an example, consider a gold bracelet containing diamonds. The goods (that is, the bracelet) constitutes “valuable metal” as it contains gold. It follows that the full value (price excluding VAT) of the bracelet, including the diamonds must be reflected as such on the invoice as required under the DRC Regulations. The supplier should not split the value of the gold in the bracelet from the value of the diamonds contained in the bracelet.

The above example must be distinguished from a scenario where a vendor supplies, for instance, a gold bracelet and diamonds separately (meaning, the gold bracelet does not contain the diamonds). In this scenario the domestic reverse charge applies to the supply of the gold bracelet and not to the diamonds.

Exclusions from “valuable metal”

There are two exclusions where supplies of goods which would normally be considered to constitute “valuable metal”, are specifically excluded from the DRC Regulations, as follows:

  • Certain supplies made by a “holder” or a person contracted to a holder – Goods produced from raw materials, for example, by an entity that conducts a mining enterprise, are excluded from the ambit of the DRC Regulations. This refers to minerals in their natural state as extracted from the ground through the mining process and supplied in that form, or refined before that gold is further processed or used in any manufacturing process by other recipients of those products. More specifically, with regard to the supplier, reference is made to any “holder” as defined in section 1 of the Mineral and Petroleum Resources Development Act 28 of 2002 (MPRD Act), or by any person contracted to such “holder” to carry on mining operations in respect of the mine where the “holder” carries on mining operations. A “holder” is therefore any person (or the person’s successor in title) that has been granted a prospecting right, mining right, mining permit, retention permit, exploration right, production right, reconnaissance permit or technical co-operation permit under the MPRD Act. A holder, or the person contracted to the holder, that supplies a valuable metal that is extracted from the ground will therefore not be subject to the DRC Regulations. However, where a ”holder” purchases gold bars, melts the gold together with gold extracted from raw materials, and subsequently manufactures gold wires, the supply of the gold wires by the “holder” is subject to the domestic reverse charge.

  • Zero-rated supplies of gold – Having regard to the overall scheme of the DRC Regulations, which is to neutralise the effect on the fiscus by matching the declaration of output tax in respect of the supply of “valuable metal” with the deduction of “input tax” on acquisition thereof in the recipient vendor’s VAT return, supplies of gold that qualify for the zero-rating under sections 11(1)(f), (k) or (m) are excluded. So, for example, the supply of Krugerrands, being a zero-rated supply of gold under section 11(1)(k) will not fall within the ambit of the DRC Regulations.

Declaration of VAT under the DRC Regulations

In terms of the DRC Regulations, certain additional administrative requirements are placed on both the supplier and recipient. For example, there are additional requirements in regard to the information that must appear on tax invoices for supplies that are subject to the domestic reverse charge (see regulations 4 and 5). Certain fields on the respective vendors’ VAT 201 returns will also be completed differently concerning supplies that are subject to the domestic reverse charge (see regulation 6).

There is no separate system for the accounting and payment of VAT under the DRC Regulations, therefore the normal processes of filing a VAT 201 return and the calculation of the payment due to or by SARS in respect of that return, apply. However, there are some changes as to how certain fields on the return are to be completed for supplies as mentioned above. The recipient vendor can only deduct the VAT on the acquisition of the valuable metal, in the tax period in which the recipient vendor accounts for the output tax in respect thereof, leaving the fiscus in a tax-neutral position.

Administrative duties and responsibilities of the supplying vendor

The normal provisions of the VAT Act apply to the supply of valuable metal by the supplying vendor in respect of, for example, the issuing of tax invoices, credit notes and debit notes, the keeping of records, and the liability for VAT, with some additional requirements and exceptions.

Some of the most important implications for the supplying vendor are as follows:

  • Reasonable steps must be taken to ensure that the recipient vendor is a registered vendor. For example, the supplier can request a copy of the recipient’s VAT notice of registration, or ask for a written confirmation from SARS that the recipient’s VAT registration has been re-validated.
  • No VAT charge must be shown on tax invoices, debit notes and credit notes issued. The relevant document must therefore reflect the price of the valuable metal including all ancillary goods and services. The value of the supplies subject to the domestic reverse charge must, however, be stated as an amount excluding VAT.
  • Indicate clearly on the tax invoice issued that –
    • the supply of valuable metal is subject to the DRC Regulations;
    • the recipient registered vendor must account and pay for the VAT in respect of the supply of the valuable metal under the domestic reverse charge; and
    • the supplying vendor is not entitled to payment of the VAT charged on the supply of valuable metal to the recipient and the VAT in relation to that supply must not be reflected as due to the supplier.
    • The value of the supply of valuable metal, or the increase or decrease in the value as a result of a debit note or credit note event, must be reported in Field 3 of the VAT 201 return. In this regard, the normal time of supply rules under the VAT Act apply.
  • The supplier is not entitled to a deduction of irrecoverable debts under section 22.
  • The supplier vendor must maintain and retain a list of all supplies made that are subject to the DRC Regulations.

Administrative duties and responsibilities of the recipient vendor

The normal provisions of the VAT Act apply in respect of the acquisition of valuable metal by a recipient vendor, with some additional requirements and exceptions.

Some of the most important implications for the recipient vendor are:

  • To provide proof of its VAT registration status to the supplying vendor.
  • To not pay any VAT on the supply of valuable metal to the supplier, but instead to account and pay the VAT thereon under the domestic reverse charge as required under the DRC Regulations. This must be done in the tax period in which the a tax invoice is held in respect of a supply (and not in the tax period in which the time of supply is triggered under section 9). The VAT amount must be calculated by applying the VAT rate (currently 15%) to the value of the goods supplied under the domestic reverse charge as reflected on the tax invoice issued by the supplier.
  • No input tax may be deducted in respect of the supply of valuable metal, unless the recipient has accounted for and paid the VAT in respect of such supply on a VAT 201 return. The declaration and payment of the VAT on the supply of valuable metal will form part of the recipient vendor’s normal calculation of the tax payable or refundable on the VAT 201 return. The VAT component paid on any supplies of valuable metal acquired that are subject to the domestic reverse charge under the DRC Regulations must be accounted for in Field 12 of VAT 201 return. Any input tax on such  acquisitions of valuable metal must be shown in Field 18 of the same VAT 201 return.
  • The recipient vendor must issue a statement containing the prescribed details in writing to the vendor that supplied the valuable metal within 21 days from the end of the calendar month during which the VAT on the supply of valuable metal has been accounted and paid for by the recipient vendor.

Joint and several liability

Regulation 7 provides that the supplier and recipient can be held jointly and severally liable for the VAT if the parties have failed to comply under the DRC Regulations. Certain exceptions apply in this regard, so it is very important that the supplier ensures that reasonable steps are taken to verify whether the recipient is a VAT vendor or not. For example, if the supplier has obtained a copy of the recipient vendor’s Notice of VAT Registration or written proof that the recipient vendor’s VAT registration has been re-validated by SARS, then joint and several liability may not be applicable.

Effective date and transitional rules

The commencement date of the DRC Regulations is 1 July 2022 and a transition period of one month from 1 July 2022 is allowed for affected vendors to ensure that they make the necessary adjustments to invoicing, accounting systems and other requirements under the DRC Regulations. In light of the invoicing and system practicalities and the circumstances prevailing, the DRC Regulations will apply to all valuable metal supplies from 1 August 2022. All affected vendors are required to have their systems updated during the transition period provided.

Supplies not subject to the DRC Regulations (for example, supplies of valuable metal to non-registered VAT vendors, or non-vendors, or supplies that do not constitute “valuable metal”), must be accounted for by the supplier under the normal provisions of the VAT Act.

VAT rulings and decisions

As the DRC Regulations are issued by the Minister of Finance, SARS cannot make decisions or issue any VAT class ruling or VAT ruling to deviate from the DRC Regulations. Applications to this effect will therefore have to be rejected. Frequently Asked Questions: Domestic Reverse Charge Regulations for VAT (FAQs) have been issued to assist vendors and the public at large to obtain clarity and to ensure consistency on certain practical and technical aspects relating to the DRC Regulations. The FAQs are therefore not intended to be used as legal reference. Questions not dealt with in these FAQs, can be directed to [email protected]. Questions regarding the validation process can be directed to [email protected]

Need more information?

For more information on the DRC Regulations, refer to the following:

The VAT Domestic Reverse Charge webpage also contains a full package of information, including the slideshows that were presented during the webinar that SARS hosted on the DRC Regulations. If you missed the event, see the recorded session on our SARS TV Channel.

Links to the slideshows are below.

Publications

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)

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 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.

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