South Africa: Is your company required to register for VAT?June 13, 2011
South Africa’s unique VAT rules may create an unexpected obligation for non-resident entities to register for VAT.
In today’s globalized economy, an entity’s obligation to register for VAT purposes in any country should be considered with great care.
Most VAT systems impose an obligation to levy VAT on supplies of goods and services made by an entity that is registered for VAT purposes or that is required to be registered.
The South African VAT system is no different and like most other VAT systems imposes hefty penalties, interest and additional taxes on entities that are non-compliant.
In common with most VAT systems around the world, the South African law requires any entity engaged in regular business activities to register for VAT purposes if its taxable supplies during a specified period exceed a threshold level (the South African threshold is currently supplies in excess of R1 million during a 12-month period).
However, unlike most other VAT systems, the obligation to register in South Africa does not depend on the place where a supply of goods or services is made.
Rather, the South African VAT system defines its jurisdictional reach based on a much wider concept, namely the place of the supplier’s business activities.
What somewhat complicates the question of an entity’s obligation to register for VAT purposes in South Africa is that whereas other VAT jurisdictions rely on detailed place-of-supply rules, the South African VAT legislation contains no place-of activity rules.
Under the country’s unique legislation, if a foreign entity supplies goods or services to any South African subsidiary, holding company or client, the foreign entity must consider its potential obligation to register for VAT.
Definition of an enterprise for South African VAT purposes
An entity becomes liable to register for VAT in South Africa if it carries on “an enterprise” and makes taxable supplies of goods or services in excess of the registration threshold.
An entity carries on an enterprise if it carries on continuous or regular business-related activities in the course of which goods or services are supplied for consideration and these activities are carried on in or partly in South Africa.
Therefore, the issue to consider from a foreign entity’s perspective is whether the foreign entity carries on any business-related activities in South Africa.
This “test” (i.e., the place of a supplier’s business activities) does not rely on having a fixed or permanent place in South Africa from where the business activities are conducted.
Any business activity carried on in South Africa may suffice. Also, there is no defined minimum scope of activity required in South Africa.
The only requirement is that the entity must supply goods or services in the course or furtherance of the activities that are carried on in or partly in South Africa; the location of where such supply is effected is irrelevant.
Examples of activities of a foreign entity that may constitute an enterprise
The following are examples of when a foreign entity may be regarded as carrying on an enterprise for South African VAT purposes:
- A foreign entity supplies services to a South African subsidiary, holding company or client through employees of the foreign entity in South Africa
- A foreign entity rents out movable or immovable property in South Africa
- A foreign entity grants the right to use intellectual property in South Africa to its South African subsidiary, holding company or client
- A foreign entity imports and distributes goods in South Africa
- A foreign entity holds consignment stock in South Africa
Separately identifiable and separate accounting systems
If a foreign entity carries on an enterprise for South African VAT purposes, the South African VAT Act applies with respect to the entity’s worldwide supplies.
However, if the main business or branch of a foreign entity is permanently situated at premises outside of South Africa, is separately identifiable and maintains an independent accounting system with respect to its foreign business, supplies of goods and services that do not relate to the South African enterprise do not have South African VAT consequences.
However, if these conditions are not met, all of the entity’s worldwide supplies are caught.
It is advisable for any foreign entity that receives income from a South African subsidiary, holding company or client to carefully analyze its activities in order to identify whether it may be obligated to register for VAT purposes in South Africa.
Foreign entities with a historic liability may make use of the Voluntary Disclosure Program to reduce their exposure to penalties, interest and additional taxes.
It may also be beneficial for a foreign entity to register for South African VAT purposes if it currently incurs a South African VAT cost on expenses incurred locally, since these may qualify for input tax credits if the entity is registered.
This article was originally published in the Ernst & Young Tax Indirect tax briefing which can be accessed using the link below: