How to calculate VAT on services provided to foreign clients

Background

  1. A South African VAT vendor levies VAT at the standard rate to a foreign entity. The charges should be zero-rated.

Questions

  1. When may VAT at the standard rate be levied on the export of services to a foreign client who doesn’t have a branch in South Africa?
  2. How do we remedy the situation?

The VAT Act

Zero-rated provisions

  1. Section 11(2) of the VAT Act determines that “where, but for this section, a supply of services, would be charged with tax at the rate referred to in section 7(1), such supply of services shall, … be charged with tax at the rate of zero percent where …” (Our underlining)

Correction of incorrect standard-rating

  1. Section 21(2) of the VAT Act determines that where a supplier has accounted for an incorrect amount of output tax as a result of circumstances contemplated in section 21(1) of the VAT Act, the supplier must make an adjustment in calculating the tax payable by the supplier in the VAT return for the tax period during which it has become apparent that the output tax is incorrect.
  2. Section 21(2)(b) of the VAT Act determines that if the amount of output tax actually accounted for exceeds the amount of output tax properly chargeable in relation to a supply, the supplier may either make a deduction in terms of section 16(3) of the VAT Act in respect of the amount of the excess (which amount is then deemed to be input tax) or reduce the amount of output tax attributable to the tax period in which it became apparent that an adjustment was required. 
  3. The proviso to section 21(2)(b) of the VAT Act determines that no deduction may be made where the excess amount of VAT has been borne by the recipient of the supply and the recipient is not a VAT vendor unless the excess has been refunded to the recipient either in cash or by processing a credit against a trading account.

Qualifying events to issue tax invoices

  1. Section 21(3)(a) and (b) of the VAT Act requires that a supplier must issue a credit or debit note  where the supplier has issued a tax invoice for a supply made and the VAT reflected on the tax invoice is incorrect for one of the following reasons:
    1. The supply has been cancelled,
    2. The nature of the supply has been fundamentally varied,
    3. The previously agreed consideration for a supply has been altered by agreement with the recipient, whether due to the offer of a discount or for any other reason,
    4. The goods or services have been returned partially or fully to the vendor, or
    5. An error has occurred in stipulating the amount of consideration agreed upon for a supply.

Sections dealing with documentation

  1. Section 11(3) of the VAT Act provides that the prescribed documentation must be obtained and retained in order to support the vendor’s entitlement to apply the zero rate of VAT. The documentation that must be obtained and retained to apply the zero rate of VAT is set out in VAT Interpretation Note No. 31 (issue 4)
  2. Section 16(2)(a) of the VAT Act determines that no deduction of input tax in respect of a supply of goods or services may be made unless, amongst others, a credit note in relation to the supply has been provided in accordance with section 21 of the VAT Act and is held by the vendor making the deduction at the time that any return in respect of the supply is furnished. 

Application of the principles 

  1. If a supply of services qualifies to be made at the zero-rate of VAT, the supplier must zero-rate the supply; the supplier has no discretion to apply the standard rate of VAT.
  2. A supplier must zero-rate a supply of services if the relevant services qualify to be made at the zero-rate of VAT and the supplier obtains the required supporting documentation.
  3. Where a supply qualifies to be zero-rated and is incorrectly standard rated, a credit note may be issued for the excess VAT (either on the basis that the previously agreed consideration for a supply has been altered by agreement with the recipient, whether due to the offer of a discount or for any other reason, or on the basis that an error has occurred in stipulating the amount of consideration agreed upon for a supply).
  4. As the non-resident is unlikely to be a registered VAT vendor in South Africa, the deduction may only be made in the VAT return of the South African supplier once:
    1. The credit note has been issued to the non-resident, and
    2. The excess VAT has been refunded to the non-resident either in cash or by processing a credit to the account of the non-resident.
  5. The deduction must be made in the tax period that the above has been complied with, i.e., the original VAT returns are not re-opened. 
  6. In practice the appropriate supporting documentation is often not obtained and retained where a supply is incorrectly standard rated. Before any adjustment is therefore made, the supplier should ensure that it is in possession of the documentation prescribed in IN 31 (issue 4).
  7. No other mechanism exists to recover VAT charged on services supplied to non-residents. The VAT Refund Administrator (VRA) mechanism cannot be utilised as it only applies to the export of goods at the standard rate of VAT.

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