Big VAT and tax changes for South Africa
There are big changes in the cards in South Africa related to value-added tax (VAT) and how local businesses with global operations are treated from a tax perspective.
President Cyril Ramaphosa announced planned changes to South Africa’s current value-added tax regime during his opening of parliament address.
Ramaphosa said the Government of National Unity will look to expand the basket of essential food items exempt from VAT.
Although he did not provide details on which products would be added to the basket, there is a strong drive to make protein-rich products like chicken VAT-exempt.
This week, the South African Poultry Association (SAPA) urged the government to include chicken in the basket of essential food items exempt from VAT.
SAPA said chicken is South Africa’s most popular and affordable meat source, and making it VAT-exempt will help poorer households.
The association said South Africa’s chicken producers are doing everything in their power to keep chicken prices down.
Removing the 15% VAT from the chicken portions, which are most consumed by poor households, would bring immediate price relief.
This is only the start of the expected VAT changes. PwC has also flagged potential changes to VAT levied on cross-border electronic services.
PwC’s monthly synopsis of developments in the local tax arena added that there could be changes to foreign donor-funded projects and the period when tax deductions can be granted.
The National Treasury’s Tax Matters and Revenue Laws section of the Budget, released in February, outlined these VAT proposals for further study in collaboration with SARS.
“This year’s VAT proposals for further consideration are significant and can have far-reaching implications,” PwC said.
The financial services firm warned that if these proposals become law, they will have a meaningful impact on businesses.
VAT collection for cross-border electronic services
South Africa’s 2024 Budget proposed simplifying VAT administration by limiting collection to direct-to-consumer (B2C) sales.
It reversed the 2019 policy and raised concerns about the fairness of this change for businesses previously required to register for B2B transactions.
VAT collection for cross-border electronic services starting on 1 April 2014, prompted by the growth in eCommerce in South Africa.
Many companies, such as Microsoft, Google, Steam, and Spotify, offer subscription services to South African consumers.
Before 2014, South Africans did not pay value-added tax on these services. This disadvantaged local companies and reduced the country’s tax revenue.
This changed when the eCommerce VAT regulations shifted the onus of collecting and paying VAT from the South African purchaser to the foreign supplier.
Foreign eCommerce suppliers had to register as VAT vendors in South Africa by 1 June 2014 to offer services in South Africa.
The change in 2014 targeted educational services, gaming, Internet-based auction services, the sale of e-books, movies, music, and images, and subscriptions.
In April 2019, South Africa expanded its VAT scope to include a broader range of foreign electronic service providers, including business-to-business (B2B) services.
However, this expansion exceeded international guidelines to maximise VAT collection on B2B and B2C services.
The latest budget proposal limits collection to direct-to-consumer (B2C) sales. It relaxes the requirements related to business-to-business (B2B) sales.
Changes to the tax period for permissible input tax deductions
South Africa’s VAT system allows vendors to recoup VAT paid on business purchases through input tax deductions, reducing businesses’ VAT burden.
To recoup VAT, the business must buy goods or services used for taxable supplies and have proper documentation.
Ideally, deductions should be claimed in the same tax period as the supply. However, a five-year grace period exists if documentation is delayed.
The grace period is aimed at helping South African businesses to manage their VAT obligations and cash flow.
The 2024 Budget proposal seeks to limit this flexibility by requiring deductions made in the original tax period. It simplifies tax administration but raises practical concerns.
Businesses may face challenges with non-compliant invoices or the need for multiple adjustments.
Another concern is that SARS’s current eFiling system might struggle to adapt to these changes.
A review of the VAT treatment of foreign donor-funded projects
A more technical change is how Foreign Donor Funded Projects (FDFPs) projects are treated under South Africa’s VAT regime.
South Africa’s VAT treatment for Foreign Donor Funded Projects (FDFPs) is designed to refund VAT on project expenses.
However, implementing agencies face challenges due to changes related to VAT introduced in 2020.
These challenges include lengthy approval processes, complex procedures, and administrative burdens that deter foreign donors.
The need for tax experts increases costs, and frequent changes and inconsistent application of the legislation create uncertainty.
These issues undermine the legislation’s intended benefits and may discourage foreign aid flowing into the country.
The National Treasury proposed simplifying the VAT registration process for Foreign Donor Funded Projects to address this.
They want to allow agencies to register all their FDFPs under a single VAT number, reducing administrative complexity.
Companies with global operations under the spotlight
PwC’s tax experts warned that the National Treasury might change the country’s tax laws after Coronation’s victory over SARS at the Constitutional Court.
In June, the Constitutional Court ruled in favour of Coronation in its legal battle against SARS regarding the profits earned by its Irish-based subsidiary.
SARS had argued that fund management formed the primary operations of Coronation’s subsidiary.
The fund management occurred in South Africa, while investment management was outsourced to Ireland.
This interpretation would result in the company paying tax on the net income of its Irish subsidiary to SARS.
The Constitutional Court disagreed with SARS and said the Irish subsidiary’s licence only permitted fund management, not investment management.
Thus, Coronation’s interpretation was correct, and its net income was exempt. Therefore, SARS could not claim tax from Coronation’s Irish-based subsidiary.
The National Treasury indicated it would amend the definition of a foreign business establishment (FBE) if the Constitutional Court’s decision deemed it necessary.
It said the government would aim to clarify that all important company functions must be performed within the same jurisdiction for the FBE exemption to apply.
Read: Calls to scrap tax and VAT on two items in South Africa
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