When services are rendered physically in South Africa by a vendor to a non-resident, the question often arises, can those services be zero-rated for VAT purposes? Zero-rating refers to the situation where VAT is charged by a vendor but at 0% (i.e. it still constitutes a taxable supply). The advantage of zero-rating is that a vendor is in principle entitled to claim input VAT in respect of expenditure incurred for purposes of making the zero-rated supply, but that they charge output VAT at 0% in respect of the supply to the recipient.
VAT is primarily a consumption-based tax meaning that in general the taxing of a specific supply of goods and or services takes place where those goods and or services are consumed. In other words, if the services are rendered and consumed in South Africa it is generally (as a rule of thumb) subject to VAT at 15%.
Notwithstanding the above, the Valued-Added Tax Act No. 89 of 1991 (as amended) (“the VAT Act”) does make provision for the zero-rating of services physically provided to non-residents in South Africa under certaincircumstances. It is a common misconception that all services rendered physically in South Africa to non-residents qualify for zero-rating and it is therefore important to first test the relevant supply against those requirements as set out under section 11(2)(l) of the VAT Act.
Whether the services are directly connected to moveable or immovable goods, where the non-resident physically is at the time the services are rendered or whether the services are rendered to any other person physically present in South Africa at the time the services are rendered, are all factors to consider when determining the qualification for zero-rating. The fact that a recipient of the services might be foreign, does not necessarily mean that they are non-resident for VAT purposes – the concept carries a very specific meaning. And even if the recipient is a non-resident (as defined for VAT purposes) does not automatically result in the underlying services qualifying for zero-rating.
Section 11(2)(l) must be carefully considered, and vendors shouldn’t merely accept that zero-rating applies because a non-resident is the recipient of the services. It is advisable that the contractual terms and conditions, actual transaction flow and nature of the services and parties involved be analysed thoroughly to determine the services’ eligibility for zero-rating under section 11(2)(l). There is no “one-size-fits-all” application of the section – each case needs to be adjudicated based on the specific facts at hand.
Vendors should also not loose sight of the fact that they are obliged to obtain, and hold specified supporting documents within a specific timeframe to substantiate the zero-rating.