Value-Added Tax (VAT) may be regarded as a familiar and well-established tax, but its legislative and administrative requirements continue to develop. This year alone the South African Revenue Service (SARS) has already issued several formal VAT amendments and Interpretation Notes as guidance, to provide clarity and enhance compliance.
Jenna le Roux
Tax Attorney
Yet, one area that continues to present challenges for VAT vendors is when they may apply zero-rate to VAT on their exports.
SARS’s continued VAT-related communication reinforces the importance of ensuring that cross-border transactions are correctly structured, declared and documented from the outset.
Zero-rating does not mean that VAT is not levied; rather, it means that VAT is levied at 0%. Merely because goods leave South Africa does not mean that the supply automatically qualifies for zero-rating.
Vendors must therefore ensure that they comply with the prescribed requirements for zero-rating, as well as retain the necessary documents to prove to SARS that they were entitled to apply the zero rate.
Pay attention to these five common misconceptions that may place a vendor’s zero-rating at risk.
1. If the Goods Leave South Africa, the Supply Is Automatically Zero-Rated
Goods leaving South Africa does not automatically mean that the seller may charge VAT at 0%. The VAT treatment is determined largely on who is responsible for exporting the goods.
The Value-Added Tax Act, No. 89 of 1991 (“VAT Act”) distinguishes between two types of exports: direct and indirect. The distinction depends on who is responsible for exporting the goods. Where the vendor arranges for their delivery to an export country, it is generally a direct export. Where the purchaser or the purchaser’s agent removes the goods from South Africa, it is generally an indirect export.
This distinction matters because different VAT rules apply. In many indirect exports, the seller must charge VAT at the standard rate of 15%, and the qualifying purchaser may then apply for a refund. The seller may apply the zero rate only in specific circumstances and if all the requirements of the Export Regulations are met.
In essence, it is not enough to prove that the goods left South Africa. The vendor must also prove that such goods were exported in a manner that qualifies for zero-rating.
2. The Goods Must Be in South Africa When They Are Sold
It may seem logical that goods can only qualify as an export if they leave South Africa after being sold. This is not always the case.
A South African business may, for example, already have stock stored in another country when it is sold, or may sell goods originating outside South Africa while they are being transported to a customer in another country. SARS recognises that these supplies may still qualify for VAT at 0%.
The business must, however, be able to prove where the goods were when they were sold and that they were delivered to the purchaser outside South Africa. The important question is therefore not only whether the goods crossed the border, but whether the business can prove that the sale meets the requirements for zero-rating.
3. The Same Proof is Required for Every Export
No, there is no single checklist that applies to every export. The evidence required depends on whether the export is direct or indirect, how the goods were transported and who was responsible for moving them. Exports by road, rail, sea and air each require different supporting documents.
The documents must do more than show that the goods left South Africa. Read together, they should establish what was sold, who arranged the transport, how the goods were removed and who received them.
If a material part of that evidence is missing, SARS may disallow the zero-rating and require the vendor to account for VAT at the standard rate.
4. Repairs and Replacements Receive the Same Treatment
Although repairs and replacements frequently arise from the same problem — a defective item — they are treated differently for VAT purposes.
A repair involves fixing the original item. Where goods are temporarily brought into South Africa for repair and subsequently returned overseas, the repair service may qualify for VAT at the zero rate. Parts incorporated into the repaired item may also qualify, provided the relevant requirements are met.
By contrast, “replacement” describes the act of replacing something and may therefore sound like a service. For VAT purposes, however, the focus is on what is actually supplied. Where a new item is provided in place of the defective item, this ordinarily constitutes a separate supply of goods.
The replacement does not automatically inherit the VAT treatment of the original export. The vendor must independently establish that the replacement supply satisfies the applicable zero-rating requirements.
5. All Zero-Rated Supplies Are Declared in the Same VAT201 Field
Applying VAT at the zero rate is only part of getting it right. The vendor must also declare the supply in the correct field of the VAT201 return.
Correctly completing your VAT return becomes important where a transaction includes both exported goods and separate services. The full value cannot simply be declared as exported goods because it relates to one cross-border transaction.
Simply put, the VAT rate may be correct, but the return may still be completed incorrectly if the supply is declared in the wrong field. Correctly applying the zero rate does not cure an incorrect VAT201 classification.
Where vendors are unsure how to complete the return or how to distinguish between exported goods and separate services, they should engage with tax experts well versed in the field of VAT.
Remember, in VAT, zero is a rate — not an absence of obligation.
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