Over the past two years we have dealt with a number of matters relating to validity of claims for diesel refunds by users of diesel in the fishing industry.
By way of background the diesel refund system was brought into effect to encourage and enable primary production in South Africa and as such allows for the refund of fuel and Road Accident Fund levies (“levies”) paid on diesel by certain qualifying industries. The industries are dealt with under various categories, one of them being offshore which in turn covers the Commercial Fishing industry. Although the refunds are claimed on a user’s VAT return, the governing legislation in respect of such refund system is Section 75 of the Customs and Excise Act 91 of 1964 (The Act) read together with Note 6 to item 670.04 of Schedule 6 to the Act (the notes). In brief the requirements of Section 75 of the Act relating to the claiming of refunds generally are as follows:
- Subject to compliance with the relevant notes, a refund of levies shall be refunded / paid to the person who actually paid such levies.
- Such refunds shall be granted to any person who has purchased and used such fuel in accordance with the provisions of the Act and the notes thereto.
- In order to qualify to claim such refunds a person must be registered for value added tax as well as a user under the Act. In order to be registered under the Act a specific application form must be submitted and the application approved.
- In order to pay such refund the Commissioner does so by means of the system in operation for refunding value added tax and as such may set off any refundable levies against any amount of value added tax payable by such person.
- Any such payment or set off is however only a provisional refund and is also subject to the production of proof / documentation by the user on request by the Commissioner.
- With regard to levies which are being recovered by the Commissioner due to such levies being excessively claimed or not qualifying to be refundable, interest shall accrue on such amounts as provided in the Value Added Tax Act.
- Accordingly where a refund is claimed in a user’s VAT return and the Commissioner request’s proof thereof, then the Commissioner may refuse to approve such refund which may result in an increase in the VAT payment due by the user for that period. The VAT amount will remain due and payable despite the request for information by the Commissioner in respect of the diesel refund claimed.
- In the event of a provisional refund having being granted, the user can still be obliged upon request to furnish the Commissioner with a declaration and supporting documents relating to the purchase and use of the fuel. If such user fails to comply with such request then the user shall be deemed to have used such fuel for a purpose other than the purpose provided for in the relevant notes to the Act. Then such refund may be recoverable from the user by the Commissioner. Such amount shall be repaid by the user upon demand by the Commissioner.
- A refund of levies must be submitted to the Commissioner within two years from the date of purchase of such fuel.
- The user claiming levies must be the purchaser of such fuel and must be issued with an original invoice by the seller reflecting certain prescribed particulars.
- The user is obliged to keep certain accounts, books and documents as prescribed in the notes.
- The Commissioner may refuse an applicant for registration by a user in the event of false or misleading statements in the application or in the event of a previous breach or contravention of the Value Added Tax Act, or any offence including dishonesty.
- The Commissioner may also cancel or suspend an existing registration if the Commissioner could have in fact refused such registration in the first place.
- It is important to note as well that in terms of the Act a person who falsely applies for such refund or uses or disposes of such fuel contrary to the Act shall be guilty of an offence and liable on a conviction to a fine not exceeding R100 000.00 or double the amount of any levies refunded whichever is the greater, or to imprisonment for a period not exceeding ten years, or to both such fine and imprisonment – It would appear from the wording of this section that there is a requirement of fraudulent intend for such a conviction.
The provisions of the notes which detail the further requirements for claiming diesel refunds are complex in nature and below is a summary of the main requirements for claiming refunds in the Commercial Fishing Industry.
- The fuel must be purchased by the user for use in a fishing vessel.
- If diesel is purchased in the Republic and used for fishing in a neighbouring territory, then the levies on such fuel do not qualify for a refund.
- A user may in certain circumstances contract a vessel owner (contractor) to catch fish on its behalf and claim the levies on the fuel which the user has purchased and supplied to the contractor for use during the contract. This would be regarded as a “dry contract” where a vessel is hired to perform the catching operations. The word “hire” in the notes is defined to include a “lease or charter”. It is submitted that a catching agreement or an agreement which deals with catching related issues appropriately worded would be sufficient to qualify as a dry contract to allow a user who has purchased the fuel to claim the refund.
- Commercial Fishing vessels which qualify are such vessels propelled by inboard engines as contemplated in the Marine Living Resources Act with such vessels being used for commercial sea fishing – recreational vessels are accordingly excluded. A dedicated mother ship where fish is processed is included in the definition of Commercial Fishing vessels.
- “Sea fishing” is defined as the catching of fish as defined in the Marine Living Resources Act and the processing of fish while at sea.
- With regard to the use of the fuel, eligible purchases of fuel only qualify in respect of fishing vessels:
Which are owned or chartered by a legal person registered in South Africa and which has its place of effective management in South Africa, or by a natural person who is resident in South Africa.
Which are registered or licensed in terms of the Merchant Shipping Act.
Which are nominated on a valid Commercial Fishing permit issued by the Department of Agriculture, Forestry and Fisheries in terms of the Marine Living Resources Act. This requirement was previously controversial in that SARS assumed that users who claimed the rebate must also be rights holders. After representations made by Fish SA to SARS in Pretoria this requirement was changed to the current requirement which merely requires the vessel in which the fuel is being used to be nominated on a valid fishing permit.
The fishing activities must be carried on with the aim of making a profit.
The fuel must be used for the propulsion or the operating of any equipment on board the fishing vessel.
- The “sea fishing activities” which qualify for the refund of diesel used must be carried on by the user. Dry contracts (e.g. catching agreements, chartered agreements and hire agreements) do qualify for the user claiming refunds. Therefore a user must be deemed to be carrying out “sea fishing activities” in a situation where the user has purchased the fuel and supplied it (free of charge) to the contracted vessel owner who is catching fish on the user’s behalf. A narrow interpretation of this provision would mean that only the vessel owner using it’s vessel to catch fish would be eligible for the refund and not the charterer (in the wide sense) of the vessel. This would not be in line with the other provisions in the notes which allow for dry contracting.
- The offloading of catch with a fixed onshore crane and onshore processing does not qualify as commercial fishing activities for the purposes of claiming diesel refunds.
- As stated previously vessels carrying out fishing for recreational, sport or tourism purposes do not qualify for the diesel refunds on the fuel utilized.
- Vessels which undertake trial runs connected with the repair or refit of such vessel also are not entitled to claim the refunds on the fuel utilized.
In dealing with diesel refund matters certain of the common issues which arise :
- In certain instances one may have a vessel owner who is also a right holder who is supplied fuel by the factory that purchases the fish caught on the rights holders’ vessel. The factory buys the fuel from the fuel supplier and the fuel is placed directly on board the vessel by the fuel supplier. On the sale of the fish by the vessel owner to the factory, the factory then provides a reconciliation and sets off certain expenses against the purchase price of the fish including the diesel expense. Therefore indirectly it can be said that the vessel owner is purchasing the fuel. However, the relevant provisions regarding diesel refund claims require that the user claiming the refund purchases the fuel directly from the supplier. In fact there are specific requirements for the tax invoice which is issued by the supplier i.e. the words tax invoice must be reflected on the document; the name, address and VAT number of the supplier; the name and address of the; the date of the transaction, the description of the goods (being diesel), the quantity delivered / purchased, the value of the supply and the amount of the VAT( which must be shown as 0% as VAT is not levied on diesel) must all be reflected on the invoice.
- There are situations where a factory contracts a number of vessels to catch and deliver fish to the factory on its behalf. In such cases the factory purchases the fuel from the fuel supplier and then provides such fuel to such vessels (for no charge) to use while catching on behalf of the factory. Whilst this in our view constitutes a “dry contract” which allows for the factory as the user purchasing the fuel to claim the diesel refunds, it is important that the agreement in place between the factory and the vessel owner is clear with regard to the supply and use of the diesel.
- Certain SARS branches have in the past operated under the misunderstanding that the user purchasing the fuel and claiming the refund must also be the rights holder with a permit issued in the name of the user. SARS were (in my view) confusing the provisions regarding the claiming of refunds in the mining sector when reaching this conclusion. In fact, this has never been a requirement under the Commercial Fishing provisions. Initially the relevant provisions stated that the Master of the relevant vessel must be in possession of a valid commercial fishing permit. It did not state that the commercial fishing permit must be issued in the name of the user claiming the refund. For sake of clarity this provision has since been replaced (as referred to earlier) and now the requirement is that the vessels on which the fuel is used must be nominated on a valid commercial fishing permit. In other words the commercial fishing permit still does not have to be issued in the name of the user claiming the refund but the vessel must be named on the commercial fishing permit upon which the vessel is operating.
- If a user is challenged by SARS regarding refunds which have previously been granted it is important to note that SARS ordinarily cannot go back beyond two years from the date of the commencement of the inspection to claim back previous refunds granted to the user. This is provided that there has not been any fraud, misrepresentation, non-disclosure of material facts or any false declaration by the user.
Experience has shown that although over the years the claiming of diesel refunds has continued in the background seemingly without event, due to the self-regulating nature of the provisions, if a user gets it wrong in the structure and manner of its claiming, accumulated refunds which are challenged by SARS could amount to substantial sums to which SARS will be entitled to add interest. Users are advised to carefully look at the way they are currently claiming refunds to ensure that they meet the relevant requirements summarized above.