One of the principles of the South African Value Added Tax (‘VAT”) system is that VAT at the standard rate is imposed when movable goods are supplied in or imported into the Republic of South Africa (“RSA”) and VAT at a zero rate may be charged by an RSA vendor where movable goods are exported. As such, when a Seller of a second hand vessel sells to a foreign Purchaser it is often taken for granted that VAT on the sale will be zero rated. However, in terms of the “Export incentive scheme in terms of paragraph (d) of the definition of “exported” in section 1 of the Value-Added Tax Act No. 89 of 1991 (GN 2761 of 13 November 1998)” (“the Export Scheme”) there are a number of procedural requirements that need to be met in order for VAT to be zero rated. As such, unless the sale agreement between the Seller and the foreign purchaser properly caters for compliance with these requirements the Seller could run the risk of incurring liability for VAT on the sale without effective recourse against the Purchaser. In light of the above this article will briefly canvas two VAT related issues in relation to the sale of a vessel to a foreign purchaser: 1) the requirements that need to be met in order for a foreign purchaser to claim a refund from the Vat Refund Administrator (“VRA”) in the event that VAT on the sale of a vessel is charged at the standard rate; and 2) the requirements that need to be met in order for VAT on the sale of a vessel to a foreign purchaser to be zero rated.
VAT CHARGED AT STANDARD RATE
Paragraph 1.2.1 of the Export Scheme states that tax at the standard rate must be charged by the RSA vendor on movable goods supplied to a qualifying purchaser. As such the default position is that when selling a vessel to a foreign purchaser VAT at the standard rate must be charged on the purchase price.
A qualifying purchaser for the purposes of the Export Scheme includes:
a) A non-resident – meaning a person who is a non-RSA passport holder, who was not in RSA at the time of the sale / supply, who is a permanent resident of an export country and who has such goods exported on his behalf by a “cartage contractor” via a qualifying port. A cartage contractor is a person who is registered as a vendor in terms of the Act, with transport being the main activity, and who has been engaged by the qualifying purchaser to transport the moveable property to him at an address in the export country. A cartage contractor includes couriers and freight forwarders;
b) A foreign enterprise – is an enterprise or business carried on continuously in an export country in the course or furtherance of which goods and services are supplied to any other person for consideration.
c) A tourist – is a non-RSA passport holder travelling to South Africa on non-resident travel documents;
d) A foreign diplomat – a refund will only be considered to a foreign diplomat where a diplomat who was stationed in South Africa is departing from SA permanently;The procedure to be followed in order for the qualifying purchaser to obtain a tax refund will be dependent on who exports the goods and which one of the designated commercial ports is used to exit RSA.
The only obligation on the Seller in this regard is to supply the purchaser with a valid tax invoice evidencing the sale of the vessel. The purchaser will then have a right to claim a refund of the VAT charged on the purchase price within 90 days from the date of the tax invoice.
The procedure to be followed in order for the qualifying purchaser to obtain a tax refund will be dependent on who exports the goods and which one of the designated commercial ports is used to exit RSA.
- In the event that the vessel is exported by the purchaser himself via one of the designated ports listed in paragraph 1.4.1 of the Export Scheme, that being Cape Town, Durban, East London, Port Elizabeth or Richards Bay , the procedure as set out in paragraphs 1.3.1 and 1.3.2 of the Export Scheme will need to be followed in order for the Purchaser to obtain a refund. This basically entails the qualifying purchaser declaring the vessel to the RSA Customs and Excise Official and presenting himself personally to the VRA together with the vessel and the valid tax invoice evidencing the sale of the vessel. If the authority is satisfied that the vessel corresponds with the description of the vessel in the invoice a VAT 255 will be presented to the qualifying purchaser for signature and the refund will be authorised;
- If the vessel is exported by the qualifying purchaser himself via one of the designated ports listed in paragraph 1.4.3 that being, Mossel Bay or Saldanha, the purchaser will need to declare the vessel to the relevant Customs and Excise official and submit a letter to the VRA requesting a refund. In support of the said letter the qualifying purchaser will need to submit the documentation listed in paragraph 220.127.116.11 of the Export Scheme (excluding an invoice from the Cartage contractor) which includes a copy of the tax invoice, a copy of qualifying purchaser’s passport or trading licence and proof that the qualifying purchaser declared the movable goods for customs purposes in the export country.
- If the vessel is exported via the qualifying purchasers cartage contractor via any of designated commercial ports listed in paragraph 1.4.1. of the Export Scheme the same procedure as set out in point 2 above must be followed however no tax refund will be paid where:
a) The moveable goods were exported more than 90 days from the date of the tax invoice;
b) The moveable goods were exported via a port other than the designated ports listed in paragraph 1.4.1 of the Export Scheme; or
c) The request for a refund together with all the documentation is received by the VRA later than 3 months after the date of export.
Where the requirements as set out above have not been met the refund claim will be invalid. If all the requirements are met at the time of departure the refund shall be paid immediately by the VRA.
As such, from the foreign purchaser’s perspective it is imperative that if VAT is to be charged on the sale, the foreign purchaser should ensure that the sale agreement makes provision for obtaining the necessary documentation from the Seller within 3 months from the date the vessel is exported. Furthermore, the purchaser will also need to ensure that the vessel is exported within 90 days from the date of the tax invoice and exported from a designated port.
VAT CHARGED AT ZERO RATE
Paragraph 2.1 of the Export Scheme states the following:
“Where the RSA vendor supplies the movable goods to a qualifying purchaser and the RSA vendor ensures that the movable goods are delivered (irrespective of the contractual conditions of delivery) to any of the harbours or airports listed in paragraph 1.4 from where the movable goods are to be exported by the qualifying purchaser, the RSA vendor can decide to zero rate the supply. The decision to supply at the zero rate is entirely subject to the RSA vendor’s choice”
As such the Seller may at its discretion elect to zero rate the VAT on the sale of a vessel to a foreign purchaser. However, there are a number of requirements that will need to be met in order for VAT to be zero rated;
a) Firstly the vessel must be exported by a qualifying purchaser i.e. either a non-RSA passport holder utilizing the services of a cartage carrier to export the goods; a tourist travelling on non-resident travel documents; a foreign enterprise or a foreign diplomat;
b) The vessel will need to be exported via one of the harbours listed in paragraph 1.4. of the Export Scheme i.e. Cape Town, Durban, East London, Port Elizabeth, Richards Bay, Saldanha or Mossel Bay;
e) Most importantly, the Seller must ensure that the zero rate is not applied in respect of the sale of a second hand vessel if a notional input tax credit was claimed by the Seller or any other person connected to the Seller when the vessel was acquired by the Seller. A notional input tax credit is basically the tax deduction that a vendor can claim on the purchase of second hand goods from a non-VAT vendor. As such if the Seller originally purchased the vessel second hand and claimed a notional input tax credit, the sale of the vessel to the foreign purchaser may not be zero rated;
f) The purchaser must furthermore retain and carefully preserve for a period of 5 years the following:
- A copy of the zero rated tax invoice;
- A copy of the qualifying purchaser’s passport or trading licence;
- A copy of the qualifying purchaser’s order or the contract between the Seller and the Purchaser;
- Proof of payment for the moveable goods by the qualifying purchaser;
- In the event that the documentation referred to above is not obtained by the Seller by the end of the tax period which ends after the expiry of a period of 2 months calculated from the date of the relevant tax invoice, the supply will be deemed to be at the standard rate.
In light of the above, it is evident that it cannot simply be taken for granted that the sale of a vessel to a foreign purchaser will be zero rated. The default position is that VAT will be charged at the standard rate and the Seller may at its discretion elect to zero rate the VAT subject to compliance with certain requirements. In the event that the Seller should elect to zero rate the VAT on the sale of a vessel to a foreign purchaser it is imperative that the sale agreement makes provision for the following: a) that the vessel is exported via a port listed in paragraph 1.4. of the Export Scheme; b) that the purchaser warrants that it is a qualifying purchaser for the purposes of the Export Scheme; and c) the Purchaser supplies the Seller with a copy of the purchasers passport or trading licence within 60 days of the date of the invoice. Furthermore, in order to further protect the Seller it may be prudent for the sale agreement to make provision for payment of a deposit by the Purchaser into the Seller’s attorneys trust account to cover the VAT payable by the Seller should the Commissioner of Inland Revenue (“the Commissioner”) decide that VAT at the standard rate is in fact applicable.
It would also be prudent for the Seller to have the contractual right to nominate the clearing agent who deals with the export formalities. In this way the seller can maintain a level of control over the export process and have easy access to the required documents evidencing export of the vessel.