e-VATline

October 2009 Issue 4

Welcome to the 4thedition of e-VATline.  e-VATline is a monthly publication that provides 

you with guidance on complicated VAT issues facing your business. It also highlights red 

flags that you need to be aware of.  

Zero-rated supplies = unlimited risks

Often, businesses only realise the critical importance of managing their zero-rated supplies once 

challenged by the revenue authorities. South Africa has a destination based VAT system. 

Essentially this means that the SA revenue authorities seek to tax only local consumption of goods 

and services. This is primarily achieved by zero-rating cross-border transactions where consumption 

of goods or services supplied takes place outside SA. 

The onus to prove that the zero-rating has been applied correctly lies with the SA supplier of goods 

or services. In practice this is easier said than done. 

Zero-rated supplies require strict control

Zero-rating of goods and services is an integral part of all destination based VAT systems. A zerorated supply is a category of taxable supplies where VAT is charged at the rate of zero percent. As 

such, vendors making zero-rated supplies are entitled to full input tax credits on costs incurred to 

make such supplies. 

From a regulatory perspective, zero-rated supplies represent a high tax avoidance risk. It is 

therefore understandable that revenue authorities require VAT vendors to exercise strict control over 

zero-rated supplies.

To zero-rate or not to zero-rate 

The dilemma that the SA supplier faces is in deciding whether or not to zero-rate a supply. Often the 

decision is driven by commercial pressures. For example, if the supply is not zero-rated, the 

enterprise loses the business opportunity. 

Logistical challenges for large organisations

Large organisations also face particular challenges in 

complying with VAT legislation.

A logistical department is often not designed to deal with the 

requirements of the VAT Act, as its primary function is to 

facilitate the movement of goods. 

Organisations need to be cautious of departments that focus 

solely on their respective mandates. This can potentially 

create obstacles for critical VAT information.  

Are you correctly zero-rating 

your supplies?

Ensure your company is compliant, 

by attending a VAT seminar: Zerorated supplies presented by Grant 

Thornton and LexisNexis this 

November.

Visit our website more information 

on this important VAT seminar.

The SA environment

In SA, zero-rated supplies consist of the export of goods and services as well as specific narrowly 

defined local supplies (for example certain foodstuffs). Each category of zero-rated supply has its 

own unique risk profile that needs to be understood and managed. 

Challenges associated with the export of goods

Exporters of moveable goods are challenged with ensuring the correct classification of exports, managing the timing of the physical export of goods and obtaining supporting documentation 

timeously.

Classification of exports

All exports of moveable goods consist of either direct or indirect exports. The essential difference 

relates to when the risks and rewards of ownership in the goods pass. For direct exports, risks and 

rewards pass only once the goods have left SA. For indirect exports, risks and rewards pass in SA. 

The correct classification of direct and indirect exports is critical as the VAT risks associated with 

each category vary significantly. Direct exports are always zero-rated while the supplier of indirect 

exports may elect to apply the zero-rate. Should the supplier elect to zero-rate the supply, the full 

risk rests with the supplier.

Indirect exports, for example free on board (FOB) deliveries, are often incorrectly classified as direct 

exports. 

Correctly timing the export of goods

An invoice in VAT terms is any document notifying an obligation to make payment. For direct 

exports, the physical goods must be exported within two months from the invoice issue date. 

The format of any documentation prepared prior to the physical export of goods must be carefully 

considered to avoid prematurely triggering the requirement to export the goods within the stipulated 

timeline. Transactions where up-front payments are required are at particular risk of noncompliance. If an extension of the period is required, an application must be lodged with SARS prior 

to the expiry of the two month period. 

There is no stipulated time frame for indirect exports, but the time frames for obtaining supporting 

documentation are much stricter than for direct exports (three months from the date that the tax 

invoice is issued). Careful planning is essential in order to comply with the timelines. 

Requirements for export documentation  

Export documentation for direct exports must be obtained and retained within a period of three 

months from the date that an invoice is first issued (or any amount is paid to the supplier). 

One of the required documents is proof of payment by the foreign purchaser. This requirement 

normally cannot be complied with within the three-month period. An extension of time may be 

applied for with SARS, but the application must be lodged before the original deadline expires. This 

is a process that needs to be carefully monitored and managed internally.

The same principles apply for indirect exports, except that export documentation must be obtained 

by the supplier within two months from the date of the tax invoice. An extension may be obtained 

from SARS for the receipt of the payment requirement only. The practical implication is that if the 

goods are not physically exported within a period of two months, the zero-rating cannot apply. 

The risk lies entirely with the supplier even though it has no control over the goods (having 

relinquished control of the goods in SA). This situation should be managed diligently to avoid 

eroding of profit margins due to an unforeseen liability for VAT. 

The penalty for non-compliance with the above timelines is harsh, but if properly planned and 

managed, there should be no necessity to pay the tax in the first place.

Zero-rated supplies of services 

Supplying services to non-residents at the zero-rate is fraught with danger. If the services are locally 

consumed by a person in SA, the services may generally not be zero-rated. Disputes often arise 

between SARS and taxpayers as to where services have been supplied and consumed. There are 

no clear guidelines that can be followed. It is advisable that organisations consult their professional 

advisors where uncertainty exists.

Other zero-rated supplies

The golden rule when applying the zero-rate to locally supplied goods (for example certain basic

foodstuffs) is that the legislation must be interpreted narrowly. If the item does not comply strictly 

with the description in the VAT Act, it does not qualify to be zero-rated. Interpretation by analogy can 

never be applied. 

Products historically qualifying for zero-rating should be reviewed on a systematic basis to assess 

whether the product still qualifies for the preferential VAT treatment. The bright side 

This edition of e-VATline highlights some of the issues faced by organisations making zero-rated 

supplies. It demonstrates the complexities that exporters and other suppliers of zero-rated goods 

and services face. 

On the bright side, the respective VAT risks are capable of identification and can be managed 

effectively within VAT enterprises. The most critical ingredient necessary to address the risks in a 

constructive manner is the buy-in of top management. This is often lacking due to the invisible 

nature of the underlying risks. 

With audit committees becoming mandatory for certain companies in the near future, awareness 

and management of VAT risks will increase within organisations.  In the interim, management is 

encouraged to take a pro-active role in addressing the various risks. 

Red flags 

Does your organisation export any goods to foreign destinations?     Y N

Does your organisation issue any zero-rated invoices for services rendered? Y N

Does your organisation supply any zero-rated goods to local recipients? Y N

Is your organisation involved in supplying logistical services? Y N

Should any of your answers to the above questions be ‘yes’, you need to consider acquiring 

professional advice to ensure that your VAT risks have been adequately identified, addressed and 

mitigated.