Clarity on VAT and foreign companies

A recent Supreme Court of Appeal judgement relating to VAT and foreign tour operators will be of interest to wildlife farmers and safari lodges.

Peter O’Halloran - Tax advice

The case under the spotlight this week deals with the question of whether services supplied to foreign tour operators by a South African operation are subject to VAT at zero percent or to VAT at the standard rate, and involves Section 11 (2) (l) of the VAT Act.

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The appellant’s company sold package tours to tour operators and individuals abroad. The appellant contracted with local operators to run the tours and arrange entertainment, travel and catering.

The appellant charged VAT at zero percent upon its sales to the clients, who were typically offshore groups or individuals.

SARS conducted an audit and issued assessments in which VAT was levied at the standard rate. The appellant objected.

After the disallowance of the objection, the matter was heard in the Western Cape Tax Court, where the appellant succeeded in reversing the penalties and interest. However, it was held that the capital amount – the standard-rated VAT – remained. The appellant then turned to the Supreme Court of Appeal.

In testimony before the Tax Court, the appellant had conceded it had employed consultants to ensure that the operators supplying the services had carried these out correctly. The consultants had ensured that every detail was attended to, down to the bottled water on the airport shuttle.

The resolution to the dispute revolved around what services had been supplied by the appellant and to whom, and whether those to whom the services were supplied were resident or present in South Africa when the services were supplied.

The appellant contended that it did not supply services to the clients in South Africa. These were provided by hotels, coach services, entertainers and restaurants in South Africa – its contractors, in effect.

But this was not consistent with the agreements entered into by the appellant. These showed that the services were bought from local companies and supplied to the offshore clientele by the appellant.

The thrust of Section 11(2) (l) is that where services are rendered to a foreigner who is in South Africa at the time, VAT must be levied at the standard rate. Thus, the appeal was dismissed, with costs.

The moral of the story is: consult a tax lawyer when entering into agreements with offshore clients and a zero VAT rate is to be claimed.

The case cited is XO Africa Safaris v CSARS (395/15) [2016] ZASCA 160 (3 October 2016).