The VAT on supplies of goods and services must be paid by the supplier, whereas the importer of goods is responsible for the payment of the import VAT. VAT on imported services must be paid by the recipient.
Persons who acquire services from foreign suppliers often omit to pay the VAT on these services. It is for this reason that the South African Revenue Service is focusing on imported services in its VAT audits. However, not all services rendered by foreign service suppliers comprise imported services.
What are imported services?
“Imported services” is defined in the Value-Added Tax Act 89 of 1991 (VAT Act) as services rendered by a supplier who is resident or carries on business outside the Republic, to a recipient who is resident of the Republic, to the extent that such services are utilised or consumed in the Republic, otherwise than for the purpose of making taxable supplies. The VAT thereon is payable in terms of section 7(1)(c) of the VAT Act.
There are in essence three requirements that must be complied with for a service to comprise an “imported service”.
- the service must be supplied by a non-resident supplier to a South African resident;
- the service must be used or consumed in South Africa; and
- the service must be acquired otherwise than for the purpose of making taxable supplies.
The place of residence of the supplier and that of the recipient are generally easily determinable. However, in the absence of so-called “place-of-supply” rules in the VAT Act, it is not always clear where a service is utilised or consumed.
Utilised or consumed in South Africa
In the case of CSARS v De Beers Consolidated Mines Ltd 74 SATC 330 the Supreme Court of Appeal (SCA) took a practical approach to determine where the services rendered by a foreign supplier were used. The SCA considered that the company was incorporated in South Africa with its head office situated in Johannesburg, the directors appointed the foreign supplier following a meeting held in Johannesburg, and it is also here that the directors met to approve the recommendations made. In addition, a scheme of arrangement in relation to the transaction was approved and implemented in South Africa.
However, as correctly pointed out by SP van Zyl ((2013) 25 SA MERC LJ at p 538), it is not always possible to apply a practical test, and certain services can only be utilised or consumed where and when they are supplied. Such services include transport services, live performances or sporting events, seminars and medical procedures. These may also include foreign listing services or foreign legal services to comply with foreign statutes, or legal services to defend or institute legal action in a foreign country. It cannot be said that, if the benefit of a service is enjoyed in South Africa, the service comprises an “imported service”. For example, if a person’s vehicle breaks down in Botswana while they are on holiday and is repaired in that country, the repair service is utilised and consumed in Botswana, and the subsequent benefit upon return to South Africa does not bring the repair service within the definition of “imported services”. In the absence of clear place-of-supply rules, one can expect on-going debates on where a service is utilised or consumed.
Purpose other than for making taxable supplies
For a service rendered by a foreign supplier to comprise an “imported service”, the service must also be acquired for a purpose other than for making taxable supplies. If the service is acquired for the purpose of making taxable supplies, the recipient is entitled to an input tax deduction if VAT was payable, and it is for this reason that services acquired for making taxable supplies are excluded.
The SCA in the De Beers case and in the case of Consol Glass (Pty) Ltd v CSARS 83 SATC 186 also considered whether a foreign service was acquired for the purpose of making taxable supplies. In the case of De Beers the SCA stated that the foreign services were principally provided to enable the company to comply with its statutory obligations towards its unit holders, and that such services had no impact on its taxable enterprise, which comprised the mining, marketing and selling of diamonds. The SCA held that on this basis the foreign service was acquired for a purpose other than making taxable supplies.
In the Consol Glass case the SCA stated that the foreign services were acquired to redeem Eurobonds which were originally issued to effect a reorganisation of the Consol group of companies.
The court stated that the reorganisation did not bring about any material change to the enterprise comprising the making of glass containers, and as such there was no functional link between the issue of the Eurobonds and the making of taxable supplies. The court considered that the foreign services which were acquired to redeem the Eurobonds were acquired for the same purpose for which the Eurobonds were initially issued. The foreign services were therefore not considered to be acquired for the purpose of making taxable supplies.
For a foreign service to fall outside the scope of “imported services” there must be a link between the services acquired and the making of taxable supplies. If the services are acquired partly for the purpose of making taxable supplies and partly for another purpose, then the services will only comprise “imported services” to the extent that they are acquired for a purpose other than making taxable supplies. Unlike the deduction of input tax, there is no prescribed method of apportionment to be applied to determine the extent to which an imported service is subject to VAT. It is also not a requirement that the recipient must obtain a ruling to approve an apportionment formula to be applied. The recipient must, however, be able to substantiate that the apportionment basis applied is reasonable.
The exemptions to imported services as contained in section 14(5) of the VAT Act should also be considered. Supplies that are subject to VAT at the standard rate under section 7(1)(a) are not also subject to VAT under section 7(1)(c) as imported services. A typical example is the supply of electronic services where the foreign supplier is required to register and levy VAT on such supplies in South Africa in terms of section 7(1)(a).
Services which would be exempt from VAT or zero rated if supplied in South Africa are also exempt from VAT on imported services. Accordingly, the supply of a loan by a foreign credit provider to a South African resident does not comprise an imported service. However, any fees charged by the foreign supplier will comprise consideration for imported services because such fees are not exempt from VAT if supplied in South Africa.
In the case of Metropolitan Life Ltd v CSARS 70 SATC 162 the taxpayer acquired business advice and computer services from foreign suppliers. The taxpayer argued that these services were physically rendered outside the Republic, and they qualified for the zero rate in terms of section 11(2)(k) and VAT is therefore not payable thereon in terms of section 14(5). The High Court held that the purpose of sections 7(1)(c) and 14(5) must be considered in the context of the VAT Act, and that the zero rating under section 11(2)(k) is not applicable to this kind of service. The services were held to be imported services because they were utilised or consumed in South Africa.
The supply of educational services by a foreign educational institution which is regulated by an educational authority in that country, is also exempt from the VAT payable under section 7(1)(c), and so is the rendering of services by foreign employees or office holders to a South Africa employer. Finally, no VAT is payable on any supply of a service by a foreign supplier with a value not exceeding R100.
The potential liability for VAT on imported services could be substantial, particularly for South African companies who embark on foreign expansion projects or the raising of foreign capital. The services acquired from foreign service providers should be carefully considered on a case-by-case basis to determine whether they comprise imported services, and if so to what extent.