Zero rating – goods delivered by a cartage contractor

In order to provide the necessary legislative amendments required to implement the tax proposals that were announced in the 2015 National Budget on 25 February 2015, the National Treasury published the Draft Taxation Laws Amendment Bill (TLAB), 2015, on 22 July 2015 for public comment.

One of the proposed amendments relates to the zero rating of movable goods physically delivered by a cartage contractor, in terms of a sale or instalment credit agreement, to a customs controlled area enterprise or an Industrial Development Zone (IDZ) operator in a customs controlled area.

By way of background, the South African value-added tax (VAT) system is destination based which means that only the consumption of goods and services in South Africa is taxed. VAT is therefore levied at the standard rate of 14%, on the supply of goods and services in South Africa as well as on the importation of goods into South Africa unless an exemption or exception applies.

The primary mechanism to ensure that only local consumption is taxed in South Africa is through the zero rating (0%) of certain exported goods and services. In other words, where goods or services are exported from South Africa, the goods will be consumed outside of South Africa and accordingly, the supply of such goods or services should not attract VAT in South Africa.

The main consideration in respect of zero rating under South African VAT law is the application of s11(1)(a) of the Value-Added Tax Act, No 89 of 1991 (VAT Act). In essence, s11(1)(a) of the VAT Act provides for the zero rating of the supply of goods, where the goods are exported from a place in South Africa to a place in an export country.

The term "exported" is defined in s1 of the VAT Act and includes, among others:

• goods consigned or delivered by the vendor to the recipient at an address in an export country as evidenced by documentary proof acceptable to the Commissioner for the South African Revenue Service (direct export); or
• goods removed from South Africa by the recipient or the recipient's agent for conveyance to an export country in accordance with any regulation made by the Minister of Finance (indirect export).

Section 11(1)(m) of the VAT Act deals with the zero rating of the supply of movable goods, in terms of a sale or instalment credit agreement, to a customs controlled area enterprise or an IDZ operator in a customs controlled area being delivered by a registered cartage contractor. Currently s11(1)(m)(ii) provides that the movable goods must be delivered by a registered cartage contractor, whose "main activity" is transporting goods and who is engaged by the supplier to deliver the goods and that supplier is liable for the full cost relating to that delivery. The South African Revenue Service (SARS) defines a cartage contractor in Interpretation Note 30 (Issue 3) of 5 May 2014 (IN 30) as

"a person whose 'activities include' the transportation of goods, and includes couriers and freight forwarders".

Having regard to the above, the term "cartage contractor", as defined in IN 30, has a wider application than the VAT Act’s current requirement pertaining to zero rating. IN 30 requires that in order for the transaction to be zero rated, the cartage contractor’s "activities must include" the transportation of goods, whereas the VAT Act requires that the transaction will only be zero rated if the "main activity" of the cartage contractor is the transportation of movable goods.

In order to align the VAT Act with IN 30, the TLAB proposes that the words "main activity" in s11(1)(m)(ii) of the VAT Act be replaced with "activities include" (as defined in IN 30) to allow for the zero rating of goods physically delivered by a registered cartage contractor whose activities include that of transporting of goods.

The proposed amendment will seemingly relax the adherence to the strict requirements imposed by the VAT Act pertaining to the zero rating of the supply of movable goods where such goods are physically delivered by a cartage contractor to an offshore entity in a customs controlled area. This, in turn, will assist vendors in avoiding the pitfalls associated with the aforementioned transactions.

The proposed amendments will come into operation on 1 April 2016. Public comments on the proposed amendments are due by close of business on 24 August 2015.