This article discusses the issue of whether services that are rendered to foreigners within South Africa are zero rated for VAT in terms of the Value Added Tax Act 89 of 1991 (the “VAT Act”).
XO Africa Safaris CC (“XO Africa”) was a registered VAT vendor who assembled tour packages to foreign tour operators who are in the business of supplying group and individual tours to foreigners in South Africa. XO Africa accepted that this involved a supply of services to the foreign tour operator, but claimed that it was a supply that was zero rated in terms of section 11(2)(l) of the VAT Act. The Commissioner of South African Revenue Services (“SARS”) contended that these services did not fall within section 11(2)(l), and rather that they were subject to the standard rate of VAT being 14% in terms of section 7(1) of the VAT Act.
Section 11(2)(1)
Section 11(2)(l) of the VAT Act reads as follows: “where a supply of services would be charged with tax at the rate referred to in section 7(1), such supply of services shall…be charged with tax at the rate of zero per cent where the services are supplied to a person who is not a resident of the Republic”.
Section 7(1)
Section 7(1) of the VAT Act states that “subject to the exemptions, exceptions, deductions and adjustments provided for in this Act, there shall be levied and paid for the benefit of the National Revenue Fund a tax to be known as the value-added tax (a) on the supply by any vendor of goods or services supplied by him on or after the commencement date in the course or furtherance of any enterprise carried on by him; (b) on the importation of any goods into the Republic by any person on or after the commencement date; and (c) on the supply of any imported services by any person on or after the commencement date, calculated at the rate of 14% on the value of the supply concerned or the importation, as the case may be”.
The audit
SARS performed an audit on XO Africa, and thereafter, provided XO Africa with a letter of audit findings, indicating that it intended to raise VAT at the standard rate on the supply of tour packages to foreign tour operators. SARS issued XO Africa with a letter of assessment in respect of VAT for the three tax periods prior to the audit and further, claimed penalties and interest from them, to which XO Africa objected. The objection was upheld with regard to penalties and interest, but failed in terms of the assessment of the VAT. XO Africa subsequently took the decision on appeal to the High Court (the “Court a quo”).
High Court findings
SARS argued that XO Africa contracted local suppliers to provide local services to it, and thereafter XO Africa supplied the local services to the foreign tour operators or its customers while in South Africa.
XO Africa argued that its services should be zero rated in terms of the VAT Act as it did not supply or render the local services directly to the foreign tour operator or its customers. XO Africa contended that the local suppliers rendered services to it by performing their contracts in favour of the tourists; that it rendered the service of organising the package to the foreign tour operators, and that the foreign tour operators had a contract with the foreign tourists to ensure that they would receive services from local suppliers while in South Africa. The argument was that since XO Africa did not have a direct relationship with the foreign tour operators or their customers in relation to the local services, these services were not directly supplied by XO Africa and the aforementioned contracts were not a local service, and thus attracted VAT at a rate of 0%.
The Court a quo dismissed the appeal and held that XO Africa directly supplied the tour packages to the foreign tour operators, and/or their customers, on behalf of the foreign tour operators and accordingly, that XO Africa was liable to pay VAT at the standard rate of 14%. XO Africa appealed the decision of the Court a quo to the Supreme Court of Appeal (the “SCA”).
The Supreme Court of Appeal findings
The SCA held that the statutory purpose of section 11(2)(l) of the VAT Act was to ensure that in the circumstance where services are rendered to a foreigner within South Africa, by a person or entity who is liable to pay VAT, and the benefit of the service is enjoyed in South Africa, those services would not enjoy the benefit of a 0% rating in terms of the VAT Act.
XO Africa’s argument was unsustainable, because if such argument were to be applied, it would mean that notwithstanding the fact that the services were consumed in South Africa and that XO Africa would have a claim for input VAT in relation thereto, the fiscus would forego the 14% output tax levied on the supply of local services by XO Africa.
Accordingly, it was held that VAT would be payable to SARS by XO Africa at the standard rate and the appeal was dismissed with costs.
Conclusion
Services that are rendered to a foreigner within South Africa by a person or entity liable to pay VAT do not enjoy the benefit of a 0% VAT rating.
