Trump’s invisible impact – part 2

In the previous article we examined the broad framework within which toll manufacturing operates in South Africa. This article deals with some of the practical implications often overlooked.

Introduction

In the previous article we examined the rules governing goods imported for toll manufacturing in South Africa.

This article examines some of the practical implications and challenges faced by suppliers of toll manufacturing services.

Impact of markets for products

In practice manufacturers in South Africa may manufacture goods for non-residents in terms of a toll manufacturing arrangement as well as goods for the local market.

If the raw materials imported are partially intended for toll manufacture and partially for the manufacture of goods for the local market, the extent of the materials to be used for toll manufacture must be separately cleared under Rebate Item 470.03 and the balance must be cleared as normal import of goods subject to VAT and duty.

But not all is lost …

Where the extent of the use for toll manufacture cannot be accurately quantified at the time of importation, a procedure exists for a subsequent voucher of correction to be processed to bring the VAT and duty to account.

The toll manufacturer retains a portion of the proceeds as compensation

Arrangements in practice may allow toll manufacturers to retain a portion of the manufactured product as compensation in lieu of cash compensation for the toll manufacturing services supplied.

Under these circumstances the portion of the manufactured product retained must be declared to SARS with a voucher of correction and the VAT and duty must be paid on the importation of the original raw materials.

Where a goods-for-services arrangement applies and the toll manufacturing for a specific non-resident client occurs regularly and continuously (i.e. not once-off arrangements), SARS may require the non-resident to register as a VAT vendor in South Africa as the supply of the goods will take place in South Africa after it has been manufactured. In practice this is something which is almost always overlooked.

Exchange of finished goods for raw materials

In practice manufacturers may manufacture goods in terms of a toll manufacture arrangement with a third party and may also manufacture the same goods separately for the local or other markets.

Where existing stock manufactured from raw materials other than raw materials acquired under Rebate Item 470.03 (normal local manufacturing) is available, the existing stock is sometimes supplied to the non-resident as a matter of commercial expediency.

The above commercial arrangement, whether or not it makes commercial sense, is a direct contravention of the rules governing Rebate Item 470.03 which requires that the goods manufactured must be manufactured from the raw materials imported under rebate. The subsequent export of the final product to the non-resident must also state that the goods have been manufactured from the raw materials imported.

Being a contravention of the rules, the original import will be deemed to have been affected other than under the rebate item and VAT and duty will become payable on the date that the original import was done. This exposes the toll manufacturer to the duties, VAT and potential penalties on the non-or late payment of the relevant amounts.

Other arrangements

In practice, raw materials may partially be processed in South Africa, and thereafter exported to a non-resident toll manufacturer that manufactures the final product. The final product is then re-imported into South Africa for packing and consigning to the client.

From a 470.03 perspective the export of the semi-manufactured goods represents the end of the 470.03 arrangement and must be declared as having been exported.

If the final product is re-imported into South Africa, it could potentially qualify for import under Rebate Item 470.03 (being the packing of goods for export) provided that a new ITAC import certificate and a new application is made for 470.03. The goods cannot be imported as being covered by the original import under Rebate Item 470.03.

Summary

Any manufacturer that enters into toll manufacturing arrangements with non-residents, should diligently ensure that the requirements of Rebate Item 470.03 are complied with.

If not, the South African toll manufacturer will be held liable for all VAT and duty unpaid, as well as potential penalties and interest. This applies irrespective of whether or not the toll manufacturer is declared as the import of record.