Zero-rated indirect exports – When should I?

South African suppliers are often requested (more often bullied) to apply the zero-rate of VAT to supplies made to non-residents where the non-resident purchaser takes possession of the goods in South Africa.

This article deals with the circumstances under which a South African supplier may supply goods at the zero-rate of VAT to non-residents and touches on the pitfalls and risks assumed by the South African supplier.

Introduction 

Today business is tough and margins under pressure. This means that customers often hold most of the negotiation cards in their hands. A supplier basically has to do what it has to do to clinch a deal. This is why suppliers are often coerced into supplying goods at the zero-rate of VAT because “the other supplier around the corner applies the zero-rate”.  

Does the above sound familiar? Then read on …

Direct versus indirect exports 

The distinction between direct and indirect export is critical as direct export must be supplied at the zero rate of VAT while in the case of indirect exports the supplier has the option to apply the zero rate under certain circumstances.

Direct export occur where the supplier either physically delivers the goods outside South Africa or arranges for the goods to be delivered outside South Africa by the supplier’s cartage contractor. Supplies falling into this category must be supplied at the zero rate of VAT. The supplier has no option to standard rate the supplies. 

Nice and straight forward. No uncertainty here. But then come indirect exports …

Indirect exports occur where ownership and possession of the goods pass in South Africa and the purchaser removes the goods from South Africa. Indirect exports may be made at the zero rate of VAT under certain circumstances.

When may an indirect export be zero-rated?

As a point of departure an indirect export may only be zero-rated if the supply is made to a specific category of person referred as “qualifying purchasers”. The most common categories of qualifying purchasers are foreign enterprises, persons who are not residents of South Africa and foreign tourists. 

If you can tick the box that the supply is made to a qualifying purchaser, the next box that needs to be ticked is the manner in which the goods will be exported, i.e. by sea or air, or by road or rail.

Exports by sea or air

Terms and conditions apply … 

The qualifying purchaser may take possession of the goods at the South African supplier’s premises or factory. 

The qualifying purchaser must provide the South African supplier with proof that the goods have been placed under Customs Control at the relevant airport or harbour and must provide the South African supplier with all export documentation.

A common example of indirect exports falling into this category is goods supplied on a Free on Board (South African Harbour or Airport) (FOB) basis.

If the goods are exported by sea or air, the qualifying purchaser that exports the goods needs not be registered as an exporter with Customs and Excise in South Africa. 

Exports by road and rail

This is an area where export mischief (technically referred to as round tripping) is most likely to occur. No wonder that various special rules apply before goods may be supplied at the zero-rate of VAT where indirect exports are done by road or rail.

Essentially goods can only be exported by road or rail at the zero rate of VAT if the qualifying purchaser appoints a South African agent that takes possession of the goods in South Africa and exports the goods from South Africa. The agent must be registered with Customs and Excise as a transporter of goods in bond.

Furthermore, the qualifying purchaser must be registered in South Africa as an exporter with Customs and Excise before the goods may be supplied to the qualifying purchaser at the zero rate of VAT.

And it does not end there …

Very strict and detailed documentary retention requirements are contained in the Regulation governing indirect exports. In practice this effectively limits the circumstances under which a supplier would opt to apply the zero rate of VAT to supplies made where formal business relationships and arrangements exist. 

The downside to zero-rating indirect exports

The potential downside is very real and potentially economically devastating. 

If the relevant documentation is not received within a prescribed period, the supply is deemed to have been made at the standard rate of VAT and the supplier must pay the VAT to SARS. As the supplier has already lost control of the goods, it is unlikely in practice that the supplier would be in a position to recover the VAT from the qualifying purchaser.

In short, the supplier’s margin has just been eroded by the VAT payable to SARS!

When should indirect exports be zero-rated in practice?

In an ideal world indirect exports should only be made where an existing business relationship exists and where the supplier has been indemnified against potential VAT that may become payable in the future.

What if the supplier applies the standard rate of VAT?

Where the supplier supplies the goods to a qualifying purchaser at the standard rate of VAT, the qualifying purchaser will be entitled to recover the VAT through the VAT Refund Administrator (“VRA”) mechanism. The VAT would therefore not become an irrecoverable cost to the purchaser if the purchaser subsequently exports the goods and claims the VAT back through the VRA.

Summary

The above is a high level overview of the relevant circumstances where indirect exports may be made at the zero rate of VAT. In practice care should be taken when entering into these transactions as it is often fraught with danger. 

Sometimes it’s better to let the deal go than harming your business! Not always an easy decision in the real world though.