Proposed amendments to VAT legislation: Potential impact on cross-border leases of certain assets used in SA
In terms of the Value-Added Tax Act No. 89 of 1991 ("the VAT Act") a person is required to register for value added-tax ("VAT") if, broadly speaking:
- It carries on an "enterprise"; and
- The total value of its taxable supplies exceeds, or is expected to exceed, R1 million in a 12-month period.
"Enterprise" is defined in section 1 of the VAT Act to mean any activity which is carried on continuously or regularly by any person in, or partly in, South Africa, and in the course or furtherance of which of which goods or services are supplied to any other person for a consideration – whether or not for profit.
The definition of “enterprise” may give rise to uncertainty in relation to the VAT registration requirements where foreign-owned ships, aircraft or other equipment are leased for use in South Africa. In particular, the foreign lessor may have no physical presence in South Africa (other than as respects the leased goods), and the lessee may be obliged in terms of the lease agreement to import the goods into South Africa. In such instances, it is unclear whether the foreign lessor is conducting an “enterprise” in South Africa.
Historically, the Commissioner addressed the above uncertainty by issuing VAT rulings to foreign lessors indicating that they are not required to register as vendors, but confirming that the South African lessee is required to declare and pay VAT on the importation of goods, the value of which was determined with reference to the term of the lease agreement. Due to recent legislative amendments, however, these VAT rulings will no longer be valid after 31 December 2021.
Accordingly, the Draft Taxation Laws Amendment Bill, 2020 ("DTLAB, 2020") proposes for the VAT Act to be amended with effect from 1 April 2021 to address the above uncertainty on a more permanent basis. As such, it is proposed for the definition of "enterprise" in section 1(1) of the VAT Act to be amended so as to exclude such a foreign lessor from the requirement to register for VAT in South Africa in circumstances where the lessee imports the goods for use in or partly in South Africa. The lessee would, however, be compelled to declare VAT on the importation of the goods.
Please note: The information as contained in this article is based on proposals as contained in the DTLAB, 2020. It should be noted that submissions have been made to National Treasury in relation to the above-mentioned proposed amendments to VAT legislation, further to which we understand these proposals may be reconsidered so as to address unintended consequences which it may otherwise give rise to.
Author: Alexa Muller, Tax Specialist, PKF Cape Town
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