Client Question:

How should we treat credit terms on our export shipments – are there limits?

Answer:

A165: In all matters of trade to and from the Republic, you need to consider Exchange Control first, but with export credit, there is a secondary consequence in terms of VAT that also needs to be managed.

For any seller, the optimum position is where the buyer pays upfront. Provided that the early settlement is Exchange Control compliant, a full prepayment would remove all Exchange Control risk and, if managed correctly, any VAT exposure.

However it is often the case that the seller is requested or required to offer a credit period. For Exchange Control purposes a credit period runs from the ‘date of shipment’. This is the first key point. When calculating a credit period, it is misleading to use the seller’s domestic accounting practice. Export credit is not calculated ‘from invoice’ or ‘from statement’ but is linked to the date of the export event: “shipment”.

The Currency and Exchanges Manual for Business entities at 7 states –

“7.1 Business entities exporting goods to countries outside South Africa must comply with the following conditions:
(a) sell goods exported within a reasonable time, but no later than six months from the date of shipment;
(b) receive the full foreign currency proceeds not later than six months from the date of shipment;”

Note that 7.1 (a) uses the word ‘sell’, being a future possibility. This allows for goods to be exported without a firm sale underpinning the event – such as might be the case with certain commodities and agricultural produce. But, regardless of this tolerance, 7.1. (b) requires full payment within 6 months of ‘shipment’. This period is commonly read as 180 days. Note that the SARB uses the customs UCR system to match each export entry with its corresponding payment.

For customs purposes, goods are considered exported –
Seafreight: The time goods are delivered to the Port Authority / Depot Operator / Master of the Ship / Container Operator,
Airfreight: The time goods are delivered to the Pilot of the aircraft concerned; or brought into the control area,
Railfreight: The time goods are delivered to the Railway authority,
Roadfreight: The time goods are loaded onto the vehicle (intended to take the cargo over the border).

A date six months from the applicable shipment trigger becomes the maximum credit period, and the Currency and Exchanges Manual for Business provides guidance on the resident’s responsibilities in the event of a complete or partial default, actual or anticipated.

To offer credit beyond the six month period the resident must refer to their bankers, who in turn may apply to the SARB for specific permission. As the requirement is for the “…full foreign currency proceeds…” residents making use of credit insurance, where claims are ZAR denominated, should first refer to their bank if they intend to lodge a claim against a non-resident default.

For VAT purposes, the risk of exposure only arises in zero-rated supplies, but, even then, if the resident’s credit agreement is Exchange Control compliant and correctly documented, the Vendor’s risk is managed.

A VAT-compliant set of documents includes ‘proof of payment’, and while there are adequate concessions for pre-payment and milestone payment models, for general conditions the starting point is that a zero-rated supply sold on credit must be paid in full within 90 days of export. Again, reference must be made to the Customs’ concept of export to determine this trigger.

However, if the vendor has offered and documented a credit period greater than this, but not greater than the Exchange Control period of six months, the 90 days (only in respect of securing the document evidencing proof of payment) is automatically extended to match. Similarly, if the period of 6 months has been exceeded, but with bank or SARB approval, then the 90 days is extended to match that documented concession, and so on.

The vendor is only exposed should they not document the offer of a credit period beyond 90 days from export, and/or not follow the correct Exchange Control procedure for extended periods. In either case, the zero-rated supply is deemed VAT-inclusive and the tax fraction (roughly 13.05% of the invoice value) becomes due to SARS, pending a reverse adjustment as and if the payment is received at a future point. Interest and penalties may also be applied, case by case.

In summary: the export credit period is limited to 6 months (commonly read as 180 days) from export. Granting a period greater than this will always require prior bank approval. Defaults must be brought to the bank’s attention within 14 days of the apparent default.

For credit offered on zero-rated supplies, VAT exposure is contained provided the Exchange Control regulations governing payment are adhered to. In the case of default, and the event of a write-off being approved by the SARB, the vendor’s tax invoice may be credited. As a general proposition, crediting the tax invoice before this approval is an offense.

Although there is no VAT exposure in a standard-rated supply, this is true only if the VAT is correctly accounted to SARS when first due. The caution here is that a default by the purchaser does not remove the obligation that the vendor has to account to SARS. Accordingly, the vendor offering credit on standard-rated supplies accepts a substantial risk.