Client Question:
I am about to export copy paper from Durban to Kenya via a local shipping company for the first time, using the CIF Incoterm. I’ll be purchasing the goods locally and paying VAT on them. Normally, I would charge the buyer VAT and show the input/output VAT to SARS, but in this case, I cannot. How do I avoid a loss on the VAT?
Answer:
VAT vendors can claim all the input VAT back on all local purchases, regardless of whether the goods purchased are intended for home use or export. To understand the VAT implications upon export, let us explain the difference between direct and indirect exports.
Direct Exports: This is when a South African supplier arranges for the delivery of goods to a buyer at a foreign destination. In this case, the supplier can apply a zero VAT rate, which means no VAT is charged on the goods.
Take note that for the vendor to apply the zero rate to the exported goods, the vendor must:
- Export the goods via a designated commercial port within the prescribed period; and
- Acquire and keep the required documentation.
Indirect Exports: The foreign buyer arranges for the collection and transportation of the goods. The supplier charges standard VAT (15%) on the sale. However, the buyer can claim a VAT refund from the South African Revenue Service (SARS) upon exporting the goods.
It’s crucial to distinguish between these two scenarios to determine the correct VAT treatment. Suppliers should carefully consider their role in the export process to decide whether to apply a zero or standard VAT rate.
In this scenario, the paper is a direct export, and although the supplier initially pays VAT on purchasing the paper locally, they can reclaim this input VAT. Essentially, there’s no VAT burden on the export transaction. However, on their VAT report, there will be no output VAT that can be linked to the original purchase and the input VAT that was paid. This may result in a VAT deficit at the end of the VAT period which may trigger a VAT audit from SARS. If this happens then the supplier may need to supply SARS with their shipping documentation and commercial invoices to prove that the goods left the country.
Alternatively, for indirect exports, VAT is charged on the commercial invoice as it would be for a local transaction. The output VAT for the sale thus matches the input VAT for the purchase.
Key takeaway: While input VAT can be claimed on all purchases by VAT vendors, adding output VAT to an invoice depends on whether it was a direct or indirect export. Direct exports may result in a scenario where input VAT exceeds output VAT resulting in a VAT deficit on the VAT report, which may trigger a SARS audit. Proper record-keeping of documentation and commercial invoices is essential for submissions to SARS.
Want to know more about VAT on exports? Read our blog post Export VAT: A quick guide.
