Client Question:
Under what conditions may we zero-rate an export sale to another SA company?
Answer:
In South Africa, vendors may in certain cases apply the zero-rate to an export sale made to another South African company. These zero-rate export South Africa rules allow supplies between local vendors to qualify for zero-rating under specific compulsory or elective models, depending on the circumstances and compliance requirements.
There are at least three (possibly four) models where an SA vendor may sell an export supply to another SA vendor at the zero-rate. Two of these are compulsory, in that the zero-rate must be applied, and the balance are elective, where the vendor may choose to zero-rate the supply at the vendor’s risk, (of non-compliance).
The first example is obvious, and that is when the supply is zero-rated by law. These supplies would be zero-rated if sold into the domestic market – products such as milk, for example.
As the supply is zero-rated when consumed locally, there is no risk of lost tax should a supply be transacted between two Vendors (A & B) but not leave the Republic, which is the principal tax risk with zero-rated sales of products that are standard-rated domestically (so-called “round-tripping”).
Note that the purchasing Vendor B would act as the exporter of record if the goods were subsequently exported. Whether they are or not is irrelevant for VAT but may have a commercial implication on the supplying Vendor A.
The second example is termed a “Special Supply”. This is a model when Vendor B (the local buyer) places an order with Vendor A (the local seller), but Vendor B requires Vendor A to deliver the supply physically to an address outside of the Republic (to Vendor B’s foreign-based client).
On the principle of “pay the freight, zero-rate”, A’s tax invoice to B is zero-rated. However, the model requires A to act as the exporter of record. This is an Exchange control risk for A, as Vendor B will pay for their purchase locally in resident Rand, yet Vendor A (as exporter) will be responsible to the SARB that foreign exchange is received into SA to acquit A’s UCR.
The mechanism here is that B will receive forex and (BoP) report the inflow as a third-party export payment against A’s UCR. Vendor A takes the risk that B fails to do this or fails to receive the foreign payment entirely. The model is therefore quite straightforward for VAT purposes, but it can be complicated (for Vendor A) from an Exchange Control position.
The third possibility for Vendor A to supply Vendor B an export supply at the zero-rate flows from a provision in Export Regulation R.316, although it only applies to air and sea freight indirect exports, and is physically limiting.
The section of Export Regulation R.316 is in Part Two (elective zero-rating of sea and air indirect exports) at 8.2 (e) –
(e) the vendor supplies movable goods to a qualifying purchaser or registered vendor, and the movable goods are
(i) situated at the designated harbour or airport;
(ii) delivered to either the port authority, master of the ship, a container operator, the pilot of an aircraft or are brought within the control area of the airport authority; and
(iii) destined to be exported from the Republic.
The key concession in the wording is that the model involves Vendor A supplying “a qualifying purchaser or registered vendor” (my emphasis.)
As this is an indirect export, Vendor A would be supplying Vendor B at the zero-rate even though A’s price excludes the international carriage.
Physically, the model looks like a local sale: Vendor A hands over to B at an address in the Republic, albeit within the port or airport control area, but at the zero-rate.
The execution of the model would require Vendor A to have control over the delivery of the goods to the port or airport.
I believe “control” in this context (to my reading) is Vendor A either physically delivering the supply on their own vehicle or appointing a third party to do so on their behalf, and at A’s risk and cost, to an exact place or point, as specified in (ii). (In VAT literature, this is referred to as “consigned or delivered” by Vendor A.)
The wording of the quoted clause isn’t precise, but in (i) above, the word ‘situated’ is past tense, which implies that Vendor A must have first physically placed the goods at a point where the service-providing parties named in (ii) are prepared and able to take further and absolute control.
A simple example might be Vendor A loading a full container, or producing a piece of break-bulk, and paying the inland transport or pre-carriage into the stacks or control area at the seaport. In this model, Vendor B buys from Vendor A, inclusive of this pre-carriage obligation, but the entire supply is at the zero-rate (if Vendor A elects to do so).
As Vendor B would act as exporter of record, Vendor A has no Exchange Control involvement and may receive a local payment without exposure to any hidden Exchange Control obligation.
(As an aside, given that this model alone specifically requires the Vendor to deliver into the port or airport, we can determine that the balance of Part Two A does not have this requirement. This perhaps clarifies the word ‘ensure’ used in the opening dialogue of Part Two A. “Ensuring” is not then the Vendor physically undertaking the delivery of the supply to the port or airport, but merely taking the risk that ‘someone’ – the Qualifying Purchaser included – does. This interpretation allows for the elective zero-rating of Incoterms EXW models, for example.)
Although the above is a narrow exception, the fourth possibility is even less clear.
Elsewhere in Export Regulation R.316 the expression “flash title” is used to describe yet another indirect export model that may be electively zero-rated.
While this assumes that Vendor A sells to a non-resident non-vendor ‘foreign’ Qualifying Purchaser, it allows the Qualifying Purchaser to immediately on-sell the supply to another party (‘title’ in the goods having ‘flashed’ from one party to another in a commercial moment.) As this final party is not described, it is possible that this might be Vendor B.
If so, there is no requirement that this transaction happen within the port or airport area. However, Vendor B would act as the exporter of record and not the Qualifying Purchaser or Vendor A.
As Vendor A would receive the non-resident payment from the Qualifying Purchaser who had flash-title, it is now Vendor B who is exposed, needing to ensure that A reports B’s UCR, etc.
One should never say never, but I have no direct experience of this fourth model happening in the real world, yet.
Source: Freight Training
