National Treasury is set to address a critical anomaly in the Value-Added Tax Act, No. 89 of 1991 (VAT Act). This anomaly has significant implications for multinational companies with foreign subsidiaries.

Consequently, the move highlights the government’s dedication to refining and enhancing South Africa’s tax laws. Importantly, it aims to create a more predictable and fair VAT environment for South African multinationals.

Anomalies and their implications

An interesting anomaly arises when a South African holding company renders services to its subsidiaries located in a foreign country.

Under the current VAT legislation, VAT is levied on services provided to South African residents. However, foreign companies generally do not pay VAT due to the exclusion in section 11(l) of the VAT Act.

Importantly, this exclusion does not apply to foreign subsidiaries managed from South Africa. This is because their place of effective management makes them South African residents for VAT purposes. As a result, these subsidiaries cannot benefit from the zero-rating provision in section 11(l) of the VAT Act. Consequently, companies must charge VAT on services provided to these subsidiaries. Unfortunately, these subsidiaries cannot claim an input tax deduction for the VAT paid.

This leads to VAT leakage and increased operational costs for these foreign subsidiaries. Ultimately, the higher costs make these subsidiaries less competitive in the global market.

Treasury’s stance and proposed VAT amendments

Recognising the inequity and economic inefficiency posed by this situation, treasury is taking steps to address the anomaly.

The proposed amendments to the VAT Act aim to address the issue for foreign subsidiaries managed from South Africa. Specifically, these changes seek to ensure that such subsidiaries can benefit from the zero-rating under section 11(l). As a result, services provided to these subsidiaries would be subject to VAT at a zero rate. This adjustment eliminates the unnecessary VAT burden imposed on these subsidiaries. Furthermore, it aligns with the original intent of the VAT legislation to promote fairness.

Positive outcomes for SA multinational corporations

This proposed change is a positive development for South African multinationals with foreign subsidiaries. By allowing these subsidiaries to benefit from the zero-rating of VAT, the amendment will reduce their operating costs and improve their global competitiveness.

Moreover, this initiative demonstrates the treasury’s commitment to creating a fairer and more efficient tax environment, reinforcing South Africa’s attractiveness as a base for multinational operations.

In conclusion

Treasury’s approach in addressing the VAT anomaly that affects foreign subsidiaries managed from South Africa is a welcome development.

By aligning the VAT Act with the realities of multinational operations, South Africa is making a significant tax improvement. This step aims to enhance the country’s tax regime while benefiting both businesses and the broader economy. Moreover, the proposed amendment reflects a broader trend of legislative reforms focused on fairness. It also seeks to reduce administrative burdens and support the growth of South African businesses globally.

Bronwin Richards | Tax Attorney | mail me |	Micaela Paschini | Tax Attorney | mail me |
| Tax Consulting SA |

Related FAQs: VAT foreign subsidiary anomaly

Q: What is the VAT foreign subsidiary anomaly?

A: The VAT foreign subsidiary anomaly refers to the discrepancies that can arise in the taxation of foreign subsidiaries under the South African value added tax (VAT) framework, particularly regarding tax compliance and the treatment of exports and invoices.

Q: How does the VAT Act address the issue of foreign subsidiaries?

A: The VAT Act outlines specific provisions that govern the taxation of foreign subsidiaries, including their VAT registration requirements and the conditions under which they may qualify for refunds or exemptions.

Q: What should a taxpayer do if they encounter a ruling issue with their foreign subsidiary?

A: If a taxpayer faces a ruling issue, they should consult with a tax practitioner to assess the situation and determine whether they need to amend their VAT declaration or seek further clarification from the tax administration.

Q: Can VAT be refunded for exports made by a foreign subsidiary?

A: Yes, VAT can be refunded for exports made by a foreign subsidiary, provided the necessary documentation, such as invoices and proof of export, is submitted in compliance with the Tax Administration Act.

Q: What is the alternative method for VAT registration of foreign subsidiaries?

A: The alternative method for VAT registration allows foreign subsidiaries to register under a simplified process that may differ from the standard turnover-based method, depending on their specific circumstances and compliance requirements.

Q: How does non-compliance affect a foreign subsidiary’s VAT liability?

A: Non-compliance with VAT regulations can lead to penalties, an increased tax liability, and issues with the tax administration, which may complicate the taxpayer’s ability to conduct business and claim refunds.

Q: What role does the South African Revenue Service (SARS) play in VAT issues for foreign subsidiaries?

A: SARS is responsible for the administration of VAT in South Africa, including the enforcement of compliance for foreign subsidiaries, processing of refunds and handling any disputes that may arise regarding VAT rulings.

Q: What is the importance of the VAT registration number for foreign subsidiaries?

A: The VAT registration number is essential for foreign subsidiaries as it allows them to conduct taxable transactions, issue valid invoices and claim VAT refunds, ensuring they remain compliant with the VAT Act.

Q: What methodologies can be used to resolve VAT disputes for foreign subsidiaries?

A: Various methodologies can be employed to resolve VAT disputes, including engaging with the commissioner for clarification, utilising alternative methods for compliance, or appealing decisions made by tax administration regarding the taxpayer’s obligations.

Q: How can foreign subsidiaries ensure they meet the eFiling requirements for VAT?

A: Foreign subsidiaries can ensure compliance with eFiling requirements by accurately completing their VAT declarations, maintaining proper records, and filing within the stipulated timelines set by the tax administration, such as the 21 business days for submission of requested information.