A friend’s ten-year-old son made his first online purchase and was disgusted to see the VAT added at the end, and he was not mollified even when his parents tried to explain – “I have to pay tax?  But I’m just a kid!”.  Welcome to the real world kiddo and the long arm of the taxman!

Value Added Tax (“VAT”) is a consumption-based indirect tax added onto the supply of products or services at each of the different stages of production and distribution. For most governments, VAT is one of the largest contributors to revenue as it applies to everyone, including kids and of course the lower earners which is why VAT changes can be politically sensitive.

So VAT we understand and accept, but what on earth is reverse VAT and how does it work? Reverse charge VAT is a deviation from the usual VAT rules, where the supplier charges the VAT to the customer and requires that the customer accounts for the VAT on the supply. It normally applies to services imported by a resident of one country from a non-resident (therefore also referred to in certain jurisdictions as “VAT on imported services”), but reverse charge VAT can also apply in the case of the import of goods.

Unfortunately, reverse VAT is very commonly levied in Africa, and often in ways where it is well nigh impossible to claim back and thus can become a huge additional cost for business.  Let’s explore this in terms of the transaction steps.

Where reverse VAT applies, the customer pays the supplier the amount of the invoice excluding VAT, but when completing the VAT return, the customer must report both input and output VAT amounts. In theory, this would generally result in a nil effect on the cashflows where the customer is VAT registered and entitled to full credit. In many jurisdictions, however, reverse charge VAT only applies where the customer is not entitled to an input tax credit or a full credit, for example, where it is an exempt entity or private individual. In other words, an output tax declaration is only required by those customers who are not entitled to claim input VAT as the imported service is not used for taxable purposes. The purpose of including provisions in the relevant VAT legislation that effectively impose VAT on a supply by a non-resident to a resident is to ensure that the resident is in the same position they would have been in, had the supply been made by a locally registered VAT supplier.

Various African jurisdictions apply the reverse VAT mechanism, including Botswana, the Ivory Coast, Kenya, Senegal, Uganda, Nigeria, Ghana, and many more.

Let’s delve in a bit more detail into South Africa, which also imposes VAT on “imported services” to the extent that the recipient does not acquire the services for the purposes of making taxable supplies. South Africa has also recently published for public comment, provisions which will, for the first time, introduce a domestic reverse charge.

In October 2021, the South African National Treasury and the South African Revenue Service (“SARS”), published the Draft Regulations and Draft Explanatory Memorandum on Domestic Reverse Charge (“DRC”) on valuable metals. As in other jurisdictions, the intention of the DRC is to limit VAT fraud schemes on the supply of valuable metals. It is important to note that DRC will not be applicable to all valuable metals, it will only be applicable to goods that are supplied as gold-bearing bars or similar items. In terms of compliance, according to the draft regulations, the supplier and the customer would have additional requirements when submitting tax returns, issuing invoices, issuing debit and credit notes, and claiming input tax credits. The regulations apply where both the supplier and customer are VAT-registered vendors.  We will be following this with interest to see if it’s expanded over time.

Are you seeing reverse VAT charges, or VAT arising in a jurisdiction where you are not a resident where you cannot reclaim?  Contact us to discuss.

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How can we help?

How you structure your business is a critical question as you expand globally.  The right structure will protect your assets, improve your currency position, support your business operations, facilitate future business expansion and changes, and optimise your overall tax rate. Trying to unscramble a sub-optimal structure entered into in haste or without full consideration of relevant facts is complex and expensive, so it’s important to plan upfront.

Structuring an international business is both a science and an art – this is our specialist area of expertise. Regan van Rooy is an international tax and structuring advisory firm focussing on Africa. We have offices in South Africa, Mauritius and Ireland and we can help you with any international tax or structuring query.

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