Page 501 - Juta's Indirect Tax

IN 85 VaLue-added tax act: InterPretatIOn nOtes IN 85
4. Principles enunciated by the SCA in the Master Currency case
4.1 The application of section 7(1)(a) is not geographically limited
The appellant contended that the VAT Act does not apply to the supply of goods and services in duty free areas and that judicial notice should be taken of the clear and well-established fact that there are duty free areas at many airports where commercial transactions by non-resident passengers are free from government duties.
The SCA con rmed that section 7(1)(a) is applicable to all supplies made by vendors in the course or furtherance of their enterprises conducted within the Republic, as per its de nition in section 1(1), which includes duty free areas.
4.2 Exclusions in section 11(2)(l) must be considered independently
The appellant contended that the rendering of its services were zero-rated under section 11(2)(l)(ii)(aa) because they were supplied directly in connection with movable property that was being ‘exported’. It was submitted that qualifying under section 11(2)(l)(ii)(aa) was suf cient to secure a zero-rating, and that section 11(2)(l)(iii) cannot be applied independently to disqualify the zero-rating under section 11(2)(l)(ii).
This contention was rejected by the SCA on the basis that section 11(2)(l) de nes services to non-residents which are zero-rated, and subparagraphs (i) to (iii) are exceptions to such zero-rated services which are self-standing and can independently disqualify such zero-rating.
4.3 Services supplied in connection with movable property
The court considered the current construction of section 11(2)(l) and concluded that services supplied to non-resident persons who were present in the Republic at the time the services were rendered, cannot be zero-rated under the provisions of section 11(2)(l) except if the circumstance of section 11(2)(l)(ii)(bb) is applicable.
In other words, in order to qualify for the zero-rating under section 11(2)(l)(ii)(aa), the supply must pass the criteria set in section 11(2)(l)(iii), that is, neither the recipient of the services nor any other person should be in the Republic at the time the services are rendered.
This view con rms that although the three sub-paragraphs are self-standing and independent, the supply of a service to a non-resident must be tested against all the exclusions autonomously in order to qualify to be zero-rated. The analysis by the SCA was that subparagraph (ii) deals with services supplied directly in connection with movable property situated inside the Republic. Those services are standard-rated unless they fall under subparagraphs (aa) or (bb). The mere fact, however, that a service may fall under subparagraph (ii)(aa) does not preclude it from being excluded by subparagraph (iii). That is, the supply of the service to a non-resident would be subject to 14% VAT if the non-resident (or other person) is in the Republic at the time the service is rendered, irrespective of whether the movable goods in respect of which the service is rendered are subsequently exported. The wording of subparagraph (iii) con rms this by de nitively excluding subparagraph (ii)(bb).
In section 11(2)(l)(ii)(aa) the phrase used is ‘exported to the said person’. The appellant argued that ‘export’ means both the carrying out of something out of a country as well as the sending of commodities out of a country.
The court concluded that the most common meaning of ‘export’ is the sending of goods out of the country, and that to call the non-resident recipient the ‘exporter’ in the circumstances of this case unduly strains the meaning of the word. It noted that the property is rather ‘exported’ by the supplier to the non-resident, and that the use of the words ‘exported to the said person’ leaves no doubt that the ‘said person’, that is, the non-resident, is not the exporter. The court held that this interpretation was supported by the opening words of section 11(2)(l) before its amendment in 1998* which stipulated that the recipient of the services supplied under section 11(2)(l)(ii)(aa) had to be outside the Republic at the time the services were rendered.
To satisfy the phrase ‘exported to’, the supplier must –
• ensure delivery;
• consign; or
• deliver,
the movable property to the non-resident.†
5. Conclusion
Services supplied by a vendor to a non-resident will be zero-rated under section 11(2)(l) unless one or more of the exclusions listed in subparagraphs (i) to (iii) of that section apply.
Although the Master Currency case and this Note only deal with two of these exclusions, the supply of services to a non-resident must be tested against all three exclusions in order to qualify to be zero-rated.
The Master Currency case clari ed that the second exclusion is limited in its application to services supplied in relation to movable property that is exported to the non-resident [refer to section 11(2)(l)(ii)(aa)]. The last exclusion, however, which has a much wider application, will disqualify the supply from being zero-rated if the non-resident is in the Republic at the time the services are rendered other than in circumstances contemplated in section 11(2)(l)(ii)(bb).
Legal and Policy Division
SOUTH AFRICAN REVENUE SERVICE
* By virtue of section 89 of the Taxation Laws Amendment Act No. 30 of 1998
† For the purposes of Regulation No. R316 with regard to the application of paragraph (d) of the de nition of ‘ex- ported’ in section 1(1), the non-resident must also be a ‘qualifying purchaser’.
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