Q162: DDP and Import VAT

We import on DDP Incoterms. Can we refuse to pay the import VAT on this shipment? If my supplier pays the VAT, do they claim it back directly from SARS or from the VAT Refund Administrator (as with exports)?

A162: The Incoterms rules system for Commercial terms is very much like a rack of 11 ready-made suits: sometimes one might fit you perfectly, sometimes you may adjust one slightly, to fit you better, but sometimes none of the suits will fit at all. Unless you have SA Reserve Bank approval, it is unlikely that the event will prove to be a true “DDP” contract, and you will be trading without an applicable Incoterms rule.

In a proper DDP sale, the seller also acts as importer, or to be more precise the buyer does not. Accordingly, if you are being pressed to settle the import VAT it is because you were required to act as the importer of record. Thus, it isn’t a DDP contract in the first place.

Bear in mind that you are judged by what you do, rather than by what you say you will do. Should you act in a manner that contradicts the Incoterms rule, then Incoterms rules can no longer be said to apply to your agreement, and you stand the risk of losing what protection Incoterms rules provide.

The reason why the SARB must be engaged in a true DDP transaction is because, as you are not the importer of record, you have no capacity to make a payment to the non-resident seller. Only the importer of record has this opportunity.

If you do not act as importer but still need to make the non-resident payment, then you have the need to make an application to ‘pay against third party documents’ i.e., you need to apply for permission to make a payment to the non-resident seller for the supply even though you are not (apparently, from the import customs documents) importing anything into the Republic; another party (the ‘third party’) is.

Equally, had this been a DDP sale, the seller would undertake to incur the import taxes (such as VAT) as well as the import duty, if applicable. Again, strictly speaking, the term DDP really means that the buyer does not incur this tax, but whether the seller takes these costs and risks directly or indirectly (by using a local third party to act on their behalf) is of no concern to the buyer i.e., the seller might not be incurring these costs directly, but through an agent they have appointed, but however it is achieved, the buyer has no obligation or risk.

But, regardless of which party actually incurs the VAT, this value cannot be recovered from the VRA (The VAT Refund Administrator) as the VRA only functions to assist and process a non-resident’s export VAT recovery.

Import ‘recovery’ involves a registered vendor ‘neutralising’ the Import VAT by way of a monthly (or two-monthly) VAT return. Of course, the foreign supplier may register as a South African vendor, and thus recover incurred VAT in this manner too.

It is a fine point, but if the supplier uses an ‘agent’ to act as importer of record on their behalf, it is debateable if that agent may recover the incurred import VAT on their VAT return, as they are not actually making any taxable supply. This would concern your supplier and their local representative rather than you, and I am sure a definitive answer is available should they contact SARS, but much hinges on the meaning of the term ‘agent’, as defined in the Act, and that party’s contractual relationship with the non-resident.

But if you acted as importer of record, then even if your non-resident supplier was registered here as a vendor, they could not recover the VAT as only the vendor named on the customs entry may do so. Accordingly, if you stand your ground on this point and decline to incur the VAT (or if you incur it but then ‘recover’ it by short payment to your supplier of an equal amount), then the Import VAT amount will become a cost of sale, and a loss to your supplier.

If, however, you act as importer of record and incur the VAT, you – as a registered SA vendor – would be able to legitimately neutralise the same on your monthly VAT return, in the ordinary course of business. Your risk (and cost), is one of cash-flow, as the VAT will be disbursed several weeks in advance of the first opportunity you have to recover the VAT.

But this brings me back to my original point. If it is your intention that the seller pays all physical costs to get the goods to a named place in South Africa; to appoint the customs’ clearing agent in SA, and to incur all costs of clearance, except that you undertake to both act as importer and incur Import VAT – i.e., you allow the seller’s appointed clearing agent to use your importer’s code – then your contract agreement is not described by the Incoterms rule DDP, and you may wish to tread carefully if you intend using the Incoterms rules to get your point across. The contract in all probability is not definable under Incoterms. Not every ready-made suit will fit you.

And, when you go into the shop that sells the ready-made suits, and you find that none of the suits fit you, then you must contemplate going to a tailor and getting something specifically made. By this analogy, I mean that if there is no Incoterms rule to describe the contract, then the parties need to sit down and write out longhand which risks, costs and responsibilities each party is prepared to take. Writing out in longhand the conditions that otherwise Incoterms rules would have described in their shorthand abbreviation.

Incoterms are not laws; they are not compulsory, and they are clearly not all-embracing.

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