Q189: We receive both single and instalment pre-payments for our direct exports – how does this impact our VAT position?

A189: For VAT purposes a ‘direct’ export is a zero-rated supply, arising because the vendor achieves three things.

Firstly, the vendor controls the supply chain. In layman’s terms this means that the vendor pays the freight to the carrier, instructing them to take the goods to a place outside of the Republic, which place may be a port, an airport, or an inland location. (Alternatively, a vendor may meet this criterion using their own transport.)

Secondly, the vendor must be paid by the purchaser in an Exchange Control compliant manner.
Then thirdly, the vendor must have the documents required to support their position. These documents are described in Interpretation Note 30(3).

But overarching these three issues is a time frame for performance, part of which is linked to the action of exporting and part of which is linked to the concept of supply.

Bear in mind that non-compliance results in a VAT liability. This manifests as the tax fraction, when roughly 13.05% of the tax invoice value becomes VAT, and thus accountable to SARS.

While this liability may be reversed once compliance is achieved, the gold medal for the vendor is to stay within the original framework of compliance and avoid the tax fraction obligation entirely.

“Supply” for VAT purposes is triggered by the vendor making a demand for payment (most commonly expressed by raising and presenting a Tax Invoice), or receiving any payment, whichever of the two comes first.

It is in this regard that prepayment needs to be managed, for if the early payment triggers supply then the VAT ‘clock’ for performance starts, and as this is potentially earlier than physical availability of the underlying contract goods, the vendor might become non-compliant simply by running out of time to physically export.

Under general conditions, the VAT time frame for an export requires the goods to be exported “…within 90 days from the earlier of the time an invoice* is issued by the vendor or the time any payment or consideration is received by the vendor.”

(*note that a ‘commercial invoice’ is not considered an invoice for VAT purposes.)

As noted, in the case of prepayments 90-days may be an insufficient period for the vendor to achieve the physical export.

In certain industries partial (“milestone”) payments may be received several months before manufacture, sometimes even predating the vendor’s procurement of the materials needed for manufacture. Unmanaged, this would leave the vendor with a VAT liability 90-days later – i.e., 13.05% of the received payment (the approximate tax fraction) would be deemed VAT, and accountable to SARS.

But the Interpretation Note provides exceptions to accommodate prepayment models, two of which speak directly to the question at hand.

The first exception is that where an advance payment is required as a condition of the contract, the underlying supply need only be exported “…within 30 days from the date(s) of export agreed upon in the contract…”.

For example, if the contract called for a prepayment in January for an export planned for July, then the payment may be transacted by the vendor at the zero-rate provided the goods were exported within 30-days from the last day of July (or earlier).

The vital issue is that the demand for a prepayment and the dates for performance must both be documented in the contract, noting that phrases such as “as soon as possible” or “on availability” would be dismissed as agreed export dates as they cannot be measured.

Importantly, for VAT purposes, contracts are given a broad definition and an email exchange would suffice – so the date of July (in my example) could move out, provided that the file contained a paper trail where this change is discussed and agreed as a modification to, or renegotiation of, the contract terms.

The second exception is in specific response to the needs of that sector of exporters who are involved in large scale fabrication, where milestone payments are an industry standard.

This exception hinges on the concept of “successively supplied” goods, which would apply to any supplies “… which are subject to a process of repair, improvement, erection, manufacture, assembly or alteration…” In these conditions, successive instalment payments may be transacted at the zero-rate provided that the supply is ultimately exported within 90-days “… from the date of completion of the said process.”

Again, to make use of this exception, the vendor would need to document the conditions and dates for the milestone payments and the anticipated date of completion of the process, by way of the contract terms.

Correctly documented then, prepayment in whole or in part should not present the vendor supplying a direct export at the zero-rate with a VAT liability.

However, should the vendor fail to meet the conditions of the Interpretation Note in this regard, the amount of the prepayment (or the tax invoice raised if a greater figure) would be deemed VAT-inclusive and the tax fraction would fall due.

As an approximate guide: if R100 is transacted at the zero-rate (where the standard rate is 15%), then on non-compliance, the R100 is deemed VAT-inclusive, thus representing a transaction of 115%. Hence, R13.05 (approx.) becomes the VAT portion.

Thus, the vendor who receives any form of prepayment takes a 13.05% risk should they fail to follow the simple requirement to properly record or document their negotiation.

The Export VAT regulations are complex and the foregoing should not be read as covering every eventuality.

The Devil is in the Detail.

If you wish to exorcise your demons – or merely exercise your mind – book on the next Exchange Control and VAT course scheduled for the 19th of October.

I’ll see you there…