Q194: When may I sell my exports in a foreign currency?

A194: This seems like a simple question, with many sellers, I am sure, convinced that it is their choice when to price and sell their goods in a foreign currency, but there’s a bit more to it than that.

There are three external and overriding issues to consider before contemplating the seller’s risk appetite for a given currency.

These are South African Exchange Control, South African VAT and the destination country’s combined Exchange Control and Customs laws.

Like most countries, South Africa welcomes a wide range of foreign currencies, but the first prohibition for the seller is whether their currency of choice is actually one wanted by South Africa.

It is fine to generalise about the commonest three currencies in our market (USD, GBP, EUR), but there are around 180-currencies in use worldwide, and not all of them are desirable, from a national perspective.

Even if we broaden our view and allow for more currencies (maybe adding the CHF, JPY, AUD and CAD), the country you are selling to must first have access to it, and this is not always the case when trading on the continent.

On this point, note that the development of a settlement system within Africa using only African currencies is in an advanced stage; one of many dividends of the African Continental Free Trade Area (AfCFTA). There are around 42 currencies across the continent.

However, while this might ease export payments between countries lacking a holding in the common Big Three (or six, or ten) currencies, it does little to assist importers who mostly procure from beyond the continent, and in one of the dominant ‘popular’ currencies.

But to the question, there’s the first restriction: does the country want the currency (given that the forex does not belong to the seller but to the country)?

If you are offered a minority currency, and you are in doubt, be guided by your bankers before you strike the deal.

Assuming South Africa has no reservations about the transactional currency, the seller in their parallel role as the vendor then needs to look to the VAT Act.

The transactional currency does not determine the rate of VAT, rather the rate of VAT dictates the currency.

Broadly, the vendor’s tax invoice may be in any currency should the supply be at the zero-rate. It follows, that if the supply is at the standard rate, then the tax invoice must be in ZAR, as the vendor must account the VAT to SARS who only deal in ZAR.

A standard-rated tax invoice may still be presented in a foreign currency, and settled in that currency, but the body must contain an exchange rate converting and declaring the VAT portion in SA Rand.

The VAT amount accounted to SARS is the amount (in ZAR) the non-resident may recover from the VRA in terms of Export Regulation R.316 Part One. The Qualifying Purchaser cannot recover the forex equivalent, notwithstanding that they paid for the supply, and therefore the VAT portion, in forex.

The currency of the exporter’s commercial invoice, however, is determined by the Customs laws (via the Exchange Control laws) of the destination country.

In the example of an indirect export, supplied by the vendor at the standard rate (that gives rise to a ZAR denominated tax invoice), it is probable that the destination country’s Customs Authority will nevertheless not accept the exporter’s ZAR commercial invoice.

This of course leads to rate-of-exchange exposure (for either the seller or the buyer, depending on the payment conditions), with the vendor’s VAT liability being based on the ZAR tax invoice, but their settlement proceeds being based on the exchange rate applied to the currency of the commercial invoice.

A seller allowing credit runs the risk that the foreign currency received (when and if received) may have deteriorated against the ZAR, so that the vendor recovers less VAT than accounted to SARS.

This is a loss to the seller.

Of course, the Rand may have weakened, in which case there is the potential for a windfall profit, the seller recovering more VAT than the vendor accounted for.

In a direct export, supplied at the zero-rate, the vendor avoids this fluctuation risk. It is the vendor of an indirect export who is exposed if they choose to work in forex. A policy whereby any indirect export is always priced in ZAR would be a defence against this exposure.

The short answer to the question is that whenever you are transacting in a currency that Exchange Control allows, then you may price your exports in that currency. But the real question remains: when may you do this with the least risk?

The optimum way is to only work in foreign currencies when undertaking a direct export (a zero-rated supply), and when payment is secured, preferably having been prepaid so that exchange fluctuation is avoided too.

Alternatively, if the seller must offer credit, then forward cover would address if not wholly manage their exchange fluctuation exposure.

Again, you may work in any accepted currency even with a standard-rated supply, provided your VAT liability is expressed on the tax invoice in ZAR, but either you or your buyer will thereafter take the risk of exchange fluctuation as SARS will not.

It follows that the highest risk is to transact a standard-rated indirect-export in a foreign currency, offering credit terms and with no forward cover, and yet I see exactly this model, often.

As it is, the best way to price an indirect export is in ZAR, at both a tax and commercial invoice level. If that causes complications in the destination country with the commercial invoice currency and import Customs, then the seller is best advised to renegotiate the model to a direct export.

If this cannot be done; then the seller should at least secure prepayment. And if that cannot be done, then they must accept the vagaries of exchange rate fluctuation.

Trying to get around the challenge by zero-rating indirect exports is a possibility, but it requires a thorough understanding of Export Regulation R.316 Parts Two A & B and Part Three.

It is unlikely that the required comprehension of this complex Regulation will come to the merchant through the ether while they sleep, but fortunately I have a course on Exchange Control and VAT for exports on the 15th of February.

Mail me if you are interested in attending: [email protected] / [email protected]