SARS VAT Reference Guide for Foreign Donor Funded Projects

SARS VAT Reference Guide for Foreign Donor Funded Projects

• 14 April 2020
• Tax Administration
• SARS

1. Background

The South African government may enter into international donor funding agreements with foreign governments or other international entities in terms of which goods or services must be supplied for the benefit of people in South Africa. The international donor funding agreements, also commonly referred to as Official Development Assistance Agreements (ODAAs), are pursuant to section 231(3) of the Constitution of the Republic of South Africa Act 108 of 1996 (the Constitution) and the ODAA stipulate that such funding cannot be used to pay for any taxes imposed under South African Law. The project under which this agreement is facilitated is known as an FDFP.

In order to give effect to the requirement stipulating that such funding cannot be used to pay for any taxes imposed under South African Law, the South African VAT legislation was designed in such a way that –

• No VAT is levied on the international funding received; and
• South African VAT charged to the FDFP on the acquisition of goods or services or VAT paid by the FDFP on the importation of goods, for purposes of the project, may be deducted as input tax.

Recent legislative changes resulted in a significant change in the administration of FDFPs for VAT purposes. The main difference between the old and new legislation is with reference to the “person” who is required to register for South African VAT.

The purpose of this reference guide is to provide certainty to taxpayers on the VAT treatment of FDFPs implemented by an implementing agency. The guide is divided into five parts:

• Part I sets out the development of the South African VAT system with regard to FDFPs and introduces the concept of an FDFP together with the different persons involved.
• Part II provides guidance on the VAT registration requirements and procedures of FDFPs registered by SARS as vendors on or after 1 April 2020.
• Part III sets out the VAT consequences of any transactions entered into by an implementing agency for the purpose of an FDFP.
• Part IV deals with the various documentary and record keeping requirements set out in the VAT Act.
• Part V contains comprehensive examples illustrating the various VAT principles discussed in this guide.

PART I – INTRODUCTION TO A FOREIGN DONOR FUNDED PROJECT
 

2. Legislative history and development

The concept of FDFPs was first introduced formally in the VAT Act during 2006. Before this date, FDFPs were dealt with by way of special arrangements made by the Commissioner under section 72. In order to cater for the “non-payment of any taxes” clauses in international donor funding agreements, a channel for refunds was created within the VAT system. This was done by regarding the FDFP to be a person for VAT purposes and including the activities of that person (that is, the FDFP) in the definition of “enterprise”. The FDFP was deemed to make a taxable supply of services to the foreign donor in respect of the international funding received from the international donor, which was taxable at the rate of 0%. The VAT incurred on acquisitions made for purposes of the project was then claimable by way of the input tax provisions in VAT legislation.

The effect of the above was that the FDFP, being a “person”, was responsible to register for VAT and ensure that the project complies with all the requirements of the VAT Act. The challenge that ensued was the difficulty to identify the “person” who must correctly register for VAT purposes and that will qualify for the VAT relief (that is, taxable supplies at the zero rate and unlocking of all input tax).

In 2007, a clarification was made to the definition of an “FDFP” to clarify that the relief should only be applied to an international donor funding agreement entered into by the South African government under section 231(3) of the Constitution if the said agreement specifically contains clauses preventing the payment of taxes.

Legislative amendments made in the Taxation Laws Amendment Act 34 of 2019, made further changes to the legislative concept of an FDFP as follows:

• Firstly, an FDFP was linked to an ODAA, to be approved by the Minister of Finance for purposes of the definition of an “FDFP”, and a definition of the “implementing agency” was introduced. This amendment provided clarity as to the level or extent to which a project can qualify as an FDFP.
• Secondly, the registration regime of an FDFP was significantly changed. An FDFP is no longer included in the definition of a “person” for VAT purposes. Rather, the implementing agency of the FDFP, being a juristic person, is required to register as a vendor for VAT purposes. Each FDFP complying with the definition in section 1(1) is regarded as separate enterprises for VAT purposes and must, where necessary, register as a branch of the main VAT registration of the legal person appointed as the implementing agency. The legal person responsible for the FDFP complying with all the requirements of the VAT Act is therefore the implementing agency.

The new legislation is effective from 1 April 2020. However, various FDFPs were registered as vendors under the old FDFP VAT legislative framework. Due to the limited duration of an FDFP, it would be impractical to require all currently registered FDFPs to change their VAT registration to that of a branch of the implementing agency. For this reason, the new legislation only applies to VAT registration applications received by SARS on or after 1 April 2020. All FDFPs registered as VAT vendors under the old regime will continue under the said regime until the project has been finalised.

This means that, if an FDFP ought to have registered before 1 April 2020 but failed to do so, and only applies for VAT registration after 1 April 2020, the new registration rules will apply to the FDFP VAT registration, even though the date of registration may be backdated.

The following terminology is used in this document, in line with the policy construct of the new legislation, unless indicated otherwise:

• “Implementing agency” is the legal person that is contractually responsible for the operation, administration, implementation and management of the FDFP.
• “Main VAT registration” is the enterprise activities conducted by a vendor, which is also an implementing agency that does not relate to the operation, administration, implementation and management of the FDFP.
• “FDFP VAT branch” is the separate VAT registration in relation to FDFP activities conducted by the implementing agency, generally as a branch of the main VAT registration, and which excludes all enterprise activities of the implementing agency that is not in relation to the operation, administration, implementation and management of an FDFP.

3. Introduction to a foreign donor funded project

3.1 What is a foreign donor funded project?

An “FDFP” is specifically defined in the VAT Act to be a project complying with all of the following:

• The project must be established under an ODAA to supply goods or services to beneficiaries. It is important that the beneficiaries referred to in this definition are the people of South Africa.
• The government of South Africa must be a party to the ODAA.
• The ODAA under which the project was established was tabled in the National Assembly, as contemplated in section 231(3) of the Constitution.
• The ODAA agreement must stipulate that the funding cannot be used to pay for any taxes imposed under South African Law.
• The Minister of Finance must have approved the project to be an FDFP for VAT purposes (only applicable to FDFP VAT registrations on or after 1 April 2020).

Before 1 April 2020, the definition of an “FDFP” referred to an international donor funding agreement. In context, the reference to an international donor funding agreement was always intended to be an agreement facilitating ODAA funding. Practically and operationally, that is also how the definition of an “FDFP” was applied. The legislative amendments did not change the definition of an “FDFP” in this regard but merely gave effect to the original policy intent.

This article first appeared on sars.gov.za

Webinar Commentary

Access commentary and an in-depth technical summary on the Webinar-On-Demand presented by Prof Jackie Arendse here.

0 COMMENTS

LEAVE A COMMENT