The Draft Taxation Laws Amendment Bill of 2 June 2011 (“the Bill”) was published on 2 June 2011 for comment by 5 July 2011.
Goods sold in bond
Section 13(2) of the Value-Added Tax Act, Act 89 of 1991, (“the VAT Act”) states that for the purposes of the VAT Act, the value to be placed on the importation of goods into the Republic of South Africa (“SA”) shall be deemed to be:
- where such goods are entered or are required to be entered for home consumption in terms of the Customs and Excise Act, Act 91 of 1964, (“the Customs Act”) the value thereof for customs duty purposes (“the Customs Value” (“CV”)), plus any duty levied in terms of the Customs Act in respect of the importation of such goods, plus 10% of the CV; or
- where such goods have their origin in Botswana, Lesotho, Swaziland or Namibia and are imported from such a country, the amount of the value as contemplated in paragraph (a), except that such value shall not be increased by the factor of 10%.
The Bill proposes to insert section 13(2A), which provides:
“(2A) The value to be placed on the importation of goods into the Republic which have been imported and entered for storage in a licensed Customs and Excise storage warehouse but have not been entered for home consumption shall be deemed to be the greater of the value determined in terms of subsection (2)(a) or the value of acquisition determined under section 10(3) if those goods while stored in that storage warehouse are supplied to any person before being entered for home consumption.”
The South African Revenue Service’s (“SARS”) reason for the change is that if a buyer removes goods from a Customs and Excise storage warehouse or bond store after a transfer of ownership in the bond store, a risk to the fiscus exists that the buyer may utilise the CV as the Value-Added Tax (“VAT”) import value. According to SARS the buyer will often rely on this value because this value will be lower than the in bond selling price. SARS believes that reliance on this lower value is misplaced because the in bond sale is the best indicator of a true arm’s length value.
Currently, if goods are imported from outside the Southern African Customs Union (“SACU”) and stored in a bond store, it can be cleared from the bond store based on the CV thereof. If such goods are sold whilst still in the bond store and if the CV is known to the importer, i.e. the purchaser of the goods clearing it from the bond store for home consumption, the lower value of the CV can be declared for customs duty and import VAT purposes.
This is often used in cases of consignment stock where goods are dutiable. The supplier and exporter wishes to remain the owner of the goods stored in SA but seeks to defer the payment of the duty thereon and to avoid registering as a vendor for VAT purposes. Registering as a vendor for VAT purposes would be required if the exporter remains the owner of the goods at the time of importation.
If the seller and the buyer are related under these conditions, the CV might be known to the importer and the seller can sell the goods to the importer at the CV. Such CV will, however, be subject to scrutiny by SARS should SARS question whether the CV is an arm’s length value.
Where the buyer and the seller are not related and the CV is not known to the buyer the goods will have to be cleared from the bond store at the higher selling price between the parties, attracting a higher customs duty. Under these conditions it would therefore be preferable for the seller to clear the goods from the bond store at the CV, pay the customs duties and VAT on the lower value and sell the goods to the buyer at a higher price.
Duty free goods imported on a temporary basis
The Bill also proposes to insert section 13(2B) which states:
“(2B) Notwithstanding sub-section (2), the value to be placed on the importation of goods into the Republic where Note 5(a)(ii)(aa) of Item No. 470.03/00.00/02.00 of Schedule 1 to this Act is applicable shall be the value determined under section 10(3).”
SARS’ reason for this amendment is that the current VAT exemption for temporary imports is facing operational barriers in the case of duty-free imported goods. This operational difficulty exists because SARS effectively relies on the Customs and Excise Item Schedule to apply the VAT exemption. SARS uses this Schedule Item Number only to clear goods that are dutiable. However, the lack of coverage for duty-free goods causes operational difficulties for Customs officials who are controlling the exemption determination. To date, this issue has mainly impacted platinum and gold imported temporarily into SA for the purposes of beneficiation. The net result has been to undermine SA’s role as a regional beneficiation stakeholder.
This problem has been addressed before for other 470.00 Rebate Items (“RI”), that allow rebates for temporary imports, through the amended section 75A of the Customs Act. RI 470.03, however, has always been problematic since it requires an import permit from the International Trade Administration Commission (“ITAC”) and since ITAC does not issue RI 470.03 permits for duty free goods, duty free goods could not be imported under RI 470.03 and qualify for the VAT exemption.
RI 470.03 is amended to allow for a specific rebate code for duty free goods.
This change should be welcomed by the jewellery industry in SA.
Note 5 to RI 470.03 for duty free goods will also be inserted requiring that where the importer is contractually entitled to keep a portion of the goods manufactured, processed, finished, equipped or packed in lieu of payment for the operations carried out, that importer must
- also export those goods within the 12 month period allowed for by the RI, or
- process a bill of entry (“BOE”) for payment of the VAT on the goods retained and pass a voucher of correction amending the quantity and value of the original BOE.
New tax incentives for Industrial Development Zones
An additional tax allowance for industrial policy projects was introduced in 2008 to benefit all manufacturing projects. The purpose of the incentive is to support industrial development by attracting large industrial projects.
The incentive offers special tax benefits to greenfield and brownfield investments with enhanced emphasis on greenfield investments.
To receive this allowance, approval from an adjudication committee is required, which makes its determination based on pre-determined criteria. This is subject to projects approved by the committee being restricted to a total of R20 billion of deductions for all industrial projects.
The main focus of the incentive is to promote capital expenditure. Greenfield projects receive an additional 55% allowance and brownfield projects receive a further 35% additional allowance.
The allowances, however, are subject to certain limitations. A ceiling on the allowance of R900 or R550 million per project is imposed for greenfield projects and R500 or R350 million per project for brownfield projects (depending on whether the project is preferred or merely qualifying).
Government is seeking to renew its efforts to enhance the Industrial Development Zone (IDZ) regime to encourage industrial development within certain geographical areas. However, the additional allowance for industrial projects awards only one point for an IDZ location when the adjudicating committee reviews applications.
The additional allowance for greenfield projects located in IDZ’s will be increased to 100% (instead of the current 55%) and to 75% for brownfield projects (instead of the current 35%).
This change will be welcomed by IDZ Operators that are constantly looking for ways to make IDZ’s more attractive.