When goods are temporarily imported into South Africa for processing, repair, reconditioning or cleaning, and which are then subsequently exported, such goods qualify for an exemption from Value-Added Tax ("VAT"). The exemption is specifically provided for in section 13(3) of the Value-Added Tax Act, No 89 of 1991 ("the VAT Act). The goods which qualify for the VAT exemption are listed in Schedule 1 to the VAT Act.
Although the VAT Act specifically exempts from VAT the importation of goods for processing in South Africa for export, the exemption is rarely applied in practice. This is because the provisions of the Customs and Excise Act, No 91 of 1964 ("the Customs Act") apply in respect of the importation of goods into South Africa as if the Customs Act is enacted in the VAT Act (section 13(6) of the VAT Act refers).
In terms of the SARS Customs procedures, the customs officials need to carry out a physical inspection of the goods when they are entered as temporary imports, and when the goods are exported, a physical inspection is carried out again to ensure that the goods that are exported are the same goods that were imported. If the customs officials cannot satisfy themselves that it is the same goods that are imported and exported, then VAT and duty (if applicable) becomes payable, or the importer simply forfeits the security payment that is required when the goods are cleared as temporary imports.
In many instances the goods exported are totally different from the goods being imported. For example, tons of material can be imported for refining or processing in South Africa and the processed product which is exported is totally different from the product imported, in quantity or quality. The same applies, for example, to rough diamonds imported for cutting and polishing in South Africa and the polished diamonds are then exported. In these circumstances SARS customs does not allow the goods to be imported exempt from VAT as they state that they cannot identify the goods exported by way of a physical inspection as being the same goods that were imported. If the goods are imported exempt from VAT, the importer will be held liable for the VAT when he cannot prove to the satisfaction of the customs officials that the goods have been exported.
The result of these customs procedures is that even though the VAT Act specifically provides for the exemption from VAT when the goods are imported for processing in South Africa, the importer still ends up paying the VAT. The South African mining and manufacturing concerns that are affected by these procedures find it very difficult to compete with foreign competitors in China or India, for example, who are not subjected to similar procedures.
To make matters worse, SARS has expressed the view that where a South African entity imports the goods owned by a foreign entity for processing and export to the foreign entity, the South African entity is not entitled to claim the import VAT paid in instances where the exemption does not apply, because the South African entity does not become the legal owner of the goods. SARS bases its view on the judgment handed down in a New Zealand case, Case T35 (1997) 18 NZTC 8,235. If the SARS view is correct, then these South African entities are simply not able to carry out the processing for a foreign entity at all, because a non-recoverable cost of 14% of the value of the goods imported is substantially more than the processing fee.
As if this is not enough, SARS has also indicated that where the foreign entity pays the South African entity in kind as opposed to a cash processing fee, for example, where the South African entity retains a portion of the processed product as its fee, and these transactions are entered into on a regular basis, then the foreign entity will be considered to carry on an enterprise in South Africa, and will be required to register for VAT. In these circumstances it is unlikely that a foreign entity will transact with a South African entity for the processing of its goods and they will simply take their business elsewhere, especially now that it has become a near impossibility to register a foreign entity for VAT in South Africa.
It is good to see that the pleas of the South African mining and manufacturing industries did not fall on deaf ears. The Minister of Finance has announced in his Budget Review on 23 February 2011 that the operational barriers which the VAT exemption of temporary imports encounters have been recognized. The Minister stated that technical adjustments will be made to eliminate conflicts between the VAT and customs rules with regard to temporary imports. This announcement is welcomed as it can only assist to make South African entities more competitive in an international market, which is essential when South Africa desperately needs to create much needed jobs.
We can only hope that SARS will also reconsider their view regarding the requirement of a foreign entity to register for VAT in South Africa when it pays the processing fee in kind as opposed to paying it in cash.