Foreign companies often need to send employees to South Africa for execution of local contracts or to assist South African group companies for various reasons. While South African income tax considerations, permanent establishment concerns and double tax treaty provisions are often considered in detail, the South African VAT (or ‘goods and services tax’ as it is known in many other jurisdictions) consequences are hardly ever taken into account.
South Africa, unlike many other countries in the world, does not have specific place of supply rules. Rather, South African VAT is collected through the vendor registration method or the reverse charge mechanism for imported goods or services. In this article we will focus on the vendor registration method and the possible registration obligation for foreign companies consequent upon employees operating in South Africa.
The vendor registration method:
The vendor registration method requires of any person (whether local or foreign, resident or not resident) to register for VAT in South Africa if that person carries on an enterprise for South African VAT purposes with past or expected sales exceeding ZAR 1 000 000. Such registration gives rise to regular reporting obligations to the South African Revenue Service (SARS) and failure to report where an obligation to do so exists gives rise to penalties and criminal sanctions.
An enterprise will be carried on for South African VAT purposes if a person conducts any activity in South Africa on a regular or continuous basis and in the course of furtherance of that local activity sells either goods or services. What exactly constitute a continuous or regular activity in South Africa for South African VAT purposes is not entirely clear under South African law and each case needs to be considered on its own facts. SARS have, however, expressed a formal view that short bi-monthly visits to South Africa by more than one employee of a foreign company is sufficient to trigger an obligation on a specific foreign company under consideration to register for South African VAT and report to SARS. Similarly, SARS have expressed a view that short training sessions provided in South Africa on software products of a specific foreign company under consideration by employees of that foreign company is likely to trigger a registration obligation under the vendor registration method and concomitant reporting obligations.
Foreign companies sending employees to South Africa should take care to consider South African VAT implications and are advised to seek advice in respect of same. South African VAT implications are not driven by the existence or otherwise of a permanent establishment in South Africa or any South African income tax obligation. In fact, it often occurs that a foreign company has no South African income tax obligation but indeed has a South African VAT obligation.