SARS has issued a new version of Interpretation Note 31. Issue 5 replaces Issue 4, which was issued in 2016. The note sets out the documentation SARS accepts as proof that a zero-rating applies. This article discusses some critical aspects of zero-rating and changes to the interpretation note.

Zero-rating risk

In my experience, taxpayers and their advisors often underestimate zero-ratings. The cost of getting it wrong is high. Most of the zero-rating questions and disputes that accountants and attorneys bring to me involve a supply the client has treated the same way for years. That recurrence builds the substantial exposure. 

The law

Section 7 of the Value-Added Tax Act 89 of 1991 (the VAT Act) requires a vendor to charge output tax at 15% on goods or services supplied in the course of an enterprise. Zero-rating and the section 12 exemptions are the exceptions. 

Section 11(1) provides the zero-ratings for goods, while section 11(2) provides them for services. Vendors often apply these provisions by applying the zero-rating based on what they understand the underlying principle is. These provisions contain detailed requirements that must be satisfied for the zero-rating to apply. It is, therefore, necessary to ensure that one considers the wording thoroughly, and supplement that by understanding the context and purpose of the provision.

The Tax Administration Act 28 of 2011 places the burden of proving that a supply is not taxable at 15% on the taxpayer. Section 11(3) of the VAT Act adds to that by requiring that a vendor applying the zero rate must obtain and retain documentary proof of its entitlement, in a form acceptable to the Commissioner. 

Interpretation Note 31

Interpretation Note 31 lists the documents SARS accepts. It uses two tables, one for goods and one for services, matching sections 11(1) and 11(2). Each subparagraph has its own item, and each item lists the documents needed to support that zero-rating. Where a binding general ruling covers the transaction, the vendor must also obtain whatever documents that ruling requires. 

Changes in Issue 5

Documentation

The revised version of the interpretation note updates the list for zero-ratings that were added into the legislation since the previous version. It also amends the documentation acceptable or required for some transactions. For example, in some instances for recurring transactions, annual confirmations by key office bearers of the counterparty may suffice to substantiate the zero-rating. It is critical to assess whether the revisions affect your company or client’s zero-ratings to avoid disputes in this regard.

Period

Issue 5 expands the guidance on when the vendor must hold the documentation. The core rule remains unchanged. The supplying vendor must obtain the documents within 90 days of the earlier of the invoice or the receipt of any consideration. The revised interpretation note provides more guidance on the process a vendor must follow where the documents arrive late, and on the exceptions to the 90-day period.

Alternative documentation

My reading is that one change in wording may perhaps carry more weight than it first appears to. Issue 4 stated that a taxpayer who cannot obtain all the documents may request approval of alternative documentation. Issue 5 no longer addresses alternative documentation. It states that the note may not prescribe all possible scenarios, and that a vendor experiencing difficulty in determining the applicable rate may apply to the Commissioner in writing, before applying a rate to a supply of movable goods, for confirmation that the zero rate applies in the circumstances. While SARS acknowledges that the note does not cover every scenario, and by implication a vendor in an uncovered scenario still needs SARS approval, this suggests that the problem may not necessarily only be a documentary one. It could be that the lack of listed documentation points to supplies that may not qualify for the zero-rating. On that reading, the documents listed in the note could tell one something about SARS’s interpretation of some zero-ratings

Take-home message

Taxpayers and their advisors should be careful not to underestimate zero-ratings. If you or your client applies one, it is essential to consider Interpretation Note 31 (Issue 5) and confirm the documentation for that specific transaction. If in doubt, get advice, and perhaps even consider obtaining a ruling from SARS where the exposure justifies it. Correcting incorrect zero-rating later usually means bearing the VAT. Often the transaction and any chance of recovering the tax from the customer have long passed.

I discuss this topic in Episode 83 of my podcast, Tax Break. You can listen here: