When are services provided to foreigners zero-rated for VAT?

Understanding the nuances of Value-Added Tax (VAT) can be pivotal for consultancy firms, especially those providing services to foreign nationals. In this article we shed light on a compelling scenario involving a VAT-registered visa consultancy in South Africa, highlighting critical VAT implications for similar businesses.

The Case at Hand

A South African consultancy assists South Africans in securing visas to work on foreign vessels. Their services include managing visa applications and recovering associated disbursements, such as consulate and appointment fees.

The consultancy charges these fees either to the individual client or, in some cases, to the vessel owner or operator. The question arises whether VAT should be charged for these services and at what rate.

VAT Implications on Services Rendered

Under Section 7(1)(a) of the VAT Act, VAT at the standard rate (currently 15%) is imposed on the supply of goods or services by a vendor in the course or furtherance of any enterprise carried on by that vendor. However, the complexity arises from the nature of the services provided and to whom they are billed.

Standard Rate vs. Zero-Rating

In terms of the VAT Act, all services typically attract a standard 15% VAT unless specified otherwise under sections like Section 11, which zero-rates services that are supplied to non-residents under certain conditions.

However, there is a critical exemption to this rule we should not forget. As noted in Section 11(2)(l)(iii), the zero-rating does not apply if the services are directly provided to a non-resident who is in South Africa at the time of service.

VAT Rules for Agents and Principals

Section 54(2) of the VAT Act specifies that if a vendor supplies goods or services to an agent acting for a principal, the transaction is treated as if it were made directly to the principal. This arrangement allows the principal to claim any related input tax credits, ensuring VAT responsibilities align with the actual recipient of the supply.

Implications for Visa Consultancies

• VAT on Service Fee Charged

Regarding the service fee, VAT is applied at the standard rate of 15%, whether the charge is to a South African resident or a non-resident, such as a ship owner or operator. This policy is based on the fact that the direct beneficiary of the visa is a South African resident present in South Africa when the visa applications are processed, as outlined in section 11(2)(l)(iii) of the VAT Act.

• Dealing with Disbursements

The handling of disbursements adds another layer of complexity. If the disbursements are recovered as costs paid directly to embassies or consulates on behalf of the applicant, they are not subject to VAT, as no VAT is payable on the charges made by foreign diplomatic missions and embassies in respect of Visa charges. Article 28 of the Vienna Convention determines that “The fees and charges levied by the mission in the course of its official duties shall be exempt from all dues and taxes.”

However, if the consultancy acts as the principal in incurring these costs, then the recovery of such costs becomes part of the chargeable service and is subject to VAT at the standard rate. Although this situation is less common, the specific terms of the agreement between the applicant and the agency must be reviewed to accurately determine the nature of these disbursements.

Conclusion and Professional Vigilance

This case exemplifies the intricacies of VAT application within specific sectors like visa consultancy. It underlines the importance for accountants and tax professionals to stay vigilant, ensuring that VAT is correctly applied and that their clients are well-informed about potential tax liabilities. For firms dealing with international and complex client bases, understanding and navigating the details of VAT regulations becomes not just a necessity but a significant aspect of risk management.

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