Domestic Reverse Charge Relating to Valuable Metal

A VAT Domestic Reverse Charge (DRC) on valuable metal was introduced in the Regulations on 08 June 2022, issued under section 74(2) of the Value Added Tax Act 1991 (Act 89 of 1991), Notice 2140 (the DRC Regulations).

A DRC is the procedure whereby the recipient accounts for VAT rather than the supplier.

The purpose of the introduction of the DRC regulations was to be used as a mechanism to curb the use of the VAT system as an instrument to commit fraud by claiming exorbitant refunds where gold was sourced by illegal means. SARS had identified through its audit and investigative processes that there are many schemes in place to manipulate the system and claim undue refunds.

Written by Sanjeevan Bisnath, Regional Manager for Kwazulu-Natal

In the past, the Government had uncovered various VAT fraud schemes in respect of second-hand goods relating to the trading of gold. It was identified that while a deduction of notional input tax on the acquisition of gold products by VAT vendors from non-VAT vendors was allowed, in practice this provision unintentionally attributed to the creation of an allowing environment that enabled access to fraudulent input tax deductions.

This resulted in changes having to be made to the definitions of “second-hand goods” in the VAT Act to the effect that vendors were then prohibited from claiming the notional input on second-hand goods containing gold unless such goods were re-sold in the same or substantially the same condition as they were bought in.

With the amendment of the regulations, the fraudulent endeavours of vendors had also evolved to extract undue refunds from the fiscus. It became apparent that numerous fabricated businesses falsified the required documentation and registered for VAT as vendors. These vendors engaged in the buying and selling of illegal gold. The vendors timeously submitted VAT returns reflecting minimal payments due to SARS, however, large amounts of VAT refunds were claimed when the gold in various forms was exported.

More specifically, the vendors utilised “invoice farms” to create a paper trail to validate, authenticate and re-characterise the supply of illegal gold. Several other fictitiously registered vendors were inserted between the first vendor supplying the gold and the last vendor that acquired the gold and exported them at a zero rate, whilst deducting the input tax and claiming a VAT refund. This resulted in billions of Rands of ‘losses’ for the revenue collection agency.

The numerous layers involved made it extremely difficult for SARS to identify at which stage the misleadingly re-characterised goods entered the production and distribution chain.  

Considering the above, in 2021, SARS tabled a proposal for the requested Regulations for the DRC to be considered. Other jurisdictions were looked at and analysed, and examples from Australia and the UK were utilised when compiling the regulations that apply to the South African issue at hand.

The DRC Regulations came into effect on 01 July 2022 and applies the following:

The DRC Regulations apply to all vendors that buy and sell gold and goods containing gold in the specified forms as provided in the definition of “valuable metal” as defined in regulation 1”.

For a supply to fall within the parameters of the DRC, the following four requirements must be met:

  • The supplier must be a registered vendor.
  • The recipient must be a registered vendor.
  • The supply must be a “valuable metal” as defined.
  • The supply must be taxable at the standard rate, which is currently 15%. This means that any supply that is zero-rated, such as the export of valuable metal, does not fall in the DRC.”

If any of the above requirements are not satisfied, the normal provisions of the VAT Act must be adhered to, and the DRC will not apply.

Perhaps the most crucial aspect of the DRC is what constitutes a “valuable metal”. It can be defined as follows, Any goods containing gold in the form of jewellery, bars, blank coins, ingots, buttons, wire, plate, granules, in a solution, residue or similar forms, including any ancillary goods or services but excluding suppliers:

  • of goods produced from raw materials by any “holder” as defined in section 1 of the Mineral and Petroleum Resources Development Act 28 of 2002 (MPRDA), or by any person contracted to such “holder” to carry on mining operations in respect of the mine where the “holder” carries on mining operations.
  • contemplated in section 11(1)(f), (k) or (m) of the VAT Act; that is, the supply –
    • to certain entities such as the South African Reserve Bank (SARB) and banks of gold in specified forms such as bars, blank coins, ingots, buttons, wire, plates, or granules or in a solution, which has not undergone any manufacturing process, save the refining, manufacture, or production of the specified forms.
    • of gold coins issued by SARB.
    • of certain movable goods to a customs-controlled area enterprise or a Special Economic Zone (SEZ) operator which are physically delivered to such customs-controlled area enterprise or SEZ operator.”

The definition of “valuable metal” leaves room for interpretation, particularly when focusing on “ancillary goods and services”, “residue” and “similar forms”. Ancillary goods and services refer to any product that forms an integral part of the supply of gold-related products, for example, packaging. The wide definition appears to include a wider range of goods and services. There should be a fair balance that permits the law to be wide enough to limit fraudulent activities but also allows legitimate businesses to trade valuable metals without the hassle of unnecessary litigation, policies, and procedures.

The entire aim of the DRC is to remove the VAT burden from the supplier to the recipient. For the DRC to be applied both the supplier and recipient MUST be registered VAT vendors. The recipient becomes totally responsible for the VAT consideration in a transaction. In a transaction between a supplier and recipient, the recipient will pay the supplier the exclusive amount stated on the tax invoice and will be required to declare the VAT on the supply of the goods on behalf of the supplier in Field 12 of the VAT201 return. The recipient is also able to claim the Input tax on the transaction, which must be done in Field 18, resulting in a Nil VAT effect on the transaction. The Input tax, however, can only be claimed once the recipient has proven that the Output tax has been correctly declared and paid to SARS.  It must be noted that the supplier still has the responsibility to declare the value of the goods and services supplied relating to the DRC in Field 3 of its VAT201 return (Field 3 does not create any VAT liability).

It is the responsibility of the taxpayer to update their VAT registration status if they fall within the definition of trading under the DRC. SARS will then automatically insert a code against the taxpayers’ VAT registration number to easily identify these taxpayers.

The purpose of the increased procedures and documentation is to ensure and create a detailed trail that can be easily traced to a registered VAT vendor at any stage, thus aiming to minimise the risk of fictitious and fraudulent activities taking place.

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