By Annelie Giles
South Africa follows an input-credit method of value-added tax (VAT) accounting, which allows a VAT-registered vendor to claim VAT on expenses that have been incurred in the course or furtherance of its taxable enterprise. The difficulty is that there is no prescribed time period within which the South African Revenue Service (Sars) is required to pay out a VAT refund.
While there are many reasons why VAT refunds are not paid out immediately, in practice, certain themes repeatedly emerge as causing the delayed payment of refunds to vendors. Some of these themes are explored in further detail in this article.
Audit or verification of refunds
Section 190(2) of the Tax Administration Act No. 28 of 2011 (TAA) preserves Sars’ right to first verify a refund before the refund is paid out. Sars will usually inform a vendor at the start of a verification or audit that, if it has a refund due, it will be paid only after the verification or audit is complete and the refund validations are passed. It has long been an issue of contention between Sars and vendors whether Sars may withhold refunds that are not the subject of the particular verification or audit. Recent experience seems to suggest that Sars no longer places general “stoppers” on vendors’ VAT profiles, which prevent the payment of any new refund claims while Sars is auditing selected historic refund claims and that the use thereof is reserved for instances where it is justifiably warranted.
There also seems to be a general acceptance among vendors that a refund may be delayed pending the finalisation of a standard verification request (commonly regarded as a desk audit, as opposed to an in-depth field audit). However, Sars has recently revised its standard VAT verification request letter, which now requires vendors to submit a substantial amount of information to Sars as listed in the letter. Vendors are usually afforded 21 business days from the date of the letter to respond but may request an extension where more time is needed.
While some aspects of the verification letter are specific to each VAT return, such as schedules and documentation supporting the declarations made in that return, other aspects are more generic, yet administratively onerous, for example, the requirement to provide detailed explanations of the nature of the business, terms of payment with customers/suppliers and financing arrangements. Vendors are also required to submit extensive financial information to Sars as requested in the letter, such as VAT control accounts for input tax and output tax, debtors and creditors ledger accounts, trial balance accounts, as well as bank statements for the selected tax period of all enterprise bank accounts. For small to medium-sized vendors, this may still be achievable within the standard 21-business day period, however, it is unclear how financial institutions such as banks and insurance companies or other large businesses with multiple divisions and product lines, are to comply with these requests within a reasonable time frame; all the while, their VAT refund payments are placed on hold until the conclusion of the verification process.
What is more concerning is the sheer amount of information requested by Sars as this bears hallmarks of a typical Sars audit or request for relevant material under section 46 of the TAA. Sars recently confirmed that the estimated assessment functionality under section 95(1)(c) of the TAA has now been implemented for VAT. Therefore, if not carefully considered, a vendor’s response to a standard verification request could lead to an estimated assessment being raised by Sars. This will also apply where a vendor has not provided all relevant material requested by Sars during the VAT verification process.
An estimated assessment becomes final and is not subject to objection and appeal, if the vendor does not submit the required relevant material within 40 business days from the date of the estimated assessment (or an extended period approved by Sars) as contemplated in section 95(6) of the TAA, read with section 100(1)(a)(i). Therefore, it is unavoidable for vendors to provide the requested information to Sars even if the new standard verification letter requests the same voluminous information from a vendor on more than one occasion.
Outstanding debt
Sars is increasingly taking debt collection steps against vendors by applying outstanding VAT refunds against outstanding tax debts within the set-off mechanism provided for by section 191 of the TAA.
Section 190(3) of the TAA provides that Sars must authorise the payment of a refund before the finalisation of the verification or audit (or investigation, inspection, and even criminal investigation) if security in a form acceptable to a senior Sars official is provided by the taxpayer. Generally, Sars requires vendors to tender security in the form of a bank guarantee for the full amount of the outstanding VAT refunds sought to be released. If, following the finalisation of the verification or audit, it is concluded that the refunds were not properly payable, Sars may recover the refunds (plus interest) from the vendor in terms of section 190(5) of the TAA.
The issue becomes more complicated when there is an active tax dispute with Sars and the vendor’s suspension of payment request regarding the disputed assessment was rejected. Even though security may be tendered to suspend the payment of a disputed assessment, Sars will often proceed to set off the tax debts (debt equalisation) against a vendor’s outstanding VAT refunds on unrelated tax periods in terms of section 164(1) of the TAA (commonly referred to as the “pay now, argue later” rule). In some instances, vendors may only realise for the first time that Sars has performed a set-off when they attempt to follow up on the payment of their outstanding VAT refunds or when they notice debt-equalisation entries on their Sars VAT statements of account and find that the VAT refunds were absorbed by the disputed assessments.
Verification of bank details
Another reoccurring theme is a request by Sars for a vendor to verify its banking details shortly after a VAT refund becomes due and payable, notwithstanding that the vendor has previously provided its banking details to Sars when it first registered for VAT. While there certainly is an appreciation for the need to ensure that Sars has the most up-to-date banking details on record, the documentation required to verify banking details and the process involved often resembles that of an original VAT registration application and can be time-consuming.
The issue is compounded for non-resident suppliers of electronic services given that these vendors do not have any physical presence in South Africa. Electronic service providers are not required to have South African bank accounts yet, in practice, Sars is not willing to make refund payments to foreign bank accounts and instead advises these vendors to offset their refunds against future VAT returns that are in a net payable position. This approach leads to various practical challenges. Firstly, the timing of any such set-off is not within the electronic service provider’s control and can lead to late payment penalties and interest being imposed on the VAT payable return; secondly, it is unclear which Sars branch office(s) and/or Sars agent(s) are to be approached to arrange for such set-off to be performed at the relevant time or what the process entails; and thirdly, prescription of VAT refund claims could apply if not timeously paid out due to invalid banking details.
Even though there are no tax legislative impediments in this regard, there does not appear to be a straightforward solution. In addition, the VAT119i indemnity form, which ordinarily allows VAT refunds to be paid out into a group company’s South African bank account in certain instances, does not seem to provide the necessary comfort to Sars in this regard. Even so, it is not clear on what basis the South African group company would be able to remit the refunds, once received from Sars, to the non-resident electronic service provider without due regard to potential exchange control implications and related requirements.
Where to from here?
While one would like to buy into the general sense that progress is being made to ensure the timely payment of VAT refunds, the reasons for delays have not fundamentally changed. The danger of not addressing these delays is that vendors may ultimately seek means to ensure that they are not in a refund position.
* Giles is the executive at ENS and Chartered Tax Adviser at the South African Institute of Taxation.
* This article was originally published in the TaxTalk magazine by the South African Institute of Taxation.
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