TAX MATTERS: VAT implication on services supplied to a non-resident

Value Added Tax (VAT) is an indirect tax on consumption, charged on the supply of taxable goods and services. It is the responsibility of persons who are registered for VAT (also known as registered operators) to charge and collect VAT on behalf of the fiscus.

Exception applies only with regard to importation of goods or services; in which case it is the importer whether individual or company who is liable to pay the VAT to the Zimbabwe Revenue Authority (Zimra). Registered operators must charge VAT on sales to their customers, unless the goods are exempt in terms of the law.

There are two rates for VAT ― 14,5 percent and zero percent. Goods or services charged to VAT at 14,5 percent are referred to as standard-rated supplies and those charged at 0 percent are called zero-rated goods or services.
Zero rated is mostly applied to pro-poor goods and exported goods and services. Many a time however, people assume that if services are supplied to a non-resident person, there are automatically zero-rated because there are export sales.

It is the purpose of this article to demystify this misconception so as to reduce the possibility of misunderstanding, which could give rise to some tax ramifications.
As stated earlier, exported services are mostly zero rated. To qualify for zero-rating, the place of consumption of the services and the residence status of the recipient are some of the key considerations.

In general services supplied to non-resident persons, namely exported services are zero rated, among them are the services supplied directly in connection with land, or any improvement thereto, situated in any export country; or the services are supplied directly in respect of movable property situated in any export country at the time the services are rendered.

Also, zero rated are services that are supplied for the benefit of and contractually to a person who is not a resident of Zimbabwe and who is outside Zimbabwe at the time the services are rendered. It was held in CA (Pvt) Ltd vs The Commissioner General of ZIMRA HH 343-19 that the phrase “the benefit of and contractually to” are not qualified by such words as the “sole” or “dominant” or “main” or one of the main” and therefore do not require the Commissioner or on appeal the Fiscal

Appeal Court to assess the extent of the “benefit of” and contractual link to the affected taxpayer.
It further held that the lack of such qualification favors taxpayers because the words must be given a wide ambit and secondly if at all the words could be construed as ambiguous then the contra fiscum rule would favour interpreting them in favour of the taxpayer.

Meanwhile, services which are supplied directly in connection with land or any improvement thereto situated inside Zimbabwe; or movable property situated inside Zimbabwe at the time the services are rendered are standard rated.

The rationale for standard rating is that the services are being consumed in Zimbabwe. This rationale was upheld in XO Africa Safaris v CSARS (395/15) [2016] ZASCA 160. The taxpayer was denied zero rate because the supply was made to people who enjoyed the services while in South Africa (SA).
The taxpayer assembled tour packages for foreign tour operators (FTOs) arranging for group and individual foreign tours to SA, which included accommodation, travel, restaurant bookings and recreational activities, such as golf, safaris, whale watching etc, to be provided in SA.

It had a contract with FTOs and a corresponding contract with local supplies for the supply of the packages.
It was held that the fact that XO Africa Safaris provided local packages in SA, whether through other people or not, zero rating is inapplicable since the supply was not directly to the FTO, but to other persons who were in SA at the time that the goods and services were provided.

This therefore, implies that if a Zimbabwean tour operator sells a tour to a foreign tour operator, the services are supplied to a non-resident, but if the actual tourists benefit from the services in Zimbabwe, the supply cannot be zero-rated. The same applies to accounting services rendered to a local branch of a non-resident company.

This is because the non-resident has a presence (the branch) in Zimbabwe while the services are rendered. Zero rating however, will be applied on the supply, for example of a tax opinion by a Zimbabwean resident to a foreign company if such services were rendered while the foreign company did not have any presence in Zimbabwe.

In conclusion to qualify for zero rating, taxpayers should look at the services supplied, to whom they were contractually supplied, the resident status of recipient of services and whether the person was present in the country when the services were rendered.
We urge you to thoroughly look at your contractual arrangement with non-resident persons, before you can conclude on zero rating the services as it is not always straight forward that all arrangements with non-resident persons are zero rated.

Meanwhile Matrix Tax School invites you to take part in the Accounting for Tax in Financial Statements course. The course commenced on August 18, 2021 and will run for four weeks.

Tapera is the founder of Tax Matrix (Pvt) Ltd and CEO of Matrix Tax School. He writes in his personal capacity.