South Africa: Non-resident non-executive directors: VAT registration ruling
Non-executive directors (NEDs) of South African companies are reacting with dismay to a ruling from the South African Revenue Service (SARS) requiring them to register and account for VAT on their directors' fees from June 1 2017.
Binding General Ruling 41 (BGR 41), issued on February 10 2017, and updated on May 4, provides that NEDs must register and charge VAT on directors' fees where these fees (and other vatable supplies made by them, if any) exceed ZAR 1 million ($75,000) in any 12-month period. Services rendered in South Africa will attract VAT at the standard rate while any services physically rendered outside South Africa may be zero-rated.
In the case of non-resident NEDs, questions around the legal basis for this ruling are being hotly debated. The requirement to charge VAT depends on whether or not a person carries on an "enterprise" (taxable activity) wholly or partly in South Africa. As a general rule, the VAT Act provides that the rendering of services by the holder of any office in performing the duties of the office does not amount to the carrying of an "enterprise" to the extent that any "remuneration" (as defined in the Income Tax Act) is paid to the holder of that office. South African company law requires directors to be natural persons and South African sourced directors' fees paid to non-resident NEDs are specifically included in the definition of "remuneration" for South African income tax purposes.
Since directors' fees earned by a non-resident NED constitute "remuneration" as defined, the agreed starting position is that services rendered by non-resident NEDs are generally not "enterprise" activities and non-resident NEDs should not need to register for South African VAT. However, the VAT Act does go on to provide that services rendered by the holder of an office can, notwithstanding the general rule, nevertheless constitute "enterprise" activities if such person "accepted (the office) in carrying on any enterprise …independently of the employer or concern by whom the amount of remuneration is paid or payable".
SARS argues in BGR 41 that as NEDs are required under South African law to carry out their duties independently of the companies in respect of which they act as directors, the directorship services concerned therefore constitute "enterprise" supplies for VAT purposes.
This argument seems to overlook the legal requirement that for remuneration to be subject to VAT, the relevant office holder must accept the office in carrying on an enterprise. The acceptance of a directorship arguably does not in itself result in a non-resident NED embarking on an "enterprise" – some nexus is required between the acceptance of the directorship and a pre-existing enterprise already being carried on by the non-resident NED.
While there may be foreign individuals who are carrying on independent enterprises at least partly in South Africa which result in their being offered South African board positions, these are likely to be the exception. In the majority of cases, non-resident NEDs are individuals who are not separately conducting any form of business activity at all, or alternatively whose other business activities have no nexus to South Africa. It is hard to see in these scenarios how SARS can argue that an NED has accepted a local directorship in carrying on an independent "enterprise".
Non-resident NEDs who do not believe the ruling can apply to them face a dilemma. Failure to register and account for VAT after June 1 will no doubt put them on a collision course with SARS, and at risk for VAT and potentially even interest and penalties. It is consequently recommended that non-resident NEDs obtain legal advice based on their specific circumstances before adopting a final position regarding their South African VAT obligations.
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