VAT leakage is a phenomenon that occurs where VAT cascades, becomes a cost to the foreign business or alternatively to the foreign business’ South African client and which often has an adverse effect on gross profit margins, the sustainability or viability of South African based projects and which can, and often does, taint business relationships where not properly managed. This typically happens in the case of a standard loop transaction where a foreign business engages a South African resident vendor to deliver services to the foreign business’ client who is also situated in South Africa.
Where the controversial and often disputed “zero rate” is not allowed under South African domestic law for charges between the South African vendor and the foreign business, VAT leakage is a real risk for the foreign business and solutions should be sought so as to prevent fiscal regulatory issues from interfering with business process and relationships.