The Treasury has amended the regulations on the domestic reverse charge (DRC) relating to valuable metals in terms of SA’s VAT laws to rein in fraudulent conduct in the second-hand gold sector.
The fraud is costing the fiscus billions of rand in lost revenue. The amendment will place a greater burden on the purchaser to account for VAT.
“The DRC regulations are an anti-avoidance measure aimed at curbing VAT refund fraud in the second-hand gold industry,” said Annelie Giles, tax executive at ENSafrica.
“The reverse charge mechanism requires the purchaser to account for VAT on the transaction (instead of the supplier) before the purchaser may claim the VAT as an input tax deduction from the SA Revenue Service (Sars). This ensures that the VAT does not ‘go missing’ in the supply chain.”
One of the changes to the regulations is the inclusion of sponge, powder, sheet, tube, strip and rod to align the ambit of the regulations with the forms of unwrought and semi-fabricated precious metals found in the Precious Metals Act.
Goods supplied in one of the prescribed forms will no longer be subject to the regulations when they contain less than 1% of gold based on gross weight.
According to Giles, this means decorative consumables such as 24 carat edible gold leaf and 24 carat lustre cake dust could now be subject to the regulations.
The “residue” from mining operations, including certain historical mine dumps will remain within the scope of the regulations, while gold-plated jewellery was removed from the regulations. Giles said the exclusion of gold-plated jewellery from the ambit of the regulations was a good move.
“Even though the regulations were never aimed at the jewellery and short-term insurance industries, the previous last-minute inclusion of ‘jewellery’ as a prescribed form to which the regulations apply has caused a number of compliance challenges for vendors,” Giles said.
“Other gold-plated items in a prescribed form besides jewellery will still be subject to the regulations. Vendors affected by these changes should carefully consider their VAT position and obtain advice from a specialist on how best to implement these new requirements.”
Sars is engaged in several legal battles with companies in the second-hand gold sector. While VAT refund fraud in the sector is not new, a new modus operandi whereby the fraud is supposedly committed has been identified.
Fictitious businesses are registered for VAT and the necessary documentation, for example tax invoices, is fabricated. This is done to enable the purchasing vendor to claim actual input tax deductions in respect of VAT at 15% supposedly charged by a fictitious supplier and, typically, the VAT reflected on the false documentation is never paid over to the fiscus.
The illicit gold is believed to originate mainly from illegally melted Krugerrands, and illegally mined and imported gold.
Business Day in March reported that the tax agency obtained a court order compelling controversial gold refinery firm Rappa Resources to hand over documents it needs to prove a tax liability of more than R4bn in a matter that implicates several players in the industry.
The documents include its “know your client” documentation of its suppliers from January 2019 to June 2020 and its bank statements for the 2018 financial year.
Sars will have in its possession Rappa’s records containing declarations made to the SA diamond and precious metals regulator regarding the breakdown of goods bought from suppliers for the period January 2019 to March 2020.
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