The National Treasury’s proposal to repeal a subsection of the VAT Act that provides for the zero-rating of newly mined gold supplied to the Reserve Bank, the South African Mint Company and banks is facing criticism, with tax experts warning that the move would isolate the country from global best practice.
Subsection [11(1)(f)] of the act enables the Bank, the South African Mint and local banks to buy primary gold bullion VAT-free in South Africa. The provision does not apply to any other buyer of the precious metal.
Among the reasons for seeking the repeal is the burden the administration of this subsection places on the South African Revenue Service (Sars). The practical difficulties of tracing and isolating unprocessed, primary-source gold make compliance and auditing complex, the Treasury said.
However, corporate law firm ENS has warned that repealing the subsection would subject domestic gold bullion supplies to the entities in question to the standard 15% VAT, increasing their acquisition costs.
“Globally, investment-grade gold is recognised as a financial asset, not a consumption good, with leading jurisdictions (such as the EU, the UK and the United Arab Emirates) treating it as a financial instrument to prevent market distortions,” ENS tax experts Charles de Wet and Annelie Giles said in a note.
“The proposed standard rating risks isolating South Africa from global best practice and undermining its highly developed gold infrastructure, including Rand Refinery, a globally recognised and accredited refiner on the Good Delivery List of the London Bullion Market Association.”
Sars has over the years been at loggerheads with several institutions regarding the scale of VAT refund fraud alleged to occur in the second-hand gold industry. The illegal schemes involve the supply of illicit gold and the claiming of unlawful VAT refunds based on fabricated documents.
The proposed standard rating risks isolating South Africa from global best practice and undermining its highly developed gold infrastructure, including Rand Refinery, a globally recognised and accredited refiner on the Good Delivery List of the London Bullion Market Association.
— Charles de Wet and Annelie Giles, ENS tax experts
The constitutionality of the subsection is also the subject of a legal challenge. In this matter, Lueven Metals supplied gold bars to Absa Bank in 2018-20 claiming a 0% VAT rate. Sars audited the transactions arguing the gold was refined from scrap or previously manufactured items, which rendered it ineligible for the zero rating.
The National Treasury said that “the Constitutional Court judgment is expected in the next month or two, which would precede any tabled bills”.
Dean Subramanian, CEO of Rand Refinery, said the company supports Sars’ efforts to enhance VAT compliance, but greater clarity on the proposed amendment is required. He said Rand Refinery’s understanding is that the Treasury’s proposal arises from difficulties in distinguishing between primary and secondary source gold.
“If gold becomes a taxable supply, it could shift from being zero-rated under section 11(1)(f) of the VAT Act to being subject to the domestic reverse charge. This change is likely to increase administrative and compliance demands on refiners, mines and banks, potentially affecting cash flow and making South Africa less competitive,” Subramanian said.
“With gold prices already elevated adding another 15% could negatively affect the industry. Greater clarity is needed about the purpose of this change and its practical effects for consumers and industry stakeholders.
“We await further detailed information in the draft amendment and subsequent communication as this could be a crucial factor in shaping the future of gold bullion in the country and the perception of international bullion banks and customers.”
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