The long-awaited amendments to the value-added tax ("VAT") Domestic Reverse Charge ("DRC") Regulations on Valuable Metal were published on 10 May 2024. The amendments apply retrospectively with effect from 1 January 2024 and no transitional rules have been provided in the regulations themselves.
The amendments followed long after a public workshop was held by the National Treasury on 9 December 2022 regarding the tax proposals for the 2023 fiscal year. Annexure C to the 2023 Budget Review published in February 2023 contained several proposals relating to the DRC Regulations and draft amendments were published for public comment on 31 July 2023. The 2024 Budget Review contained only one proposed DRC amendment relating to the 'primary gold sector'. No other, or more recent, public workshops or consultation processes regarding the DRC amendments seem to have taken place and no revised draft of the amendments was circulated for comment prior to the publication thereof.
The DRC Regulations are an anti-avoidance measure aimed at curbing VAT refund fraud in the second-hand gold industry. 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 South African Revenue Service (SARS). This ensures that the VAT does not 'go missing' in the supply chain.
The regulations first came into effect on 1 July 2022 (with a one-month transition period) and apply to gold-containing material supplied in certain prescribed forms between VAT-registered vendors. Before the recent amendments, gold supplied in the form of jewellery, bars, blank coins, ingots, buttons, wire, plate, granules, solution, residue, or similar forms was within scope.
The key changes to the DRC Regulations, as contained in the amendments, are summarised below.
New 1% de minimus threshold
A welcome new 1% de minimus threshold has been introduced. Goods supplied in one of the prescribed forms will no longer be subject to the regulations where they contain less than 1% of gold based on gross weight.
Previously various commodities containing trace elements of gold (such as platinum group metals, silver, coal, etc.) were caught by the regulations even though no value and no part of the purchase price were allocated to the gold content of the goods.
In addition, any VAT-registered businesses that acquired certain gold-containing goods as long-service awards or corporate gifts were also inadvertently affected, even though the goods may have contained very little gold.
Six additional forms added
Six additional forms have been introduced as constituting "valuable metal" to which the regulations apply, namely: sponge, powder, sheet, tube, strip, and rod. This was ostensibly done to align the ambit of the regulations (which are form-based) with the forms of unwrought and semi-fabricated precious metals found in the Precious Metals Act, 2005.
Gold is extremely malleable and has many applications. In addition to the number of unintended consequences the regulations have created since it was first introduced, it now appears that the culinary industry could be caught in the crosshairs. Decorative consumables such as 24-carat edible gold leaf (available in various sizes of finely hammered 'sheets') and 24-carat lustre cake dust (available in 'powder' form) could now be subject to the regulations. 24 Carat amounts to pure gold; therefore, it is unlikely that the 1% de minimus threshold will find application in this regard.
Mine 'residue' to remain in scope (subject to certain exclusions)
One of the prescribed forms subject to the regulations is "residue", referring to aspects such as debris, discard, tailings, slurry, waste rock, and foundry sand, commonly found in the mining industry. The definition of "residue" has been clarified as relating only to that resulting from mining operations, as opposed to a potentially wider application previously believed to include gold-containing debris or discard from the general factory floor or other shop 'sweeps'.
This means that all "residue" from mining operations (including certain historic mine dumps) remains within the scope of the regulations, unless the transaction is zero-rated (subject to VAT at 0%, such as exports) or if the mining exclusion in the regulations applies. The mining exclusion provides that supplies of gold-containing goods produced from raw materials by a mining title "holder" (as defined in the Mineral and Petroleum Resources Development Act, 2002), or any person contracted to such "holder" to carry on mining operations, are excluded while unregulated mine material (e.g., Zama Zama gold) are caught by the regulations. Although it is understood that the mining exclusion applies at an entity level (as opposed to a transaction level), varying interpretations are still being applied in practice.
The 2023 Budget Review contained a proposal that the scope of the mining exclusion would be clarified, however, no amendments have been made in that regard. Also, no amendments were included to address the government's concern, as stated in the 2024 Budget Review, that the fraudulent VAT schemes and malpractices suspected in the second-hand gold industry may have shifted to the primary gold sector.
Gold-plated jewellery removed from scope
Another welcome amendment is the exclusion of gold-plated jewellery from the ambit of the regulations.
Even though the regulations were never aimed at the jewellery and short-term insurance industries, the last-minute inclusion of "jewellery" as a prescribed form to which the regulations apply, caused several compliance challenges for vendors operating in this space. Other gold-plated items in a prescribed form besides jewellery will still be subject to the regulations.
New flexibility on recording of gold percentage
Before the amendments, a purchaser was required to provide a written statement to the supplier containing, inter alia, a full and proper description of the valuable metal, as well as the percentage of the gold content thereof. Although it is a common feature of the second-hand gold industry for the purchaser to establish the gold content of the goods, many purchasers not operating in this industry were affected by the DRC Regulations and were either not privy to this information, or did not have the necessary equipment or know-how to determine the gold content.
Based on the amendments, the supplier and purchaser may now agree on which one of them is to determine the gold percentage of the goods. While the purchaser is still required to include a full and proper description of the valuable metal in the DRC statement it is required to furnish to the supplier, it no longer needs to specify the percentage of the gold content of the goods.
Practical implications
Various practical challenges and questions arise regarding the VAT treatment of valuable metal supplied between the retrospective effective date of 1 January 2024 and the date on which the amendments were published on 10 May 2024. Whilst certain additional supplies were brought within the ambit of the DRC Regulations (e.g., due to additional forms added into scope), others fell outside the ambit (e.g., due to the new 1% de minimus threshold). Due to the reverse charge mechanism under the DRC Regulations, the retrospectivity of the amendments could mean that the incorrect party may have accounted for the VAT in its VAT returns (e.g., the supplier instead of the purchaser, or vice versa).
In addition, purchasers of "valuable metal" potentially face risks to the validity of their input tax claims due to the requirement that they may not claim VAT on DRC-subject transactions until they have accounted for the VAT on the transactions in their VAT returns.
In this regard, SARS has published an updated version of its "Frequently Asked Questions ("FAQs") on the Domestic Reverse Charge (DRC) Regulations" (issue 3, dated 10 June 2024) in which it provides practical transitional rules as a means of providing clarity to vendors of what is required of them. In terms of question 3 of the FAQs historic transactions should be dealt with as follows:
- transactions that have a time of supply before 10 May 2024, must be treated in accordance with the 'old' DRC Regulations (i.e., as it read before the recent amendments);
- supplies made on or after 1 July 2024 must comply with the 'new' DRC Regulations (i.e., as it currently reads following the amendments); and
- affected vendors are allowed time until 30 June 2024 to amend their systems to enable them to issue the correct documentation regarding supplies from 1 July 2024 onwards.
Further, in terms of the DRC amendments the supplier of valuable metal must now "provide [sic] full and proper description of the valuable metal as well as the percentage of the gold content contained" therein (unless agreed otherwise with the purchaser). However, the manner in which this information is to be provided, or to whom, has not been specified as part of the amendments (e.g., statement, invoice, etc.).
Lastly, from a commercial perspective, consideration should be given to potential disputes arising between transacting parties on the quantum of gold contained within the valuable metal and which party is to account for the VAT on the transaction, especially where results are borderline around the 1% de minimus threshold.
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.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.