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Value-Added Tax

Have you considered the Value-Added Tax effects of Foreign Donor Funded Projects?

The Value-Added Tax Act (the VAT Act) specifically defines the so-called “Foreign Donor Funded Project” (FDFP), which contains the following features:

  • The project must be established under the international donor funding agreement to supply goods or services to beneficiaries.
  • The Government of South Africa must be a party to the agreement and be tabled in the National Assembly.
  • The agreement must stipulate that the funding cannot be used to pay any taxes imposed under South African Law.
  • The Minister of Finance must have approved the project as an FDFP for VAT purposes. 

Such agreements are standard for Government Departments and generally aligned to the development and reconstruction priorities developed by them. Such projects must be utilised entirely for such purposes. It is also common for the Government Departments to subcontract their responsibilities to a different institution or 3rd party who operates, administers, implements, and manages the specific project. 

To give effect to the requirement stipulating that such international donor funding cannot be used to pay for any taxes imposed under the South African Law, the VAT Act imposes VAT at the rate of 0% on international funding received, which qualifies as FDFP. Equally, the VAT incurred on acquiring goods or services by the FDFP may be deducted as input tax. 

On 1 April 2020, the VAT Law was amended by introducing the term “implementing agency”, which is defined as a legal person that the Government of South Africa contractually appoints to operate, administer, implement and manage the FDFP. The implementing agency is responsible for accounting for funding and distributing such funding received from the foreign donor for the sole intended purpose. In this regard, it is also a requirement under such agreements that the foreign donor funding be kept separate from the general funds of the implementing agency.

Although the implementing agent may be carrying out its own activities outside of FDFP activities, the VAT Law regards each FDFP (e.g. each agreement) as a separate enterprise for VAT purposes with the result that each FDFP must be registered separately as a branch of the main VAT registration of the implementing agent. Consequently, each FDP must file its VAT returns separately and keep its financial records separately.

Have you considered the following in your business operations?

  • Are you party to international donor agreements?
  • Have you evaluated the VAT status of the implementing agents appointed to operate, administer, implement, and manage their FDFP, on your behalf?
  • Have you evaluated whether the implementing agents’ systems can separately manage the financial activities of each FDFP with adequate controls and processes for VAT accounting?
  • Have you evaluated whether the implementing agents have separately registered the FDFP for VAT purposes and accordingly filed separate VAT returns?