South Africa: Proposal to change VAT treatment of cross-border leases of aircraft engines
A draft bill to change VAT treatment of cross-border leases of aircraft engines imported for use in South Africa
A draft bill to change VAT treatment of cross-border leases of aircraft engines
The government published a draft bill to change the value added tax (VAT) treatment of cross-border leases of aircraft engines imported for use in South Africa.
The draft bill provides that—consistent with the current treatment of leases of aircraft—when a lessor of aircraft engines is neither a resident of South Africa, nor a registered vendor, and that lessor supplies foreign-owned aircraft for use in South Africa under a cross-border rental/lease, then the lessor would be excluded from the requirement to register for VAT in South Africa provided that:
- The supply is made to a recipient, i.e., lessee, that is a resident of South Africa
- The goods being supplied is for use by the lessee wholly or partly in South Africa
- The lessee and lessor agreed in writing that the lessee would enter the goods for home consumption, pay the VAT on importation and that the lessee would not be reimbursed by the lessor for any VAT suffered
If the proposal under the draft bill is promulgated, non-resident aircraft engine lessors that are also non-registered vendors would no longer be liable for VAT registration from a future date (currently proposed to be 1 January 2023). However, until promulgation such lessors are still liable to register for VAT, but would likely be able to deregister once the proposal is effected.
KPMG observation
An issue that has not been addressed in the proposal is the liability in terms of section 8(2) of the VAT Act. This section provides that when a person ceases to be a vendor (i.e., its aircraft engine leasing activities ceases or by virtue of the above noted amendment being promulgated) and it has assets (i.e., aircraft engines) that formed part of the enterprise immediately before it ceased to be a vendor, then those assets would be deemed to have been supplied by the vendor immediately before it ceased to be a vendor. In other words, aircraft engine lessors would have to account for standard rate VAT on the value of the aircraft engines that were the subject matter of any lease in South Africa. This would apply to aircraft engine lessors that are currently VAT registered or should have been VAT registered.
Read a September 2022 report [PDF 292 KB] prepared by the KPMG member firm in South Africa
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