VAT BENEFITS FOR FOREIGN DONOR FUNDED PROJECTS
If foreign funding is received by a South African registered VAT vendor, it may be able to benefit from a special dispensation for approved "foreign donor funded projects" ("FDFP"). If a VAT vendor is registered as a FDFP, it will be allowed to zero rate all its supplies. The benefit of zero rating, is that the VAT vendor is still entitled to claim VAT input tax credits even though it charges VAT on its supplies at 0%.
So, what is a FDFP? A FDFP is a development project which is funded by a foreign government or other International Development Agency under an international agreement with the South African government. These international agreements are referred to as Official Development Agreements ("ODAs") and normally provide that the funds donated should only be used for specific, mutually agreed upon programmes and activities, and cannot be utilised for any taxes imposed under domestic law.
Where the ODA is one which is binding in the Republic in terms of section 231(3) of the Constitution of the Republic of South Africa, 1996 and also contains a requirement that the funds may not be used to pay any South African taxes, the recipient of the funding will qualify as a FDFP and can apply to be registered as such by SARS.
Section 8(5B) of the Value-Added Tax Act, 89 of 1991 (the "Act") states that a FDFP which has been registered as such, is deemed to supply services to the international donor to the extent of the international donor funding received from the donor. The deeming mechanism means that when the foreign donor makes payment to the recipient of the funding, the recipient is deemed to have made a "supply" to the foreign donor, which is subject to VAT at 0% (instead of the standard rate of 14%) in terms of section 11(2)(q) of the Act.
This deeming mechanism, allows the foreign donor to give funds to a FDFP in South Africa without having to also pay VAT on the amount donated.
However, because the vendor is registered as a FDFP, it can claim from SARS all input tax paid in respect of supplies made to it i.e. it will be entitled to a refund from SARS as the input tax will exceed the output tax on its VAT 201 return. Refunds must be paid by SARS within 21 working days of receiving the correctly completed refund return, otherwise interest at the prescribed rate is payable by SARS to the vendor.
The benefits of zero-rating will only be available if the recipient of the foreign donor funding is registered as a FDFP. However, a vendor will only be registered as a FDFP in respect of the services which it supplies and the funds received in respect of the FDFP. In respect of its other, unrelated activities it will operate in terms of its normal VAT registration.