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Warning: If you deal with foreign clients but don't use the correct exchange rate on your tax invoices, you'll face hefty penalties

by , 04 November 2016
Warning: If you deal with foreign clients but don't use the correct exchange rate on your tax invoices, you'll face hefty penaltiesIf you deal with foreign clients, the most important thing you must do is to issue valid tax invoices and use the correct exchange rate.

What we often find is that most Vat vendors fail to do this correctly. As a result, they face harsh penalties.

Keep reading to discover the severity of these penalties so you can avoid them at all costs. We'll also tell you how to apply the right exchange rate to your tax invoices.


Here's why it's important to use the correct exchange rate if you deal with foreign clients
 

The Practical Vat Loose Leaf Service says you'll find out what your output tax liability is, based on the exchange rate of the date of the invoice. This way you can be sure you're paying the right amount over to SARS (or claimimg the correct amount, as the case may be).


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If you don't use the correct exchange rate on tax invoices to foreign clients, you'll face these penalties


The best way to explain the penalties is to provide a practical example. So take a look at this example…
 
A South African TV channel sent 'The Investment Lads' a tax invoice for advertising about off-shore investments.
 
The cost of the advertising was R114 000. This is a local supply, so they charged Vat at the 14% standard rate and charged R14 000. Because the advert was about offshore investments, the accountant at the TV channel assumed it had to do with non-South African matters. He issued the tax invoice in USD ($) for $12 515. 65 with Vat of $1 752.19. He stated the Rand on the tax invoice. (At the time the exchange rate was R7.99 = $1).
 
When 'The Investment Lads' wanted to complete their Vat return and calculate the input tax, they used the current exchange rate of R8.55=$1 and applied it to $1 752.19. What they didn't realise was that the exchange rate fluctuated a lot. So 'The Investment Lads' calculated their input tax as $1 752.19 x R8.55 = R14 981. They 'over claimed' input tax. They should've used the exchange rate applicable on the date of the tax invoice!

Here's what went wrong…
 
  • The TV channel should've issued the tax invoice in Rand because this was a standard rated supply (it wasn't zero-rated);
 
  • 'The Investment Lads' were also wrong because they over-claimed the input tax. They actually weren't even entitled to claim it because the tax invoice was wrong – it wasn't a valid document to support their input tax claim.
 
Take a look at the harsh penalties…

If SARS decides to audit 'The Investment Lads' it won't allow the input tax claim. It'll add the 10% Vat penalty and interest to its assessment. On top of that, SARS can also penalise 'The Investment Lads' in terms of the Tax Admin Act (TAA).

If SARS audits the TV channel, it can penalise them for non-compliance. They didn't issue the tax invoices correctly. They accounted for their output tax incorrectly by using wrong exchange rates. This means there'll be a double penalty for them because of:
 
  • Non-compliance and possible understatement of Vat – which SARS will penalise them for by adding the 10% penalty; and
 
  • Interest and the understatement penalty in terms of the TAA.
 
As you can see, the penalties are quite severe. The good news is you can avoid them if you know how to apply the right exchange rate to your tax invoices.

Here's how to apply the right exchange rate to your tax invoices

 
  • Issue a tax invoice within 21 days of the date of the supply.
 
  • Invoice in the foreign currency, and show the relevant exchange rate on the tax invoice.
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