n Business Tax and Company Law Quarterly - Contract manufacturing across borders – selected South African tax implications

Volume 7 Number 1
  • ISSN : 2219-1585


Where a contract-manufacturing arrangement involves a local manufacturer and a nonresident customer, a number of South African VAT and income tax implications are triggered. This article seeks to address the most important South African tax considerations. From a VAT perspective the most important issue is whether the contractual arrangement between the local manufacturer and the nonresident customer gives rise to a supply of goods or services. The authors conclude that the most usual type of contract manufacturing arrangement, where the contract manufacturer undertakes to manufacture goods using its own inputs and infrastructure, in fact gives rise to a supply of goods by the South African manufacturer to the nonresident customer. That being the case, the supply by the local manufacturer of the finished goods to the nonresident customer will only be zero-rated if it meets the requirements of the direct or indirect export rules provided for in section 11(1)(a), read with the definition of 'exported' in section 1(1) of the Value-Added Tax Act, 1991 ('VAT Act'). These rules provide for significant evidentiary proof of export as well as time limits for the removal of the manufactured goods from South Africa. The article concludes as regards income tax that the nonresident client will not be subject to any South African income tax on the sale of the finished goods acquired from the local contract manufacturer.The article also explores the less common contract manufacturer arrangement, that is, where all the necessary inputs are provided to the South African manufacturer by the nonresident customer. The authors argue that this contractual arrangement gives rise to a supply of services by the South African manufacturer to the nonresident customer. The VAT implications of such a contractual arrangement are complex - and become even more complex if the nonresident customer decides to sell some of the finished products to customers in South Africa. The conclusion is that the local manufacturer may zero-rate the supply of the services rendered to the nonresident customer provided the goods in respect of which the services are supplied will either be exported, or the goods in respect of which the services have been rendered will form part of a supply by the nonresident customer to registered vendors in South Africa.

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