South African businesses are exposed to foreign currency transactions on a daily basis, which invariably cause practical issues around the appropriate foreign exchange rates to be used. Not only are there often accounting system limitations (which in some cases only allow exchange rates to be updated on a monthly basis), but businesses negotiate different rates with commercial banks and enter into hedging and forward exchange agreements.

Both the Income Tax Act[1] and the Value-Added Tax Act[2] are however specific in the exchange rates that should be used for certain transactions and in some cases even determine the source where the exchange rates should be obtained. Although the Income Tax Act provides definitions for “spot rate” and “average exchange rate”, it does not specify a source from where these rates should be obtained, save for that it should be a quoted exchange rate from any authorised dealer (generally commercial banks). The foreign exchange rules for value-added tax are however more specific.

Generally, for standard rate supplies, tax invoices by South African vendors are required to be issued in rand. However, in terms of Binding General Ruling 11 (BGR 11), consideration for standard rate supplies may be in a foreign currency, if one of the following options are used to determine the rand equivalent of the consideration for the supply:

• The daily exchange rate on the date that the time of supply occurs, which should be the weighted average of the banks’ daily rates at approximately 10:30 am; or
• The daily exchange rate on the last day of the month preceding the time of supply; or
• The monthly average rate for the month preceding the month during which the time of supply occurs.

For the second and third options, the exchange rate to be used is the rate as published on the website of either the South African Reserve Bank, Bloomberg or the European Central Bank. These options are also not allowable in circumstances where the equivalent rand value is distorted due to the exchange rate used (for example the fluctuation of a foreign currency of 10% or more within the month), in which case the first option applies. Given the volatility of many emerging market currencies and South Africa’s trading partners, this is a relevant consideration.

The take away from the above is that determining the foreign currency to be used, may differ between transactions types and the type of tax that applied. Vendors who issue standard rate VAT invoices in foreign currency are particularly exposed to the risk of incorrect exchange rates and should familiarise themselves with the provisions of BGR 11 and keep detailed records of the exchange rates used, as well as the sources where the rates were obtained. There are also mechanisms available to taxpayers where the provisions of BGR 11 are not practical or do not cater for a specific scenario, to approach SARS to make alternative arrangements. Taxpayers are encouraged to obtain professional advice in this regard.

[1] 58 of 1961

[2] 89 of 1991

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)