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Supreme Court of Appeal Casts Light on VAT Debate
The Supreme Court of Appeal (SCA) recently delivered judgment in the VAT matter Commissioner: South African Revenue Services v De Beers Consolidated Mines Limited on 1 June 2012. Despite the fact that the SCA considered the facts of the matter to be unique, the case sheds light on one of the most topical debates in VAT circles, concerning reverse charges and the deductibility of input VAT. Taxand South Africa explores this case in the context of a wider VAT debate to see what multinationals should look out for when considering VAT.
The background to the matter Commissioner: South African Revenue Services v De Beers Consolidated Mines Limited is as follows:
- De Beers Consolidated Mines Limited (DBCM) was considering a complex restructuring transaction and engaged the services of an offshore independent financial advisor, NM Rothschild and Sons Limited (NMR) in addition to various local legal and tax advisors.
- The NMR services were obtained essentially to satisfy DBCM's statutory obligation, as a public company which was the target of a take-over, to provide advice to its unit holders.
- The invoices issued by the local providers to DBCM included VAT which DBCM deducted as an input tax in its own VAT returns. Arguing that neither the NMR nor local services were consumed by DBCM in the course of making taxable supplies, the South African Revenue Services (SARS) assessed DBCM on two grounds: a) the NMR services were 'imported services' for purposes of section 7(1)(c) of the VAT Act 89 of 1991 'the Act'; b) The VAT charged by the local service providers did not qualify for an 'input tax' as the term is defined in section 1 of the Act.
- As DCBM's objections against the assessments were disallowed, the matter was referred to the Tax Court. The Tax Court ruled in favour of DBCM by holding that the NMR services were used or consumed by DBCM for the purpose of making taxable supplies in the course of its enterprise i.e the mining, marketing and selling of diamonds.
- As the Tax Court was satisfied that the legal obligation imposed on DBCM to obtain the NMR advice was sufficiently closely connected to the conduct of the overall taxable activities of DBCM, it held that DBCM could not be subject to the reverse VAT charge imposed on imported services.
- But the Tax Court also held that DBCM could not claim an input VAT for the majority of the local services obtained, as these services constituted financial services which fell outside the scope of the Act and which were not rendered in the course of a financial enterprise.
SARS appealed and DBCM counter-appealed to the SCA.
The SCA were then required to interpret and apply the VAT legislation in question to the facts presented. Consequently, the SCA held that the NMR services were 'imported services'. In this regard, Navsa and Van Heerden JJA held that:
- the statutory duty imposed on DBCM was too far removed from the advancement of the VAT enterprise to justify characterising services acquired in the discharge of that duty as services acquired for purposes of making taxable supplies
- the NMR services were focused on the interests of DBCM's exiting shareholders and investors, rather than the core activities and interests of DBCM
- although some meetings with NMR were held abroad, the compelling conclusion was that the NMR services were consumed in South Africa
The SCA also held that DBCM could not deduct an input tax in respect of any of the local tax and legal services. Here the SCA adopted the same reasoning regarding the making of "taxable supplies" as it did in respect of the NMR services. It was held that the local services were provided for multiple purposes which included: enabling DBCM to comply with its statutory obligations to its unit holders; providing DBCM with tax advice on the implementation of the transaction; and obtaining the necessary court and unit holder approvals. As none of these purposes included the 'consumption, use or supply in the course of making taxable supplies' by an 'enterprise' which mines, markets and sells diamonds, the cross-appeal of DBCM failed.
In another case, Stellenbosch Farmers' Winery v Commissioner for SA Revenue Service (25 May 2012) the SCA held that the location of a contractual right, in this case a distribution right, is located where the grantor of the right is situated, i.e. in the UK, and that the consideration for the cancellation of such a distribution right qualifies for VAT at the rate of zero percent.
Despite the fact that the SCA considered the facts of the matter as unique, the case sheds light on one of the most topical debates in VAT circles, that concerning reverse charges and the deductibility of input VAT. South Africa is adopting a more restrictive approach to allowing VAT input credits, in the case of enterprises which earn VAT exempt income, or utilise corporate advisory or compliance services.
Even companies which only make taxable supplies may incur a VAT cost on corporate advisory and related services if such expenses are considered to be incurred in the interest of its shareholders as opposed to comprising overhead expenses attributable to its taxable enterprise activities.
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