South Africa has a number of indirect taxes, of which VAT is by far
the most important. It was introduced in 1991 and today it accounts for
approximately 26% of the total tax take. VAT is levied either at a
standard rate of 14% or at a rate of 0% (mainly in relation to exported
goods and services). VAT is levied on all supplies of goods and services
by an enterprise conducted in South Africa and on the importation of
goods and certain services, with relatively few exceptions. The most
significant exceptions relate to the supply of financial services, which
are exempt from VAT. However, fee based financial services such as bank
fees or commissions are subject to VAT. VAT is largely a self
assessment system of tax collection which is policed by regular audits
by the South African Revenue Service (SARS).
The self assessment system, coupled with the ability to obtain
refunds of input VAT (where the VAT account is in credit) contributed to
fairly significant VAT frauds and abuses. This led to significant
tightening up of the processes around the claiming of inputs and refunds
and the ability of enterprises to register as VAT vendors in the first
instance. It is understood that policing VAT compliance remains a high
priority for SARS and that increasingly emphasis is being placed on the
evidentiary aspects of vendors' compliance with their obligations. A VAT
risk engine was introduced by SARS in May 2011 and has generated
significant numbers of revised assessments.
The significant delays by the SARS to register vendors for VAT
purposes, in particular non-resident entities, have caused many
practical difficulties regarding the treatment of VAT on transactions
from the date of application to the date of registration. The SARS is
now considering introducing VAT registration procedures and requirements
specifically for non-residents carrying on business in, or partly, in
South Africa.
The legal basis of the VAT system
The primary source of law is the Value-Added Tax Act 89 of 1991 as
amended. This Act is amended at least annually and often bi-annually as
part of the tax laws amendment cycle. Policy changes are usually
announced by the Minister of Finance on reading his budget in February
of each year. The release of legislation (initially in draft) and in
final form can take place throughout the year. Often the effective dates
of changes to the law are staggered and may even have retrospective
effect. The legal landscape can be changed by other means as well
including the issue of binding rulings, the release of regulations and
practice or interpretation notes.
Significant law changes
The Taxation Laws Amendment Act of 2011 was promulgated on January 10
2012. Among other things this contained an extension to the framework
for Sharia compliant financing structures. Other changes relate to the
claiming of VAT on fixed property acquired from non-registered vendors
and the temporary letting of residential property by a developer.
Further amendments were proposed by the Minister in the budget including changes relating to:
- Zero-rating of interest earned on loans to non-residents;
- The treatment of indirect exports of goods by road;
- The treatment of temporary imports to promote local processing and beneficiation;
- Elimination of a double VAT charge on imported goods removed from a
customs controlled area and on standard rated goods sold by a vendor
prior to entry for home consumption; and
- The VAT treatment of public passenger transport.
Case law
South Africa has relatively few important reported VAT cases.
Fortunately because of the similarity between our VAT Act and that of
other countries including New Zealand, we are able to refer to foreign
case law for guidance on interpretation. A recent Supreme Court of
Appeals (SCA) case dealt with the deductibility of input VAT in relation
to imported services (reverse charge) and the question here is whether
the services were used or consumed by the vendor for the purpose of
making taxable supplies in the course or furtherance of its enterprise.
The case concerned dealt with services provided by an English
advisory company acting as independent financial advisers to a listed
South African company. In summary, the Court held in favour of the SARS
on the basis that the legal obligation imposed on the listed company to
obtain advice in the circumstances was insufficiently closely connected
to the conduct of its overall taxable activities. Accordingly the
services in question were not used and consumed by the vendor for the
making of taxable supplies and in the course or furtherance of this
enterprise and the vendor was held to be subject to the VAT reverse
charge.
A second aspect of the case dealt with the deductibility of a VAT
input credit for legal and tax services incurred to optimise the
structuring of an arrangement with the unit holders of the company
concerned. The Court held that the services concerned did not qualify
for an input tax deduction as the financial activities in question
constituted supplies which simply fell outside the scope of the Act.
They were financial services which were not rendered in the course of a
financial enterprise. Accordingly the legal and tax advice obtained were
related to this discrete activity and not in the course of the
underlying business which constituted the taxpayer's taxable enterprise.
This case is of some significance in casting light on an unfolding
debate in South African VAT practice relating to the deductibility of
input VAT.
In another SCA case, the court had to deal with the question whether
VAT was chargeable on consideration received where the vendor agreed to
the early termination of a distribution agreement with a non-resident.
The SCA confirmed the Tax Court's finding that the agreement to give up
the distribution rights constituted a supply of services which was
chargeable with VAT at a zero percent rate in terms of the provision of
the Act which relates to services supplied to a non-resident (exported
services).
A recent High Court case dealt with the ability of the SARS to take
steps to recover VAT from a vendor without giving notice to the vendor
before taking judgement and executing against the vendor's assets. In
this case it was common cause that the vendor was indebted to SARS and
the Court held that once a debt is due, the enforcement procedures must
follow without any obligation on SARS to make an assessment or give
notice before obtaining judgement against the vendor. Moreover because
in terms of the Act interest and penalties automatically run when a debt
is due there was no need for SARS to raise an assessment to calculate
interest and penalties on the overdue taxes and it was accordingly
entitled to proceed to take steps for the recovery thereof without
further ado. This last case is of some importance in the current
environment where there has been a dramatic increase in the
assertiveness of SARS in collecting unpaid taxes, including those which
are subject to legal dispute.
Issues of the day
One particular area of VAT practice has spawned considerable activity
in recent times. This relates to the deductibility of input VAT in the
case of enterprises which make a combination of taxable and exempt
supplies. Examples of this are the banking sector and the extension of
credit by retailers. The issue here concerns the basis upon which input
VAT claims are to be allocated or apportioned. The standard means of
apportionment in terms of our Act is the turnover method but this
generally yields results which are commercially unpalatable to vendors.
They are accordingly required to make applications for rulings approving
of an alternative basis of apportionment or allocation. Considerable
difficulties arise in the obtaining of these rulings and in various
instances where the rulings sought for have been disallowed; the matters
are likely to come before the Tax Court in due course.
A second area in which the deductibility of input credits has given
rise to controversy and dispute relates to enterprises which wholly make
taxable supplies but which nevertheless are obliged to incur overhead
services. A good example of this type of service is the annual audit. In
an earlier Tax Court decision it was held that a direct and immediate
link is required between the incurral of the service and the making of
taxable supplies. The latest SCA decision mentioned above left this
issue open.
The current policy of SARS is that they follow this ealier Tax Court
decision, requiring that there be a direct or immediate link to a
taxable supply for VAT on an expense to qualify as input tax, regarding
the ultimate purpose for incurring the expense as irrelevant. However,
the definition of input tax requires that goods or services must be
acquired for the purpose of use, consumption or supply in the course of
making taxable supplies. There are a number of South African judgements
dealing with the phrase "in the course of" which indicates that to claim
input tax, there must be some relationship between the consumption or
use of the services or goods and the making of taxable supplies. A
direct or immediate link to taxable supplies is not required. SARS,
however, continues to apply the direct or immediate link requirement
despite subsequent international precedent contradicting the earlier Tax
Court decision requiring such direct and immediate link. This area of
law is clearly being developed as can be seen from the recent cases
cited above. However the SCA expressly declined to follow certain
international precedents, and South Africa may therefore continue to
follow a more restrictive approach in future.
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Robert Gad |
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Gerhard Badenhorst |
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Gary Vogelman |