The Supreme Court of Appeal ("SCA") delivered two important value-added tax ("VAT") judgments recently.
In the first matter, Stellenbosch Farmers' Winery v Commissioner for SA Revenue Service (504/2011) [2012] ZASCA 72 on 25 May 2012 the SCA confirmed the decision of the Tax Court that the consideration of some R67 million received by the vendor for agreeing to the early termination of a distribution right granted to it by United Distillers plc, a company incorporated in the United Kingdom is subject to VAT at the rate of zero percent in terms of section 11(2)(l) of the Value-Added Tax Act, No 89 of 1991 ("the VAT Act").
Two important principles emerge from this judgment. Firstly, the SCA confirmed that although the agreeing to the early termination of the distribution right comprises the taxable supply of a service for VAT purposes, such service is not supplied directly in connection with any movable property situated in South Africa. It dismissed the arguments by counsel acting for the South African Revenue Service ("SARS") that the service supplied, that is, the right being surrendered, can at the same time constitute the movable property in respect of which the service is supplied.
Secondly, the SCA confirmed the finding of the Tax Court that the location of an incorporeal right is where the grantor or the right resides. This should clarify the position of a foreign entity which grants incorporeal rights to South African entities, such as the use of intellectual property or software, is not carrying on an enterprise in or partly in South Africa and is therefore not required to register for VAT in South Africa as a result.
Judgment in another VAT matter, namely, Commissioner: South African Revenue Services v De Beers Consolidated Mines Limited [2012] ZASCA 103 was delivered by the SCA on 1 June 2012.
The background to the matter is briefly as follows. In considering a complex restructuring transaction, De Beers Consolidated Mines Limited ("DBCM") engaged the services of an offshore independent financial advisor, NM Rothschild and Sons Limited ("NMR") and various local legal and tax advisors. The NMR services were obtained essentially to satisfy a statutory obligation of DBCM towards 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 SARS assessed DBCM on two grounds:
- The NMR services were "imported services" for purposes of section 7(1)(c) of the Value-Added Tax Act 89 of 1991 ("the Act")"; and
- The VAT charged by the local service providers did not qualify as "input tax" as this term is defined in section 1 of the Act.
The SCA held that the NMR services were "imported services". Most importantly, the SCA 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. For the same reasoning the SCA also held that no input tax could be deducted in respect of any of the local services. The purposes for which the local services were provided was held to be too far removed from the "consumption, use or supply in the course of making taxable supplies" by an "enterprise" which mines, markets and sells diamonds.
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, concerning the deductibility of input VAT. It sets aside a more literal approach to the matter which had been upheld by the lower Court.
The first important principle that emerged from this judgment is that the SCA dismissed the contention where a vendor wholly carries on taxable activities, that all its expenses, including expenses relating to corporate actions that may arise, are attributable to such taxable activities. The activities and related expenses of a vendor should therefore be analysed and each category of activity and related expenses should be considered on its own merits to determine whether it comprises a taxable activity, for purposes of claiming input tax.
The second important principle is that the SCA followed a practical approach to determine the place of consumption with regard to the NMR services. It concluded that these services were consumed where the DBCM board finally met to receive and approve the recommendations made, and where the transactions were implemented. It would be interesting to see whether SARS will also apply this principle with regard to South African suppliers supplying services to foreign entities, that is, whether SARS will accept that advice provided by a South African service supplier to a foreign recipient who receives the advice and approves the recommendations outside South Africa is consumed outside South Africa, and that the zero rate to such services will apply, notwithstanding the fact that a representative of the foreign entity may have been present in South Africa when the advice was given or recommendations made.
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