It’s not just about money

Ab­so­lute costs of host­ing World Cup must be weighed against in­di­rect ben­e­fits

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - JAC­QUI WIERZBOWSKI & ZWELO­DUMO MABHOZA

IN THE wake of the spend­ing han­gover ex­pe­ri­enced by many South Africans af­ter the Soc­cer World Cup, some are ques­tion­ing whether this in­ter­na­tional sport­ing event has cost the coun­try dearly.

Var­i­ous econ­o­mists have es­ti­mated the cost to the tax­payer to be be­tween R30bn and R50bn.

These fig­ures are a far cry from the re­ported spend by Visa of $312m. How­ever, not only does one have to look at the ac­tual cost, but the op­por­tu­nity cost as well. Al­though many tax­pay­ers feel that this money could have been bet­ter spent on hous­ing and ed­u­ca­tion, a World Cup is not all about money. In the South African con­text, the po­ten­tial ef­fect of bring­ing a nation to­gether is per­haps price­less.

The out­look may not be en­tirely bleak from a VAT rev­enue gen­er­a­tion per­spec­tive. The gen­eral thrust of the VAT sys­tem is that it is a tax on fi­nal con­sump­tion. Broadly speak­ing, the man on the street bears the cost of VAT and it is this cost which passes to the rev­enue author­ity as in­come. Con­se­quently, the statis­tics re­ferred to be­low must be viewed against the back­drop of the prin­ci­ples of VAT rev­enue gen­er­a­tion and, in par­tic­u­lar, the fi­nal con­sumer’s pur­chas­ing pat­terns.

The South African govern­ment granted spe­cial tax con­ces­sions and guar­an­tees to Fifa for the World Cup; “tax-free bub­bles” were es­tab­lished. These bub­bles were des­ig­nated Fifa sites such as the cham­pi­onship sta­di­ums and the of­fi­cial fan sites. Al­though the re­lief within these bub­bles ap­plied to both non-res­i­dents and res­i­dents, it was re­stricted to “qual­i­fy­ing per­sons” within the realm of the Fifa des­ig­nated sites. With re­gard to VAT, goods and ser­vices within these bub­bles were zero rated, while any in­put tax on the ac- qui­si­tion of such goods or ser­vices was claimable. This ben­e­fited for­eign ser­vice providers op­er­at­ing tem­po­rar­ily within the bub­ble. The pub­lic who pur­chased goods and ser­vices also ben­e­fited from the lower cost due to the zero rat­ing. In spite of these spe­cial tax con­ces­sions, the ticket sales re­mained sub­ject to VAT and the spec­ta­tors con­trib­uted to VAT rev­enue gen­er­a­tion in this way. Con­versely, how­ever, the con­cept of the tax-free bub­ble rep­re­sented VAT leak­age for the South African Rev­enue Ser­vice (SARS).

Ac­cord­ing to Ned­bank, growth in re­tail sales beat mar­ket ex­pec­ta­tions in May. The in­creased spend­ing was bol­stered by the build-up to the World Cup as cit­i­zens and for­eign­ers alike got caught up in the frenzy of this once in a life­time op­por­tu­nity. Ned­bank re­ported that all ma­jor cat­e­gories recorded growth on an an­nual ba­sis. The cat­e­gories that con­trib­uted the most to the growth were sales of house­hold fur­ni­ture, ap­pli­ances and equip­ment, phar­ma­ceu­ti­cal and med­i­cal goods, cos­met­ics and toi­letries.

In part, this growth may be at­trib­uted to the in­jec­tion ini­ti­ated by the World Cup but is also a sign of an econ­omy on the mend.

Visa re­ported that for­eign card spend­ing reached $312m (about R2,4bn) in the lead-up to and dur­ing the eventm an in­crease of 70% over the same pe­riod last year. Visa con­firmed that more than 90% of the spend­ing was in leisure and busi­ness travel cat­e­gories — restau­rants, re­tail, ve­hi­cle rental, ac­com­mo­da­tion and air travel. The VAT levied on these sup­plies would have added to the cof­fers of SARS.

Al­though these fig­ures re­flect the di­rect im­me­di­ate ben­e­fit, the longer term can­not be ig­nored. SARS should reap the ben­e­fits of the World Cup in years to come with par­tic­u­lar em­pha­sis on in­creased VAT rev­enues.

The host­ing of the World Cup in SA saw an in­flux of spe­cial­ists who as­sisted with the con­struc­tion of in­fra­struc­ture to en­sure the suc­cess­ful host­ing of the event. How­ever, most of these in­di­vid­u­als would have been ex­empt from pay as you earn (PAYE) tax un­der leg­is­la­tion passed re­gard­ing World Cuprelated ac­tiv­i­ties.

On the other hand, a num­ber of South African tax res­i­dents who were work­ing off­shore were re­cruited back to the coun­try to as­sist with the build­ing of the sta­di­ums and other in­fra­struc­ture. This also saw an in­crease in the num­ber of South Africans who were em­ployed. This re­sulted in an in­crease in the col­lec­tion of PAYE for the coun­try. It is re­ported that 50 000 per­ma­nent jobs have been cre­ated by this event and this is a legacy that would be most wel­comed by SARS as their tax col­lec­tion would in­crease. There were also tem­po­rary jobs that were cre­ated be­fore and dur­ing the World Cup and it is re­ported that about 690 000 jobs were cre­ated as a re­sult. This would also be a boost for PAYE col­lec­tion.

A num­ber of South African-based com­pa­nies have also seen an in­crease in their rev­enues re­sult­ing from the need to im­prove in­fra­struc­ture. How­ever, the ben­e­fit of this in­crease in rev­enue may have not been recog­nised be­cause it co­in­cided with the global eco­nomic melt­down.

Most com­pa­nies at­tracted nor­mal tax on these rev­enues but SARS, in con­sul­ta­tion with Fifa, agreed that spon­sors, sup­port­ers and Fifa part­ners would not be sub­ject to tax on cer­tain rev­enues gen­er­ated be­fore and dur­ing the World Cup and the Con­fed­er­a­tions Cup. These are rev­enues that were gen­er­ated in cer­tain des­ig­nated sites such as sta­di­ums, fan parks and so forth. Some of the South African en­ti­ties who ben­e­fited from this spe­cial dis­pen­sa­tion are Match, MTN, Telkom, SABC and First Na­tional Bank. How­ever, any costs in­curred to gen­er­ate these rev- enues were not de­ducted for tax pur­poses. In or­der for these en­ti­ties to ben­e­fit from a de­duc­tion, they would have to be in a tax-pay­ing po­si­tion in­so­far as the rev­enues gen­er­ated from the des­ig­nated sites are concerned.

If the costs in­curred ex­ceed the rev­enues gen­er­ated, the en­ti­ties that are sub­ject to this spe­cial dis­pen­sa­tion will not be in a po­si­tion to carry for­ward the tax losses. The biggest chal­lenge for these en­ti­ties is to iden­tify di­rect rev­enues and costs that are sub­ject to these spe­cific ar­range­ments. For ex­am­ple, there could be for­eign ex­change dif­fer­ences if cer­tain goods or ser­vices are priced in for­eign cur­ren­cies such as UK pounds or US dol­lars. The other item would be in­ter­est in­come as­so­ci­ated with rev­enues gen­er­ated dur­ing the World Cup and the Con­fed­er­a­tions Cup. The ques­tion is whether these amounts should be treated as part of ex­penses or rev­enue that are sub­ject to this spe­cific dis­pen­sa­tion.

The en­ti­ties that were not sub­ject to this dis­pen­sa­tion will be sub­ject to cor­po­rate tax for all the rev­enues gen­er­ated be­fore and dur­ing the World Cup and SARS should ben­e­fit from the in­creased rev­enues. How­ever, there could also have been a num­ber of en­ti­ties or in­di­vid­u­als who have fi­nan­cially ben­e­fited from this tour­na­ment but who are not within the tax net. In these cases SARS will be the loser.

Moses Mab­hida Sta­dium, Dur­ban

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