Understand what VAT ruling means
VENDORS: NOTE THE CLARIFICATION IN JUDGMENT
The result will be a higher tax liability. Moneyweb
Companies should take heed of a recent decision by the Supreme Court of Appeal that may impact their future positions regarding value-added tax (VAT).
The case relates to the proper interpretation of the deeming provisions in the VAT Act, especially Section 8(15) on the single supply of goods and services – which, in certain circumstances, could be deemed to be more than one supply.
The result will be a higher tax liability.
In the case before the appeal court, a manufacturer and distributor of alcohol in South Africa, Diageo, appealed a tax court decision that it owed the South African Revenue Service (Sars) VAT of about R14 million for the supply of goods and services.
Diageo entered into exclusive contracts with foreign alcohol brand owners to market and promote their products in SA. In terms of the VAT Act, the services provided to a non-resident entity such as the brand owners are zero-rated. However, in this case Diageo used certain marketing products such as free samples, glasses, flags or caps to entice consumers to buy the products.
The court ruled that those products were deemed not to form part of the single supply of the marketing service rendered to the foreign entities. These products were consumed in SA and should therefore attract VAT at the standard rate.
It dismissed Diageo’s appeal.
Ferdie Schneider, CEO of STA Konsult and chair of the SA Institute of Tax Professionals, says the appeal court referred to the VAT system’s objective to tax private domestic consumption in SAa.
Diageo argued that the promotional items were part of the single supply (its advertising and promotion service to the foreign brand owners) and that it did not make separate or “dissociable supplies” of services and goods.
The courts found that the local supply of promotional goods, which were not exported but consumed in SA, was deemed to be a separate supply. The VAT levied at the standard rate on those goods was therefore justifiable.
PwC directors Rodney Govender
and Matthew Besanko raise the issue whether this judgment could impact the price of zero-rated food products in SA.
They consider the probability that purchases by manufacturer of, for example, a loaf of bread or a container of milk, should be split between the supply of the actual product and the other components associated with the product, such as the packaging or transport costs.
However, Schneider disagrees with such a broad interpretation. The provision in the Act interposes a deeming between foreign or zero-rated services rendered by a SAentity, and goods supplied for local consumption.
“To assume that this will automatically be applicable to zero-rated food products such as bread and milk is extreme.”
Moneyweb asked Sars for its interpretation, but received no response.
Schneider says it is clear that the principles of Section 8(15), where a single supply for a single consideration is deemed to be more than one supply (where one supply can be subject to the standard rate and another to the zero rate), can have far-reaching consequences in various other industries.
It can have farreaching consequences