South Africa: The VAT Treatment Of Supplies Made – Are You An Agent And Can You Prove It?

In the recent case of KEN CC v CSARS, VAT2218 (VAT) [2023] ZATC CPT, the Tax Court (Cape Town) was tasked with deciding the dispute that had arisen between KEN CC (the "vendor") and SARS concerning the vendor's supply of services to foreign tour operators ("FTOs") incorporated outside of South Africa.

The vendor argued that it provided a single supply of tourism package assembly services to its non-resident FTO customers and that such services were zero-rated under section 11(2)(l) of the Value Added Tax Act, 1991 ("VAT Act"). This was on the basis that the FTO customers were not residents of South Africa and were not located in South Africa when the package assembly services were rendered. As part of its package assembly services, the vendor was appointed on behalf of the FTOs to contract with local third-party service providers for inter alia accommodation, guides, and greeting services. These 'local services' were acquired by the FTOs for on-supply to their own customers who purchased the assembled holiday packages from the FTOs outside of South Africa.

The vendor regarded itself as an agent on behalf of the FTOs and therefore in no way responsible for the South African VAT implications of the services supplied by the local third-party service providers. The vendor argued that the only income that accrued to it was the zero-rated commission for rendering the package assembly services, and amounts received to purchase the 'local services' on behalf of the FTOs did not constitute consideration for any taxable supply, standard or zero-rated, made by it. KEN submitted its VAT returns to SARS on this basis i.e. declaring only VAT at the zero rate on its agency commission from the FTOs.

SARS argued that KEN acquired the 'local services' as principal and on-supplied those services to its FTO customers. According to SARS, the commission earned by KEN was in fact a mark-up on the cost of the 'local services' and the total taxable consideration that accrued to the vendor was therefore the commission plus the cost of the 'local services'. The composite amount, SARS contended, was subject to VAT at the standard rate in terms of the exclusion under section 11(2)(l)(iii) of the VAT Act which applied because the tourists who consumed the holiday packages were in South Africa when the 'local services' were supplied.

From the evidence adduced by KEN, the relevant facts include the following:

• Based on the terms of the contracts between KEN and its FTO customers, KEN secured bookings or was appointed as an exclusive representative to purchase tourist products and related bookings/reservations and process payments on behalf of the FTO.
• KEN did not decide which local suppliers were included in a tour package, it merely advised on the suitable options available, and the FTO selected the suppliers and instructed KEN to book with these suppliers on its behalf.
• KEN represented itself as an agent for the FTOs and all local service providers were aware of this. The documents that KEN issued; for example, the introductory emails, confirmation of booking emails and vouchers expressly and routinely stated this.
• While the quantum of the commission earned by KEN for its assembly services was not disclosed in KEN's quotations and invoices issued to its FTO customers for reasons of confidentiality and competitiveness, FTOs knew what comprised the total amounts included in the quotations and invoices, and the issuing of invoices on this basis was a practice commonly applied in the industry.
• In email correspondence between SARS and the vendor in 2005, SARS' VAT department confirmed that SARS did not "have any problem" with the layout of the invoices issued by the vendor, but for the vendor's internal records it was required to be able to determine the quantum of its commission.
• KEN's commission charges could be readily determined by KEN's systems, and KEN's VAT returns and annual financial statements only reflected the commission as KEN's income.
• The decision to cancel any local supplies was that of the FTO alone, and it would bear any adverse financial consequences that may arise.
• KEN never claimed a deduction of the VAT charged by local suppliers in respect of the supplies made to the FTOs.
• KEN did not have any assets such as hotels, and thus no inventory to sell because it did not "buy" hotel rooms for on-sale nor did it take responsibility for the performance of the service by the local supplier.
• KEN had no contractual nexus with the foreign tourists, who were clients of the FTOs.
• KEN also did not have any contact with the foreign tourists (clients of the FTOs) whilst they were in South Africa, except for the limited purpose of serving as a conduit between the tourists and the FTO in the case of emergencies. Any complaints by the foreign tourists were directed to the FTO.
• SARS had previously audited the vendor and raised additional VAT assessments in relation to four tax periods in 2016 on the same basis as the subject matter of the dispute before the court. SARS had allowed the vendor's objection in respect of those assessments but sought to re-assess the periods as part of the current dispute.

The Tax Court held that SARS' approach and arguments, in light of the facts and evidence, were disconsonant with both SARS' own Interpretation Note 42 and the judgment in XO Africa Safaris v CSARS, [2016] ZASCA 160, which SARS had placed significant reliance on to support its views to issue to the additional VAT assessments.

According to the Tax Court, the facts of the XO Africa case were "completely distinguishable" from the facts before it. In particular:

• XO Africa's accounting records reflected the gross amounts invoiced to the FTOs (as its sales), and the invoices received from the local service providers as its cost of sales. KEN only accounted for the commissions earned in its accounting records.
• XO Africa purchased the local services and provided them to foreign tourists and deducted input VAT charged by the local suppliers responsible for delivery of the local services during the tours. It employed consultants to supervise this. XO Africa was obliged to rectify any problems with the local suppliers, and the FTO played no role in this.
• XO Africa's documents and/or agreements left no doubt that it was providing materials and services consisting of accommodation, meals, entertainment, gifts, transport and the like. This is what XO Africa undertook to provide to the FTOs; that is what it was paid to provide and that is what it provided.

In terms of section 130(1)(a) of the Tax Administration Act, 2011, costs will only be awarded in favour of a taxpayer if the court is satisfied that the grounds relied upon by SARS are unreasonable. According to the Tax Court, SARS was "grossly unreasonable in adopting the stance it did, both in relation to the challenged assessments and the stance it adopted throughout [the] proceedings". No evidence was adduced by SARS to explain or justify the stance that it adopted. The vendor was accordingly awarded costs, including the cost of two counsels both in relation to (i) the main issues in dispute, and (ii) an interlocutory matter that pertained to a request for SARS documents brought by KEN in respect of the four 2016 tax periods already re/assessed by SARS and in terms of which the vendor's objection at the time was accepted.

The KEN case demonstrates the importance of adopting a VAT position that is supported not only by the contractual terms of the relevant arrangement that should be clearly documented but also by the conduct of the parties. The case also demonstrates the importance of properly articulated and consistent disclosures to SARS, as well as the benefit of detailed record-keeping even beyond the five-year statutory retention period.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.