Most Read Contributor in South Africa, September 2016
In a recent case, XYZ Co v The Commissioner for the South
African Revenue Service (VAT 382), the Tax Court held that
advisory services acquired from a foreign supplier in relation to
an offer which unit holders in XYZ Co had received to eliminate
their interests in the company, do not comprise imported services
for Value-Added Tax ("VAT") purposes. The Tax Court
further held that the VAT incurred on local services acquired from
legal and financial advisors in relation to the transaction, is not
deductible as input tax.
The trading activities of XYZ Co involved the mining and selling
of diamonds from South Africa. It received a proposal from three of
its main shareholders as a consortium to acquire the interests of
the remaining shareholders in the company.
The company appointed an independent foreign financial advisor
to advise its board of directors as to whether the consortium's
offer was fair and reasonable. The company also appointed certain
local financial and legal advisors in relation to the offer and to
implement the transaction.
After having been advised that the offer was fair and
reasonable, the transaction was implemented through a scheme of
arrangement pursuant to section 311 of the Companies Act No. 61 of
1973. The scheme in effect involved a buy-back of certain of the
shares of linked unit holders in the company and a cancellation of
the balance of the remaining shares, in return for the payment of
cash and shares in a subsidiary company.
The board of directors of the company which was listed on the
Johannesburg, London and Swiss securities exchanges, was legally
obliged to obtain proper advice on the offer and to provide the
information to the holders of its linked units to enable them to
reach an informed decision on the merits of the offer made by the
The South African Revenue Service ("SARS") assessed
the company on the services it acquired from the foreign financial
advisor, and disallowed the VAT it claimed as input tax on the
local suppliers services.
A legal obligation was imposed upon the board of directors of
the company to obtain the services of an independent financial
advisor to inform the holders of the linked units in the company of
the fairness of the consortium's offer. The Tax Court therefore
considered the cost in this regard to comprise an overhead cost of
the company, which was acquired for the purpose of its diamond
mining and selling enterprise.
The Tax Court held that the definition of "enterprise"
in the VAT Act should not be limited to apply it exclusively to
assets which are used directly in the making of taxable supplies,
and found that the services did not comprise "imported
services" because they were used and consumed by the company
for the making of taxable supplies and in the course or furtherance
of the company's enterprise of mining and selling diamonds.
Unfortunately, the Tax Court did not consider the question as to
the location where the services were consumed or utilised, as only
services consumed or utilised in South Africa comprise
The Tax Court differentiated the local services from the foreign
services because it considered them to be incurred mainly to ensure
the maximum transfer of shares and cash to unit holders, both
activities of which do not comprise "enterprise"
activities as defined in the VAT Act. It accepted that certain of
the local legal services related to the statutory obligation to
provide information and advice to its linked unit holders, but it
could not determine the portion that related to this
The Court held that the VAT incurred on the local services did
not comprise input tax and is therefore not deductible as such,
save insofar as a certain portion of the local legal services are
The Tax Court agreed with SARS counsel that the zero rating
provisions of section 11(2) and the exemption provisions of section
12(a) only apply to supplies which would, in the absence of
sections 11 and 12, have been subject to VAT at the standard rate,
i.e. supplies in the course of an enterprise. The investment in its
subsidiary company, which was distributed as part of the
implementation scheme, did not comprise an enterprise activity and
therefore fell outside the scope of VAT and is not zero rated, even
though it may have been supplied to a non-resident.
The VAT on the local legal expenses, where the services related
to fulfilling the statutory obligation and those relating to the
non-taxable activities could not be determined and was referred
back to SARS for reassessment.
We understand that both parties have appealed the judgment.
Vendors should, nevertheless, carefully consider the VAT
implications of the services they acquire from foreign suppliers
and local suppliers in relation to investment activities in view of
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.
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The expansion of the West African regional market to foreign investors, and the search for emerging markets has led to a continuous increase in business mobility and cross border investments with Nigeria.
Effective collaboration amongst government agencies, automation of processes and capacity building by tax authorities have always been identified by stakeholders as strategies for achieving an efficient tax system.
The major objective of the waiver is to promote voluntary compliance and consequently generate revenue for government which otherwise, could have been lost.
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