The Supreme Court of Appeal (SCA) recently handed down the judgement (Case No: 503/11) in the case between the Commissioner for the South African Revenue Service (SARS) and De Beers Consolidated Mines Limited (DBCM).
The judgement related to two separate VAT disputes, the first regarding whether services rendered by independent financial advisers in London constituted "imported services" and the second whether VAT charged by certain local service providers qualified as input tax deductions.
SARS was successful in respect of both disputes.
Commencing in 2000, DBCM was party to a series of complex transactions, the ultimate result of which was that DBCM would be acquired by a new holding company. The scheme involved the implementation of a scheme of arrangement pursuant to section 311 of the Companies Act, No 61 of 1973 in terms of which DBCM bought back linked units (the shares in DBCM were linked to depository receipts issued by De Beers Centenary AG), primarily held by independent unit holders in exchange for shares which it held in Anglo American PLC. A cash dividend was also paid to the former DBCM unit holders.
NM Rothschild and Sons Ltd (NMR), an English advisory services company, was appointed in order to provide an opinion that the offer made to the independent unit holders was fair and reasonable. In respect of such services, NMR raised an invoice on DBCM for USD19,895,965 in June 2001. This invoice was settled at a Rand cost of R161,064,684.
DBCM also appointed a number of local advisors, including sponsoring brokers, lawyers and accountants. The collective role of the local advisors was to ensure that the transaction was implemented without impediment. The fundamental question before the SCA was whether the services of NMR and those of the local service providers were acquired by DBCM for the purpose of making taxable supplies in the course or furtherance of an enterprise carried on by DBCM.
A number of definitions require consideration in this regard. All section references are to the Value-Added Tax Act, No 89 of 1991 ("the Act").
"Imported services" is defined to mean: ".....a supply of services that is made by a supplier who is resident or carries on business outside the Republic to a recipient who is a resident of the Republic to the extent that such services are utilized or consumed in the Republic otherwise than for the purpose of making taxable supplies".
To the extent that the definition is relevant to the current issue, the term "enterprise" is defined as follows:
- in the case of any vendor, any enterprise or activity which is carried on continuously or regularly by any person in the Republic or partly in the Republic and in the course or furtherance of which goods or services are supplied to any other person for a consideration, whether or not for profit, including any enterprise or activity carried on in the form of a commercial, financial, industrial, mining, farming, fishing, municipal or professional concern or any other concern of a continuing nature or in the form of an association or club;
- without limiting the applicability of paragraph (a) in respect of any activity carried on in the form of a commercial, financial, industrial, mining, farming, fishing or professional concern — ... provided that – "...any activity shall to the extent to which it involves the making of exempt supplies not be deemed to be the carrying on of an enterprise; ..."
"Taxable supply" is defined to mean: "any supply of goods or services which is chargeable with tax under the provisions of section 7(1)(a), including tax chargeable at the rate of zero per cent under section 11".
Application of the law
The question before the SCA in relation to the services provided by NMR was whether the services were acquired for the purpose of making taxable supplies.
In support of this question, it was argued for DBCM that the NMR services were consumed outside of South Africa (in which case the services would fall outside of the ambit of the definition of "imported services"). This argument did, however, not succeed before the SCA.
It was also argued for DBCM that the services were acquired for the purposes of making taxable supplies (in which case the "imported services" definition would not apply). The reasons put forward by DBCM in support of this argument included that the transactions derived real advantages for the diamond business, inter alia, that the financial advice utilised by NMR was a useful management tool, that the revised structure allowed increased involvement by the Oppenheimer family in the business, thus adding to its image and morale and that the restructure eliminated certain negative effects resultant from the Anglo cross-holding.
SARS, however, argued that NMR's services were unrelated to DBCM's core activities being the mining and sale of diamonds and that the NMR services were directed at the interests of the former independent unit holders, rather, than at the interests of DBCM itself. It was also argued that the duties imposed on a public company in the present circumstances were too far removed to characterise such services as services acquired for purposes of making taxable supplies.
The SCA found in favour of SARS, concluding that the NMR services constituted "imported services" that were:
- utilised and consumed in South Africa by DBCM, being a South African company with its head offices located in Johannesburg; and
- not incurred for the purposes other than making taxable supplies, and thus attract VAT for DBCM at the standard rate.
At paragraph 53 it was noted that: "The question to be answered therefore is whether NMR's services were acquired for the purpose of making 'taxable supplies' in that 'enterprise'. The answer is clearly no. DBCM acquired NMR's services because DBCM was the target of a take-over by parties to whom it was related and DBCM's board had a duty to report to independent unit holders as to whether the consortium's offer was fair and reasonable and to obtain independent financial advice in that regard. In order to do this NMR was obliged to determine the value of DBCM's diamond business and then express an opinion that the consideration offered for the shares was fair and reasonable in the light of that evaluation. Such services were not acquired to enable DBCM to enhance its VAT 'enterprise' of mining, marketing and selling diamonds. The 'enterprise' was not in the least affected by whether or not DBCM acquired NMR's services. They could not contribute in any way to the making of DBCM's 'taxable supplies'. They were also not acquired in the ordinary course of DBCM's 'enterprise' as part of its overhead expenditure as argued by DBCM. They were supplied simply to enable DBCM's board to comply with its legal obligations."
The VAT of R22,549,955 raised by SARS was thus payable as output tax in terms of section 7(1)(c) of the Act. As regards the second dispute involving input tax claims of R7 021 855 in respect of the VAT charged by the local service providers, the SCA held that the local services were, based on the same contentions put forward by SARS in relation to the imported services, not acquired by DBCM for the purposes of making taxable supplies. The SCA confirmed that the input tax claims were correctly disallowed by SARS, as the local services were only obtained to implement the scheme of arrangement referred to in 4.2 above. In this regard, it was held by the SCA that: "The same reasoning in relation to NMR's services applies in respect of the provider of local services. In short, the services were acquired for the purposes of dealing with the proposal by the consortium. In regard to the special features of the transaction in question, as set out in paragraphs 10 to 15 above, it is worth reiterating that, from the outset, the intention was to ensure that the scheme conceived by Mr Oppenheimer materialised."
Implications of the judgement
Although it might be argued that SARS followed a narrow interpretation in arriving at its decisions, vendors need to be aware of the implications of the DBCM case.
The question whether goods or services have been acquired "for purpose of making taxable supplies" needs to be carefully considered in relation to the specific circumstances of each transaction. The fact that such services may be imposed on the vendor by law, or that they are directly connected to the overall operations of the business, does not necessarily mean that this test is satisfied.
Should costs be incurred in restructuring the operations of a business, the vendor must thus be in a position to demonstrate how the business itself has benefitted in the form of making taxable supplies - something which the DBSA was unable to do.