In a recent Court Case at the North Gauteng High Court, a judgment handed down confirmed that Citibank South African branch (Citibank SA) is required to pay VAT in respect of the employees seconded from its offshore related parties since the services supplied by the respective employees qualify as "imported services" as defined for VAT purposes.

In this matter, Citibank US entered into agreements with Citibank SA pertaining to the secondment of employees to Citibank SA. The agreement stipulated that Citibank US lends the services of the seconded employees to Citibank, which further concludes that the agreement is for the supply of employee services. The agreements were also explicit that the seconded employees areis not an employees of Citibank SA. Citibank SA argued that the seconded employees are its employees since:

  • The seconded employees place their productive capacity at the disposal of Citibank SA;
  • Citibank SA has the right of supervision and control over the seconded employees for the duration of their secondment; and
  • Citibank SA paid Citibank US for the supply of the seconded employees' services and the amount was equivalent to the remuneration due to the employees and no mark-up was charged or paid.

SARS argued that the critical determination is whether Citibank SA is an employer of seconded employees in terms of the definition of an employer in the relevant tax Act and if not, whether Citibank SA is liable to pay VAT on imported services. SARS further argued that the agreements are explicitly clear that the seconded employees are supplied as a service provided to Citibank SA and it follows that the payments made in respect of the secondees in question, are made as payment for a service in terms of the agreement.

The Court held that Citibank SA faulters at two level, in a sense that they have not shown that they are employers of the seconded employees and secondly that the payments made to individuals in question constitute "remuneration" within the meaning contemplated in the definition of enterprise in the VAT Act.

Consequently, it was concluded that since Citibank US supplied services to Citibank SA, such services constituted imported services as defined for VAT purposes and therefore Citibank SA was required to charge and account for VAT at the standard rate of 15% on such services acquired from a non-resident to be used in the course of its exempt supplies.

Key lessons from the case: It is important to carefully consider wording used in secondment agreements especially where the secondment is between an RSA based and foreign party. All tax implications must be assessed upfront before the agreements are concluded to ensure an efficient tax position is adopted.

The Courts will rely on the intention of the parties which is expressed in legal provisions. In this case, Citibank SA could not argue against the legal provisions which are explicit and clearly express the intention of the parties with respect to seconded employees, without any ambiguity. Therefore, since Citibank SA is not an employer, it follows that it could not argue that it paid salaries to individuals who were not employed by it, however, the recoveries from Citibank US constituted fees for the services rendered which are subject to VAT under the reverse charge mechanism.

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