IS IT SUFFICIENT FOR EXPENDITURE TO
MERELY BE CONNECTED TO BUSINESS-
RELATED ACTIVITIES IN ORDER TO DEDUCT
INPUT TAX?
The case of CSARS v De Beers (503/2011) [2012]
ZASCA 103 dealt with a complex transaction that is
unlikely to occur regularly, but some important
general considerations were nevertheless touched
on in this judgment.
In brief, the background to this case was that De
Beers Consolidated Mines Ltd (hereafter DBCM)
was approached by a consortium with an offer for a
restructuring in terms of which a new company that
would be owned by the consortium would be
established. This would enable the consortium to
effectively become DBCMs holding company. In
order to advise the board and existing shareholders
on whether the consortiums offer was fair and
reasonable, DBCM engaged a London based
consulting firm as well as South African advisors.
VAT implications of the services acquired from the
foreign service provider
SARS argued that the fee of approximately R160
million paid to the foreign service provider constituted
an imported service and that DBCM was therefore
liable to pay output tax on this fee paid in terms of
section 7(1)(c). The following definition of an imported
service is relevant in this regard:
imported services means 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 (own emphasis added in
italics)
The taxpayer argued that the services were not
imported services as it, firstly, related to DBCMs
enterprise because of the fact that the duty to obtain
this advice was imposed by law4 and that, secondly,
the services were not fully consumed in South Africa
as some of the meetings with the foreign service
providers were held in London.
The judges had differing reasons for their views but all
concluded that the services constituted imported
services for the following reasons. In the first place it
was held that the services, despite stemming from a
requirement imposed on DBCM by law, were too far
removed from the activities that constituted DBCMs
enterprise making the taxable supplies (mining and
selling diamonds) to be said to have been acquired for
the purposes of making taxable supplies in the course
of this enterprise. The court was of the view that these
services were not normal overhead costs necessary to
make taxable supplies and represented services
acquired for the benefit of the companys shareholders,
as opposed to being consumed or
utilised in the course of the taxpayers enterprise for
VAT purposes. It was also held that incidental links
or benefits to the enterprise were not sufficient to be
able to conclude that the services were acquired to
make taxable supplies. Based on these views
expressed, it is submitted that any expenditure
incurred on services by an entity for the benefit of its
shareholders or investors, which is is not directly
related to the core activities of the entity, may
therefore not be acquired for the purpose of making
taxable supplies and therefore not qualify for an
input tax deduction.
In respect of the place of consumption of the
services, it was held that irrespective of where the
meetings with the advisors were held, the services
were consumed in South Africa where the board of
DBCM used the outputs produced by the advisors to
make the decisions. It therefore appears as the
courts will not be persuaded about the place of
consumption of services by only considering the
place where the physical activities related to the
service take place, but will also consider the place
where the benefits received by the recipient from
this service are consumed.
Consequently, it was held that the services were
consumed in South Africa and that it was not
acquired for the purpose of consumption or use in
making taxable supplies, due to the lack of linkage
to DBCMs taxable supplies. DBCM was required to
pay output tax on the imported service.
VAT implications of the services acquired from
local service providers
For the same reason as the services provided by
the foreign service provider, it was held that the
services rendered by the local service were similarly
not acquired by DBCM for purposes of making
taxable supplies. DBCM was denied an input tax
deduction in respect of these services.
Concluding thoughts
From the judgment in this case it is clear that the
courts will not merely consider whether expenditure
to acquire goods or services relate to the business
making taxable supplies in general but rather
whether a direct or clearly identifiable relationship
exists between the goods or services acquired and
the taxable supplies of the vendor.