n Business Tax and Company Law Quarterly - VAT incurred in relation to M and A activity - there be dragons, but they remain confused!

Volume 2, Issue 3
  • ISSN : 2219-1585


In this article, the authors examine a recent, but still unreported, Tax Court judgment which dealt with two issues in the context of a merger and acquisition ('M & A') transaction : firstly, whether certain foreign corporate advisory services utilised by the vendor (a company engaged in mining and selling diamonds) in relation to a proposed restructuring of its shareholding, constituted imported services as defined in the VAT Act and was accordingly subject to tax in the hands of the vendor; and secondly, whether the value-added tax paid by the vendor in respect of certain services acquired by the vendor from local suppliers (corporate advisory, legal and accounting) constituted input tax as defined in the VAT Act. While the Court acknowledged that the services rendered by the foreign corporate advisory firm had not been directly linked to the diamond-mining operations and were a once-off transaction, it accepted that the taxpayer had a legal obligation to engage these services so as to permit the shareholders to arrive at an informed decision as regards the merits of the proposed restructure of the vendor's shareholding. This, in the Court's view, was sufficiently connected to the taxpayer's overall enterprise activities for the services supplied by the foreign advisory firm to be regarded as having been used or consumed in South Africa for the purpose of making taxable supplies in the course or furtherance of the vendor's enterprise of mining and selling diamonds. The corporate advisory services rendered from outside South Africa were accordingly found not to constitute imported services, and the vendor was therefore held not to be liable to account for any value-added tax in respect of those services. As regards the value-added tax paid in respect of the local services rendered to the vendor in relation to the implementation of the restructure of the vendor's shareholding, the Court held that, to the extent that the services rendered by the local law firm related to the actual implementation of the restructuring (by way of a section 311 scheme of arrangement), these services had been rendered in relation to non-enterprise activities and accordingly were not deductible as input tax. As the law firm charged a globular fee, the Court found that apportionment as mandated by section 17(1) of the VAT Act had to be applied on the turnover basis. Interestingly, SARS had argued that, as a single fee had been charged that related partly to the making of taxable supplies and partly to the making of non-taxable supplies, the fee had to be apportioned on a fair and reasonable basis in terms of section 10(22) of the VAT Act and not on the basis of apportionment as prescribed in section 17(1). The Court also found that the other local services did not relate to the making of taxable supplies by the vendor and accordingly did not constitute deductible input tax. Having found largely in favour of the taxpayer, the Court ruled that there was no basis on which SARS was entitled to impose a 10% penalty for failure to pay the tax due timeously. The article analyses the decision critically and concludes that the legal requirement of providing advice to the taxpayer's shareholders was insufficient to provide a basis for the foreign services to fall outside the definition of 'imported services'. The article submits that rather, in providing the relevant financial information to its shareholders, the vendor in fact made a taxable supply thereof to them. Accordingly, the foreign services did not constitute imported services, and no VAT was payable thereon, while the VAT incurred in respect of the local services constituted deductible input tax.

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