From The Courts The De Beers VAT Case
31 July 2012
Posted by: Author: Alastair Morphet
From The Courts The De Beers VAT Case
Last year in September, a case dealing with the services of the English merchant bank in advising De Beers on a scheme of arrangement under Section 311 of the old Companies Act, was heard in the Tax Court (ITC 853 (2011)73 SATC).The court's conclusion was that these services from the English merchant bank did not constitute ‘imported services’,because the services had been used and consumed by the taxpayer for the making of taxable supplies and in the course or furtherance of its enterprise of mining and selling diamonds.
This matter was taken by SARS on appeal to the Supreme Court of Appeal (SCA). Judgement was handed down on 1 June 2012.There were two judgments written for the court—a lengthy judgement written jointly by Navsa and van Heerden JJA, and a separate concurring judgment written by Southwood AJA (Leach JA and Maclaren AJA concurring with that separate judgment).
The judgment of Navsa and van Heerden sets out the background in the matter very clearly—that this English merchant bank had been retained to advise the independent committee of directors as to whether the consortium's offer to buy out the diamond business was fair and reasonable to independent unit holders.There were, of course,a complex set of relationships between the Oppenheimer family,Anglo American plc., and De Beers.The critical issue before the court was whether the English merchant bank's services were utilised or consumed by De Beers for the purpose of making taxable supplies in the course or furtherance of its enterprise of buying and selling diamonds.
De Beers’ contention was that the provision of these services were a necessary concomitant of their mining, and their commercial enterprise as a public company. The requirements of the independent committee of directors and the formalities involved in Section 311 of the Companies’ Act(as it then applied) were statutory obligations that are incurred by a company that conducts its operations as a public company having raised money from the public. They argued that these supplies can rightly be said to have been wholly utilised or consumed in the making of supplies in the course of the commercial enterprise.As such, it was contended, they did not fall within the definition of imported services.
The Commissioner was arguing for a restrictive approach to this question of what is an enterprise,and seeing it as "the nuts and bolts of the operational diamond business and excluding statutory duties imposed on the company in the interest of shareholders” (Navsa and van Heerden JJA at paragraph 23).
These two judges said that, in the case of a public company, there is a clear distinction between the enterprise with its attendant overhead expenses, and the special duties imposed on a company in respect of its shareholders.The duty imposed on a public company that is the target of a takeover is too far removed from the advancement of the VAT enterprise to justify characterising the services acquired in the discharge of that duty as services acquired for the purposes of making taxable supplies (at paragraph27).The two judges said that the submissions on behalf of the Commissioner were undoubtedly correct.The Canadian and Australian cases referred to were particular to the facts of those cases, and the task of the court was to interpret and apply the VAT legislation to the facts put before them.
De Beers pointed out that the advice from the English merchant bank was, to a large extent, related to De Beers' holding of shares in Anglo American.It did not have a discrete non-enterprise activity of holding Anglo American shares for investment, which was separate from its diamond business.The court was unconvinced by this argument, and did not see the investment as constituting an enterprise in the meaning of the Act.
Given this finding, there was quite substantial argument on the question of where the supplies by the English merchant bank were consumed—whether in London or in Johannesburg. The court's view that De Beers was a South African company with its head office in Johannesburg—that was where the independent committee of directors had met and resolved to acquire the services of the English merchant bank (and other local service providers).That was the place where the board met to receive and approve the recommendation of the sub-committee, and the Section 311 scheme of arrangement was approved and implemented in South Africa.The court's overwhelming conclusion was therefore that the services had been consumed in South Africa.
The cross-appeal in the case related to import credits in respect of the legal services rendered to the company as part of the Section 311 scheme of arrangement.The court had found that the purchase consideration that a unit holder received was partly a share buy backing terms of which they received new shares in another company, and then the cancellation leg that gave the unit holder an amount in cash.
The matter had accordingly been referred back to SARS to determine an appropriate ratio to which a percentage of the services would constitute a deductible input credit.In the SCA, the judges' view was that the legal services of formulating and executing the Section 311 scheme of arrangement,obtaining the tax rulings in terms of Section 60 of the Income Tax Act (no 113 of 1993, which gave effect to the tax proposals of the 1993 Budget), and the exchange control requirements for the distribution of the unbundled Anglo shares, was subject to the same reasoning as those applying to the English merchant bank's services.
The intention of these services was to ensure that the scheme conceived by Mr Oppenheimer was carried out.As such, this was not part of De Beers' diamond mining enterprise.The separate concurring judgement of South wood AJA dealt with a tight analysis of the provisions of the VAT Act (no 89of 1991) (VAT Act).
The majority judges said that if one looked to the definition of‘enterprise’ and proviso (v), any activity to the extent it involves the making of exempt supplies is not deemed to be the carrying on of an enterprise.To be entitled to deduct' input tax' against VAT payable, the vendor must be carrying on an enterprise, and must have paid VAT on goods and services which he acquired wholly for the purpose of consumption, use or supply in the course of supplying the goods or services which are chargeable to tax under Section 7(1)(a) of the VATAct.
Section 17 provides for the apportionment method where the deductible input tax is acquired partly for consumption, use, or supply in the course of making taxable supplies.Then, having regard to the definition of ‘imported services’ the question is whether the services are not utilised or consumed in the Republic, or if they are utilised or consumed in the Republic, they are utilised or consumed for the purpose of making taxable supplies,then the services would not be‘imported services’.
Accordingly, the question boiled down to was the nature of the enterprise, because the purpose of acquiring the services and whether they were consumed or utilised in making taxable supplies could only be determined in relation to the enterprise (at paragraph 51). In the circumstances of the case, the majority held that De Beers was not a dealer in shares, and that the holding of shares and the receipt of dividends did not fall within the definition of 'enterprise'. De Beers' enterprise for the purposes of the VAT Act consisted of mining,marketing, and selling diamonds.
Having arrived at this conclusion, it was clear that the English merchant bank's services were not acquired to enable De Beers to enhance its VAT enterprise of mining, marketing,and selling diamonds. The services of the English merchant bank did not contribute in any way to the making of De Beers taxable supplies (at paragraph 53), and the input VAT was thus not claimable by De Beers.
Source: By Alastair Morphet (Tax breaks)