The future of VAT apportionment unknown
23 May 2013
Posted by: Author: Cliff Watson (Grant Thornton)
Source: Cliff Watson (Grant Thornton)
The proposed future
At the time of the 2013/2014 budget speech, National Treasury issued Annexure C – Miscellaneous tax amendments – which includes a list of research projects that Treasury proposes to undertake.
One of these projects, which we alluded to in the March edition of e-taxline, is a review of the apportionment of input tax relating to non-financial sectors. The financial sector is excluded because the VAT treatment of transactions and the input tax apportionment methods relating to this sector are extremely complex and are addressed separately from the non-financial sectors.
The proposal specifically indicated that the default apportionment method allowed by SARS is based on turnover and "appears” to be inequitable in certain circumstances. This is because there "may” not be a direct correlation between expenditure incurred and the resultant turnover generated by the vendor.
Our experience is that the standard turnover apportionment method is indeed usually inequitable and there is seldom a direct correlation between the expenses a vendor incurs and the resultant income generated. Vendors and tax practitioners are waiting expectantly for the results of this re-evaluation process.
The status quo
However, mere days after the announcement to review VAT apportionment regime, SARS issued a Binding General Ruling (BGR), which confirmed that the turnover based apportionment method is the only apportionment method vendors can use to apportion the input tax incurred in respect of goods or services acquired to make taxable and non-taxable supplies (mixed use purposes).
Thus despite SARS and Treasury agreeing that the turnover based apportionment method is inequitable, it remains the only acceptable apportionment method, without a ruling from SARS. However, SARS appears to be very hesitant to allow any other apportionment method.
The current method
In essence the formula for the turnover based method is:
One of the biggest problems with this apportionment method is that SARS requires vendors to include as non-supplies in the formula; any other amounts which are not classified as taxable or exempt supplies and which were received or accrued during the period, irrespective of whether these amounts were received in respect of supply or not.
This is particularly problematic for dividends received. To illustrate, a holding company where income from dividends represents a significant portion of the company’s total income. While little or no expenses are directly incurred to earn the dividends, holding companies are generally actively involved in their subsidiaries’ day-to-day management and consequently charges these subsidiaries a management fee for providing the required services.
Most, if not all, expenses incurred by such a holding company relate directly to the supply of the management services. Yet, based on the turnover based apportionment method, a significant portion of VAT incurred for mixed-use purposes such as on general overheads e.g. rent, utilities and certain statutory expenses are now disallowed.
Vendors can either use the standard turnover based apportionment method but must remember to exclude the value of any capital goods or services and the value of any goods or services where input tax was specifically denied.
Where the formula yields an equitable ratio, the vendor may use such ratio for apportioning its input tax for mixed-use purposes. Where the resultant ratio is in excess of 95% the vendor may claim a full input tax deduction. This is referred to as the de minimis rule.
Where the ratio does not yield an equitable result, it is recommended that vendors approach their tax practitioners to assist in applying to SARS to use an alternative method that yields a more reasonable result.
SARS and National Treasury should involve all affected parties to participate in developing a more practical, uncomplicated standardised apportionment method and allow other standardised methods. Such a move, will not only result in a more equitable solution for vendors and general industry growth, but will also further entice foreign direct investment such as with the head quarter company incentive.