When are goods acquired for purposes of claiming input tax?
07 April 2014
Posted by: Author: Gerhard Badenhorst
Author: Gerhard Badenhorst (ENS)
Gerhard Badenhorst delves deeper into the meaning of the word "acquired” in relation to the VAT Act and argues that in South Africa the ordinary meaning of the word should be ascribed to it.
The underlying principle of the Value-Added Tax (VAT) system is that a registered person that levies and accounts for VAT on taxable supplies is entitled to claim a deduction of VAT incurred on expenses and acquisitions relating to such taxable supplies in order to prevent the cascading of tax. The neutrality principle ensures that the VAT system does not distort competition, consumer choice or the allocation of investment in any market.
The right of a vendor to deduct VAT on inputs is also a fundamental part of the South African VAT system and is provided for in section 1, definition of "input tax” and section 16(3) of the VAT Act. "Input tax” is defined for this purpose to include:
where the goods or services are acquired by the vendor wholly for the purpose of consumption, use or supply in the course of making taxable supplies, or to the extent that the goods or services are acquired for such purpose.
- VAT charged under section 7 and payable in terms of that section by a supplier on the supply of goods or services made by the supplier to the vendor; or
- VAT payable on the importation of goods by the vendor;
The South African Revenue Service (SARS) has expressed the view that where goods are imported into South Africa, and the importer does not acquire ownership of the goods being imported, the importer is not entitled to claim the VAT paid on importation of the goods, because the importer does not become the legal owner of the goods. SARS therefore considers the word ‘acquire’ in the definition of input tax to
mean acquiring legal ownership of the goods.
SARS base their view on the judgment in a New Zealand case, Case T35 (1997) 18 NZTC 8,235. In that case the New Zealand Tax Revenue Authority considered the entitlement of a taxpayer to claim an input tax deduction in respect of computer components imported by it on behalf of a foreign supplier who supplied computer equipment to New Zealand customers under warranty. The customers returned the
defective computer components to the taxpayer who then replaced the components for the customer on behalf of the foreign supplier for no consideration, in terms of the warranty provided by the foreign supplier. For this purpose the taxpayer imported the components from the foreign supplier and held them in stock, but did not pay for the components. Furthermore, the taxpayer did not obtain ownership of the stock of components.
The taxpayer, as the importer of the components, paid VAT on the importation thereof into New Zealand, and sought to deduct the VAT as input tax, which was the subject of the dispute. J Barber considered whether the taxpayer ‘acquired’ the components as contemplated by the definition of ‘input tax’ (which was at the time similar to the South African definition of ‘input tax’), and concluded that in order to ‘acquire’ an item, one must obtain legal rights in the nature of proprietary rights, and one can be a legal
owner or a beneficial owner. He held that the taxpayer had not ‘acquired’ the components because it had not acquired ownership of the components, but merely held the components as agent on behalf of the foreign supplier for onward supply to the customer under the warranty for no charge.
Although one cannot fault the decision of the court to disallow the input tax claim, the basis for the decision should instead have been that the taxpayer did not acquire the goods imported for the purpose of making any taxable supplies. However, if the conclusion of the court and the interpretation of SARS are correct that a vendor can only claim input tax if the vendor acquires legal ownership of the goods, then it will end up jeopardising the neutrality principle of the VAT system.
Typical transactions that are affected are, for example, where a vendor leases equipment from a foreign supplier, where goods owned by a foreign supplier are imported for processing in South Africa after which the goods are returned to the owner, or even transactions where ownership only passes after the goods have been imported and delivered to the vendor in South Africa.
The question is whether it is correct to consider the word ‘acquire’ in the definition of ‘input tax’ to mean acquiring legal ownership.
The word ‘acquire’ is not defined in the VAT Act and therefore the ordinary meaning of the word must be attributed to it in the context of the VAT Act. The Oxford English Dictionary defines the word "acquire” to mean:
"There is in principle no difference between goods leased from a local supplier and goods leased from a foreign supplier. If goods are leased by a vendor and the leased goods are applied or used by the vendor in the course of making taxable supplies, there is no reason why the vendor should not be
entitled to claim the VAT paid as input tax, unless the input tax is specifically prohibited by section 17(2) (i.e. motor cars)”
"To receive, or get as one’s own (without reference to the manner), to come into possession of.”
The ordinary meaning of the word ‘acquire’ and the context in which it is used in the definition of ‘input
tax’ in the VAT Act does not indicate that it is limited to the obtaining of ownership or legal title.
The requirement that the goods must be ‘acquired’ for the purpose of making taxable supplies also does not only apply to imports, but also to local acquisitions of goods and services. Although SARS has expressed the view that a vendor must be the legal owner of goods imported in order to claim the VAT paid on importation as input tax, SARS has never questioned the entitlement of a vendor who rents goods from a local lessor on this basis. There is in principle no difference between goods leased from a local supplier and goods leased from a foreign supplier. If goods are leased by a vendor and the
leased goods are applied or used by the vendor in the course of making taxable supplies, there is no reason why the vendor should not be entitled to claim the VAT paid as input tax, unless the input tax is specifically prohibited by section 17(2) (i.e. motor cars).
Further support for the contention that the word ‘acquire’ in the definition of input tax is not limited to the obtaining of ownership or legal title, is that one cannot obtain ownership or legal title to services supplied. The requirement for an amount to comprise ‘input tax’ is that the goods or services are acquired for the purpose of consumption, use or supply in the course of making taxable supplies.
In conclusion, the judgment in the New Zealand Case T35 with regard to the meaning of the word
‘acquire’ for purposes of input tax should not find application in the South African context, and the ordinary meaning of the word should be ascribed to it. For an amount of VAT paid to comprise input tax,
the test should rather be whether the goods or services ‘acquired’ are consumed, used or supplied in
the course of making taxable supplies, as opposed to determining whether the vendor seeking to claim
the input tax obtained ownership or legal title to the goods or services.
This article first appeared on the March/April edition of Tax Talk.