By Nicole Paulsen (DLA Cliffe Dekker Hofmeyr Tax Alert 21 June 2012)
In our Tax Alert of 1 June 2012, we reported on the Supreme Court of Appeal (SCA) judgment handed down on 25 May 2012, involving Stellenbosch Farmers' Winery Limited (SFW) and the Commissioner for the South African Revenue Service (SARS). We elaborate on the SCA's finding on the VAT issue and particularly why the SCA found in favour of the taxpayer.
By way of a general background, SFW received compensation in the amount of R67 million from United Distillers plc (Distillers), a United Kingdom based company, for the early termination of the distribution agreement that was entered into between the parties. The main question that arose from the compensation for the early termination of the distribution agreement was whether the payment was subject to VAT at the standard rate of 14%, or whether the supply was capable of being zero-rated. On appeal to the SCA, the SCA upheld the finding of the Tax Court in relation to the VAT issue and confirmed that the amount was subject to VAT but at the rate of 0%. The reasoning behind the SCA's finding is as follows:
- Section 11(2)(l) of the Value Added Tax Act, No 89 of 1991 (VAT Act) provides that the services supplied to a person who is a non-resident of the Republic shall be charged at the tax rate of 0%. However, s11(2)(l)(ii) contains an important proviso that states that the services supplied and as contemplated in s11(2)(l) shall not be services that are supplied directly in connection with movable property situated inside of the Republic at the time that the services are rendered
- In essence, the proviso contained in s11(2)(l)(ii) contains a two-pronged approach in establishing the zero-rating of servicessupplied to persons not resident in the Republic. The first enquiryrelates to whether the services supplied were not directly in connection with movable property. The second enquiry is in relation to the locality of the movable property and the timing of the services.
- In considering the first leg of the enquiry, the SCA confirmedthe decision and reasoning of the Tax Court and emphasised that in the present circumstances it is the surrender of a right that constitutes the supply of the service and which is thus a constituent part of the services being supplied. Based on this it is illogical to think that the surrendering of the right "can at the same time constitute the movable property which is requiredby s11(2)(l) to be in direct connection with the very services being supplied". In other words, the movable property had to have been separate and distinct from the distribution right.
- Although the SCA considered the second leg of the enquiry unnecessary, it did however state in passing that the distribution right of the taxpayer was an incorporeal right that was situated in the place where the debtor resides. In this case the debtor was registered and thus resided in the United Kingdom.
- Based on the SCA's finding above, it was clear that the matter fell squarely within the ambit of s11(2)(l)(ii) of the VAT Act and hencethe SCA held in favour of the taxpayer that the compensationamount received was subject to VAT at the rate of 0%.
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