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When Are Services of a Non Resident “imported services” Subject to VAT

01 November 2011   (0 Comments)
Posted by: Author: Charles de Wet
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When Are Services of a Non Resident "imported services” Subject to VAT
The VAT Act requires that VAT be paid by the recipient of imported services.In short, imported services are services performed by a non-resident supplier to a resident recipient that are used fora purpose other than making taxable supplies in the course or furtherance of an enterprise.When imported services are supplied to a person, that person is required to calculate the VAT element that applies to the charge for the services and make payment of that amount to SARS.The Tax Court in the Western Cape was recently called upon to decide whether certain services were imported services or not (Case No. VAT 382, judgment given on 13 June 2011).


The facts, simply, were as follows: 
• the recipient was a mining company and a registered vendor.
• the recipient’s shares were listed on a number of stock exchanges,including the JSE, in the form of      so-called linked units, which linked its shares to interests that it held in another listed entity.
• related party shareholders of the recipient proposed a transaction in terms of which the interests of the recipient and its linked investment would be de-linked and the linked units replaced with shares in a new holding company with the recipient and its formerly linked investment as its subsidiaries.
• a committee of directors of the two companies was set up to evaluate the proposed transaction and empowered to consult independent advisers to determine the implications for independent shareholders.
• after consultation with various consultants, which resulted in a revised proposal being put forward, the boards of directors were able to satisfy themselves that the proposal was fair and reasonable and to recommend it to their shareholders.
• the transaction was effected through a scheme of arrangement sanctioned by the High Court and duly implemented.
• the non-resident consultant invoiced the recipient for its share of the cost of services.

SARS determined that the services provided by the non-resident consultant were imported services and assessed the recipient to VAT in respect of those services.The recipient objected against the assessment and, after disallowance of the objection, the matter came before the Court on appeal.

The arguments

SARS contended that the business of the recipient was the sale of minerals.These sales were the taxable supplies that it made.The services were not supplied to the recipient in relation to the sale of minerals,but so they might report to shareholders.Sales of minerals were not in the least affected by the advice obtained from the consultant; hence the consultant’s services were imported services.The recipient argued otherwise.It carried on an enterprise in the course of which minerals were continuously and regularly supplied for a consideration. Its supplies were therefore taxable supplies.It carried on business as a listed company, and was accordingly required to operate within a regulated framework.Stock exchange requirements necessitated that its board of directors take appropriate external advice to enable it to report to its shareholders on the reasonableness of the proposed transaction.The services were, in effect, overhead costs of the business of making taxable supplies, and therefore they were not imported services.

Comparable authority

The recipient referred to a Canadian income tax decision (BG Service Co Canada v R[2002] GSTC 124 TCC) where the obtaining of advice to counter a hostile takeover bid was held to be:"a result of the necessary response to developments arising in the operation of the business to produce income... such costs are commercial in nature and as part of the business activities ... are therefore incurred for the purpose of gaining or producing income”.

SARS relied on an Australian income tax decision (FCT v The Swann Brewery Co Ltd(1991) 22 ATR 295 (FCA) at 303), in which it had been stated:
"It could not be said that the expenditure was relevant or incidental to the gaining or producing of assessable income on the facts of this case.It was directed to duly informing the shareholders of the corporation of the true worth of their shares and the adequacy of the offer to acquire their capital interest in the corporation … to qualify must be shown that the expenditure is characterised by the business ends to which it is directed, those ends forming part of or being truly incidental to the business…The expenditure upon aids to the consideration of the adequacy of the evaluation of the capital interest of the shareholders contained in the takeover offer and of the nature of the response to that offer recommended to shareholders owed nothing to the conduct of the business of the taxpayer.”

The Court referred to the GST ruling in respect of the Swann Brewery transactions,from which it was clear that the indirect tax issues are substantially different than the income tax issues.Paragraph 70 of the ruling listed circumstances in which the acquisition of goods or services would be in the course or furtherance of the enterprise including where: "the acquisition is made by the enterprise in accordance with, or to satisfy, a statutory requirement imposed on the enterprise”.

The ruling concluded at paragraph 74:"For GST purposes, however, the commissioner would, on balance, accept that acquisitions made by a company in these circumstances would be made in carrying on of its enterprise, having regard to all the factors mentioned at paragraph 70 of this ruling.”

The finding of the court

Based on this and the European authority of similar persuasion, the Court found that the services in question were not imported services.The Court summed the position up in this manner:"A legal obligation imposed upon an entity to seek and procure advice to be given to the shareholders, such as of appellant, was sufficiently closely connected to the conduct of its overall activities to justify its inclusion as a supply of services.Hence these services did not constitute imported services because the services were used and consumed by the appellant for the making of taxable supplies and in the course of furtherance of appellant’s enterprise of mining and selling diamonds.”It may be expected that this decision will betaken on appeal by SARS.
Source: By Charles de Wet (TaxTALK)


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