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Splitting hairs… VAT Case 1558

Monday, 10 June 2019   (0 Comments)
Posted by: Authors: Varusha Moodaley and Gerhard Badenhorst
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Authors: Varusha Moodaley and Gerhard Badenhorst (Cliffe Dekker Hofmeyr)

Suppliers often make single supplies of goods or services to their customers which comprise of various component parts such as, for example, various goods purchased in a supermarket, some of which are subject to VAT at the standard rate and some of which are zero rated. Other examples include tour operators who charge a single fee for a tour package which may comprise of standard rated accommodation and zero-rated international travel, or an insurer who charges a single premium for providing insurance cover for assets located in South Africa and offshore.  

Section 8(15) of the Value-Added Tax Act, No 89 of 1991 (VAT Act) prescribes how VAT should be levied on these supplies. Section 8(15) provides that if a single supply of goods or services, or of goods and services is made, and if separate considerations had been payable, they would have been charged for in part at the standard rate and in part at the zero-rate, then each part of the supply is deemed to be a separate supply for VAT purposes. This means that the supplier only levies VAT at the standard rate on that part of the consideration of the composite supply which is attributable to the standard rated goods or services. The zero rate applies to the part of the consideration which is attributable to the zero-rated goods or services supplied.

The application of s8(15) of the VAT Act was recently considered by the Tax Court in the case of Taxpayer v The Commissioner for the South African Revenue Service (VAT1558) [2018] ZATC 3 (5 December 2018) with regard to its application to marketing services.

The facts

In this case the taxpayer manufactured and distributed various brands of alcoholic beverages in South Africa under an exclusive rights distribution agreement entered into with foreign brand owners. The taxpayer supplied marketing services to the foreign brand owners for a fee. The marketing fee was calculated with reference to the actual annual cost the taxpayer incurred on marketing the brands. The marketing included a mix of media advertising, promotions, sponsorships, and relationship marketing. It also included product sampling and tasting, product giveaways comprising of, inter alia, branded glassware, t-shirts and lanyards to raise brand awareness. The products used for product sampling and tasting were taken out of the taxpayer’s own stock and the taxpayer paid for the promotional goods purchased for marketing purposes. The taxpayer charged a single all-inclusive marketing fee to the foreign brand owners and levied VAT thereon at the rate of zero per cent. SARS levied VAT at the standard rate in terms of s8(15) on the portion of the fees which was calculated on the cost of the promotional goods incurred by the taxpayer.

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