CPD 60mins TAX CHRONICLES...TAX CHRONICLES MONTHLY COMPANIES Addressing form IT14SD TRANSFER PRICING Compliance and non-submission VAT The new rate Official Journal for the South African

TAX CHRONICLES MONTHLY

COMPANIESAddressing form IT14SD

TRANSFER PRICINGCompliance and non-submission

VATThe new rate

Official Journal for the South African Tax Professional

CPD 60mins

Issue 3 | 2018

TAX RETURNSeFiling and submission

CONTENTS

COMPANIES1 0036. Addressing form IT14SD

ESTATES AND TRUSTS4 0037. Donation to a special trust

GENERAL5 0038. eFiling and submission of

tax returns

INCOME6 0039. Accruals on cession of

right to dividends

7 0040. Securities lending arrangements

INTERNATIONAL8 0041. Permanent establishment:

Indian revenue authority and Formula One

TAX ADMINISTRATION11 0042. Enforcement must be

procedurally fair and reasonable

TRANSFER PRICING13 0043. Document compliance and

non-submission

VALUE-ADDED TAX11 0044. The new rate

10

14

01

12 18

WELCOME TO TAX CHRONICLES MONTHLY!

Tax Chronicles Monthly is moving in leaps and strides, within the tax practitioner fraternity and has been received well. The extensive and intensive articles in this Issue 3 range from Donations to a Special Trust, Income Tax Supplementary Declaration (IT14SD) Cross-border Transactions, Transfer Pricing, Permanent Establishment and then to e-filing and submission of Tax Returns and many more…

Sit back, relax and enjoy the read!

Editorial Panel:Mr KG Karro (Chairman), Dr BJ Croome, Mr MA Khan, Prof KI Mitchell, Prof JJ Roeleveld, Prof PG Surtees, Mr Z Mabhoza, Ms MC Foster.

Tax Chronicles Monthly is published as a service to members of the tax community and includes items selected from the newsletters of firms in public practice and commerce and industry, as well as other contributors. The information contained herein is for general guidance only and should not be used as a basis for action without further research or specialist advice. The views of the authors are not necessarily the views of the editorial panel, the South African Institute of Professional Accountants or the South African Institute of Tax Professionals.

1 TAX CHRONICLES MONTHLY ISSUE 3 2018

I n May 2013 SARS issued a guide on “How to complete the IT14SD” and it can be downloaded at http://www.sars.gov.za/AllDocs/OpsDocs/Guides/IT-GEN-03-G01%20-%20How%20to%20complete%20the%20IT14SD%20Supplementary%20Declaration%20Form%20-%20External%20Guide.pdf, found on

http://www.sars.gov.za/Pages/All-Guides.aspx.

If a company gets selected for verification by SARS after submitting the annual income tax return (ITR14), SARS might issue a letter (for whatever reason) called the “Verification of Income Tax Return” to

the company. This letter states that the company can either submit a revised ITR14, or alternatively submit the IT14SD by a specified due date. If the company decides to submit the IT14SD, it must reconcile the income tax, value-added tax (VAT), pay-as-you-earn (PAYE) and customs declarations for the applicable tax year.

The form distinguishes between different kinds of companies, such as a dormant company, a body corporate, a share block company, a micro business, a small business and a medium to large business, according to the classifications in the SARS guide.

COMPANIES

ADDRESSING FORM IT14SD

The Income Tax Supplementary Declaration (IT14SD) form is only applicable to companies and not yet to individuals or trusts.


COMPANIES

To complete this form, the company will need its annual financial statements, the ITR14, the VAT201 returns, the EMP201 returns and any customs declarations for the applicable tax year.

The methodology of the form is to compare amounts declared on the ITR14 with the total of the amounts declared on the respective VAT201, EMP201 and customs declarations during the applicable tax year. If there are any discrepancies in excess of R100 between these amounts, the company needs to provide a reconciliation with reasons.

In the event that there are unreconciled differences, SARS may proceed to levy penalties and interest (at the very least) on any amounts that it deems under-declared or over-claimed. It might even lead to any taxpayer’s worst nightmare – a SARS audit.

PAYE RECONCILIATIONLet’s start with the reconciliation most people are familiar with – the PAYE reconciliation. The EMP501 employer reconciliation is completed and submitted every six months. This is the process where you reconcile the PAYE declared and paid on the EMP201 returns for that period, and generate the IRP5 tax certificates for your employees.

The IT14SD takes this reconciliation a step further. Here the company has to reconcile the payroll costs declared on the income tax returns as tax deductions with the payroll costs declared on the EMP201 returns for the tax year.

INCOME TAX RECONCILIATIONThe next reconciliation is probably the easiest of the four reconciliations on the IT14SD, namely income tax.

The reconciliation is between the net profit or loss and the calculated profit or loss for the year, and represents the difference between the accounting profit or loss and the taxable income or tax loss.

VAT RECONCILIATIONNext up is the VAT reconciliation.

Do you reconcile your output VAT with your sales and your input VAT with your purchases and expenses? Well, you need to, as this is the reconciliation required on the IT14SD. A good time to do this will be after your last VAT return of the financial year, but first prize belongs to the person who does this after each VAT201 submission.

The IT14SD requires a reconciliation between the income declared on the ITR14 and the amount of supplies declared on the applicable VAT201 returns, as well as a reconciliation between purchases and applicable expenses claimed on the ITR14 and the amount declared under input VAT.

CUSTOMS DECLARATIONS RECONCILIATIONCustoms declarations also need to be reconciled between the information declared on the SAD500, VAT201 and other relevant documentation, and the amounts claimed and declared in the ITR14 for imports and exports.

The IT14SD provides yet another reason why accurate and timely bookkeeping is essential. ■

Unik Professional Services

Tags: IT14SD, Reconciliation.

“In the event that there are unreconciled differences, SARS may proceed to levy penalties and interest (at the very least) on any amounts that it deems under-declared or over-claimed.”



ESTATES AND TRUSTS

DONATION TO A SPECIAL TRUSTOn 28 June 2018, SARS issued an interesting binding private ruling, BPR 306, in which the applicant, a person in the early stages of dementia but still lucid and with the capacity to contract, distributed part of her estate to a special trust she had established for her care and maintenance. The distribution was ruled not to be a donation.

A special trust established inter vivos, as was the case in the present matter, is one created for the benefit of one or more persons with a disability as defined in section 6B of the Income Tax Act, 1962 (the Act). This means a moderate to severe limitation of any person’s ability to

function or perform daily activities as a result of a physical, sensory, communication, intellectual or mental impairment that has lasted or has a prognosis of more than a year. Clearly, dementia qualifies under this definition.

In addition to the applicant, there were other beneficiaries of the trust. The trust was discretionary as to all beneficiaries. The fact that there were other beneficiaries did not affect the trust’s status as a special trust, because their discretionary right would come into operation only on the death of the applicant. This is an important point for estate planning purposes; one may establish a special trust that continues seamlessly for the benefit of the remaining beneficiaries without the need to terminate the trust and create a new one for those beneficiaries by establishing two classes of beneficiary and only the disabled person having rights until that beneficiary’s death.

[In passing, using this two-tier approach for beneficiaries might have made it easier for the executors of Mr Welch’s estate to win their case in Welch’s Estate v CSARS, 2004. Mr Welch had established a trust for the benefit of his former wife and son Tom in terms of their divorce agreement. Mr Welch died before he had transferred the obligatory funds into the trust, so the executors were obliged to do so. SARS treated the payment as a donation by the executors, who ultimately prevailed in the SCA in showing that they had performed an obligation, not made a donation. But what made their life more difficult than it should have been was that Mr Welch had included himself and his other children as discretionary beneficiaries as well, although the trust deed indicated that the trust had been established in pursuance of the provisions of the divorce agreement. Mr Welch would have been better advised to have created two classes of beneficiary: the first being his former wife and Tom as primary beneficiaries; and himself and his other children as secondary beneficiaries, to be considered only after the obligations to the primary beneficiaries had been satisfied.]

The purpose of the trust in BPR 306 was to provide for the applicant’s care and maintenance when she was no longer able to do so. SARS ruled that the distribution to the trust was not a donation as contemplated in sections 54 and 55 of the Act.

This decision is interesting, because it did not state what the distribution was if it wasn’t a donation. It seems also that the drafter of the ruling was confused, because its title was the same as for

this summary. The reason for this conclusion would be illuminating – and helpful to estate planners. Perhaps the reason is that there was a quid pro quo in that the trustees were obliged to care for the applicant when the time came. It is trite law that a payment to a person with a corresponding obligation is not a donation. An alternative conclusion would have been that the distribution was a donation but that it was exempt from donations tax under section 56(2)(c), a bona fide contribution towards the maintenance of any person as the Commissioner considers to be reasonable. There is no requirement that the contribution be made directly to the person for whose maintenance it is made. ■

“The purpose of the trust in BPR 306 was to provide for the applicant’s care and maintenance when she was no longer able to do so.”

Professor Peter Surtees

Editorial Comments: • Whether intended or not, the applicant also reduced her estate

for estate duty purposes.• Published SARS rulings are necessarily redacted summaries of

the facts and circumstances. Consequently, they and articles discussing them should be treated with care and not simply relied on as they appear.

Act sections: Income Tax Act 58 of 1962: Eighth Schedule; Value-Added Tax Act 89 of 1991.Cases: Welch’s Estate v CSARS [2004] 66 SATC 303 SCA.Rulings: Binding Private Ruling 306.Tags: BPRs, Donations, Special trusts.


GENERAL

A registered tax practitioner must be a member of a SARS Recognised Controlling Body or a body recognised by the Income Tax, 1962 (the Act). All registered tax practitioners must adhere to the code of professional conduct prescribed by their controlling

body. If the practitioner does not comply with their code of conduct or the provisions of the Act, SARS can lodge a complaint against the practitioner.

Although a taxpayer appoints a tax practitioner to submit tax returns on their behalf, the taxpayer retains the legal obligations imposed by the Act. Thus, if the tax practitioner fails to submit a tax return at all or on time, the taxpayer can be subjected to the administrative penalties for late submission of returns, which can range from R250 per month to R16 000 per month that the return remains outstanding. The penalty amount depends on the taxpayer’s level of income.

The failure by a tax practitioner to file returns on time can give rise to action being taken by SARS against the tax practitioner. However, this does not detract from the taxpayer’s personal liability for the failure to lodge a return. SARS can still subject the taxpayer to the administrative penalty and prosecute the taxpayer for non-submission of a return.

Should a taxpayer be dissatisfied with the service received from a tax practitioner, they should terminate the agreement with the tax practitioner. The taxpayer may have a basis on which to lodge a formal complaint with the practitioner’s controlling body or with SARS itself where the practitioner has violated the Act. If a practitioner delays the submission of a return they can face action by SARS itself. In addition, the taxpayer must remember that the eFiling profile belongs to the taxpayer and can be retrieved from the tax practitioner at any time.

On 16 April 2018 SARS indicated that it would use the National Prosecuting Authority to prosecute taxpayers in the tax court for the failure to submit tax returns. It must be remembered that the failure to submit a return when required to do so constitutes a criminal offence, which can give rise to a fine or a period of imprisonment. This will, on a successful prosecution, result in the taxpayer having a criminal record.

Taxpayers using eFiling must ensure that they do not allow unauthorised persons to obtain their login and password details. The Office of the Tax Ombud has in its various annual reports indicated that there have been too many cases of identity theft where taxpayers have been duped into making their passwords available to unauthorised third parties.

Once a return is filed via eFiling, SARS will often request that the taxpayer submit the documents to support the filed return. The taxpayer should receive notice of such verification requests via email or SMS. The taxpayer is entitled to receive proper notice of SARS requests and, it is submitted, it is not sufficient for SARS to merely post a letter on the taxpayer’s eFiling profile.

eFiling has allowed SARS to enhance its data matching processes to ensure that taxpayers properly declare all income derived by them. Should a taxpayer choose not to declare all income received or accrued they will be subject to the understatement penalty, which can range from 10% to 200% of the income tax underpaid.

eFiling has its advantages to both taxpayers and SARS in that returns can be processed far more quickly than paper-based returns. However, taxpayers must still submit their tax returns on time. Where a tax practitioner is appointed, that person must act professionally and should not delay the filing of returns without a good reason.

Whether returns are filed via eFiling or manual submission, or managed by a tax practitioner or the taxpayer personally, the taxpayer remains liable for the failure to submit a tax return on time. ■

“Although a taxpayer appoints a tax practitioner to submit tax returns on their behalf, the taxpayer retains the legal obligations imposed by the Act. ”

EFILING AND SUBMISSION OF TAX RETURNSUntil 2007 taxpayers had no choice but to file paper-based tax returns with SARS. This required the completion of a paper-based return and also the submission of the taxpayers’ supporting documents and tax certificates. SARS then introduced eFiling, whereby taxpayers could register for eFiling and submit their tax returns electronically. With eFiling it is not possible to submit supporting documents when, for example, an individual files their tax return, the ITR12.

ENSafrica

Act sections: Income Tax Act 58 of 1962.Cases: eFiling, Tax practitioner.


INCOME

ACCRUALS ON CESSION OF RIGHT TO DIVIDENDSGenerally speaking, dividends paid by South African companies are exempt from income tax in the hands of shareholders. The dividends may, however, be subject to dividends tax, subject to certain exemptions.

D ividends are exempt from income tax even if a person receives the dividend by virtue of a cession to that person of the right to receive the dividend. A notable exception to this principle is that, if a shareholder cedes only the right to receive dividends (that is,

without transferring the other rights attaching to the underlying shares) to a company, then the dividend accruing to the company is subject to income tax, in terms of paragraph (ee) of the proviso to section 10(1)(k) of the Income Tax Act, 1962.

However, what are the tax implications of the right to receive a dividend in the hands of the cessionary (that is, the person to whom the right is ceded)?

That question was the subject matter in the case of CSARS v KWJ Investments Service (Pty) Ltd (142/2017), 2018.

The facts of the case were relatively complex. Put simply, the taxpayer made an investment with a bank. The return on the investment was that the bank ceded rights to dividends on listed shares to the taxpayer antecedently, that is before the entitlement to the dividends themselves arose. The question that arose is whether the dividend right constituted “an amount” that accrued to the taxpayer.

SARS contended that where rights to dividends are ceded to a taxpayer there are two distinct accruals in the hands of the taxpayer: first, there is an accrual of the dividend right; and second, there is an accrual of the dividend when the company actually declares the dividend. The taxpayer contended that while the mode of delivery (the cession) was unconditional, the right ceded was conditional on the dividends being actually declared by the companies and the taxpayer therefore merely held a contingent right.

On this point, the court found in favour of SARS. It held that the right to the dividends to be declared in future cannot be classified as dividends and, accordingly, the right was a separate amount. That right has a monetary value despite the fact that the entitlement to dividends was conditional and, hence, was an amount that accrued to the taxpayer.

Ultimately, the taxpayer won the case on a separate technical point, namely, that SARS had raised the additional assessment after the statutory prescription period.

The lesson from the case is this: Where a taxpayer acquires the right to receive dividends, the taxpayer must account for tax separately on two distinct receipts: first, on the accrual of the amount of dividends if and when declared by the relevant company; and, second, on the accrual of the amount of the right to the dividend. As pointed out above, the first accrual may, depending on the circumstances, be subject to, or exempt from income tax or dividends tax in the hands of the taxpayer.

As to the second accrual, the incidence of tax will depend on the transaction giving rise to the receipt. For example, if a taxpayer transfers a revenue asset (for instance, trading stock) to a person, and that person in exchange transfers the right to receive a dividend to the taxpayer, then the taxpayer would need to include the amount of the dividend right as gross income for income tax purposes. If a taxpayer transfers a capital asset to a person and that person in exchange transfers the right to receive a dividend to the taxpayer, then the taxpayer would, for capital gains tax purposes, need to include the amount of the dividend right as proceeds on disposal of the capital asset.

What the case also shows again is that the incidence of tax on the cession of the rights to dividends is a minefield, and taxpayers should exercise great caution when entering into transactions of this kind. ■

Cliffe Dekker Hofmeyr

Act sections: Income Tax Act 58 of 1962: section 10(1)(k).Cases: CSARS v KWJ Investments Service (Pty) Ltd (142/2017) [2018] ZASCA 81 (31 May 2018).Tags: Dividends tax, Gross income, Capital gains tax.

“Where a taxpayer acquires the right to receive dividends, the taxpayer must account for tax separately on two distinct receipts...”


INCOME

SECURITIES LENDING ARRANGEMENTSOn 20 April 2018 SARS issued Binding Private Ruling 301 (the Ruling) which determined whether a South African sourced dividend received by a borrower in terms of a securities lending arrangement should be included in the “income” of the borrower and whether any related securities lending expenditure would be deductible.

Editorial comment: Published SARS rulings are necessarily redacted summaries of the facts and circumstances. Consequently, they and articles discussing them should be treated with care and not simply relied on as they appear.Act sections: Income Tax Act 58 of 1962: sections 1(1) (“gross income”, paragraph (k), “income”), 9(2)(a), 10(1)(k)(i) (paragraph (ff) of the proviso), 11(a), 23(g), 64F(1)(l).Rulings: Binding Private Ruling 301.Tags: BPRs, Securities lending arrangements, Dividends tax, Anti-avoidance.

B y way of background, in a typical securities lending transaction, equities are lent to a borrower usually to facilitate the borrower to on-deliver or sell such equities within a short space of time. The borrower is then obliged to return the same security (or something

similar) to the lender within a stipulated period and to compensate the lender for any distributions (ie dividends) declared on such equities during such period. Ordinarily the borrower also has to put up collateral (often cash) as security for the underlying equities lent. Such arrangements are common in the financial services industry and are entered into for a variety of reasons including for speculating (eg short selling), arbitrage and hedging purposes.

The background facts of the proposed transaction pursuant to the Ruling were similar in that the applicant, a non-resident company (the Applicant) would enter into a securities lending arrangement (the SLA) in terms of which it would borrow South African equities (the SA Equities) from the lender, also a non-resident company (the Lender). Importantly, it was assumed that the SA Equities would be borrowed prior to any interim or final dividend on the relevant SA Equity being announced or declared.

The Applicant would then on-deliver (either by way of another securities lending arrangement or collateral arrangement) the SA Equities to independent third-party entities. In anticipation of dividends being declared on the SA Equities, the Applicant would recall the SA Equities prior to the dividend record date, which was on average envisaged to be 20–30 days after the date of on-delivery.

The Applicant, as the owner of the SA Equities on the record date, would receive any dividend paid in respect of the SA Equities. Contractually, the Applicant would be required to pay a “manufactured dividend” to the Lender in terms of the SLA. To the extent that any dividend or interest would be paid on the collateral provided in terms of the SLA, the Lender would make payment to the Applicant of a “manufactured payment” in respect of the collateral. On the close-out date of the SLA, the Lender would return the collateral to the Applicant; and the Applicant would return the SA Equities to the Lender.

SARS made several rulings on the issues at hand, including the following:• The dividend received by or accrued to the Applicant in respect

of the SA Equities would be from a source within South Africa as contemplated in section 9(2)(a) of the Income Tax Act, 1962 (the Act) and would form part of the “gross income” of the Applicant under paragraph (k) of the definition of that term in section 1(1).

• The dividend would, under paragraph (ff) of the proviso to section 10(1)(k)(i), not be exempt from income tax on the basis that the dividend would be received by or accrued to the Applicant in respect of a share borrowed by the Applicant. The dividend would accordingly be included in the Applicant’s “income”, as defined in section 1(1).

• The “manufactured dividend”, and other related expenditure to be paid to the Lender under the SLA, would be deductible by the Applicant in terms of section 11(a), read with section 23(g). The portion of the dividend received by or accrued to the Applicant, remaining after the “manufactured dividend” and after any related expenditure paid to the Lender had been deducted, would be included in the taxable income of the Applicant.

Lastly, on the basis that the dividend would be included in the Applicant’s income, such dividend would be exempt from dividends tax in terms of section 64F(1)(l). Interestingly, while the Ruling expressly stated that the dividend would be from a South African source and included in the Applicant’s income, it made no mention or reference to any potential permanent establishment of the Applicant in South Africa or whether the Applicant would qualify for double taxation relief in respect of any double tax treaty.

Furthermore, while SARS generally cannot make any rulings pertaining to the application of the General Anti-Avoidance Rules or the common-law anti-avoidance principles, the Ruling specifically stated in paragraph 8 that the proposed transaction was not considered from the perspective of whether it would be entered into with the purpose of avoiding dividends tax. The key issue, in addition to the potential application of any tax treaty, is that the taxable income in the hands of the Applicant may be immaterial – the result being that one may then potentially obtain a tax benefit compared to the scenario where the dividend declared would otherwise be subject to 20% dividends tax. ■


INTERNATIONAL

Typically, a tax treaty defines a PE using the following two general tests:• Whether the corporation has a fixed place of business within the

target country, as defined under the language of a specific treaty (a fixed-place PE); or

• Whether the corporation operates in the target country through a dependent agent, other than a general agent of independent status acting in the ordinary business as such, that habitually exercises the authority to conclude contracts on behalf of the corporation in the target country (a dependent agent PE).

The definition of a PE is typically similar under the Organisation for Economic Co-operation and Development Model Tax Convention on Income and on Capital (the OECD MTC), the United Nations Model Double Taxation Convention between Developed and Developing Countries and the United States Model Income Tax Convention.

For the purposes of the OECD MTC, a PE is defined in paragraph 1 of Article 5 as “a fixed place of business through which the business of an enterprise is wholly or partly carried on” and specifically includes a place of management, a branch, an office, a factory, a workshop and a mine, an oil or gas well, a quarry or any other place of extraction of natural resources. It also includes a building site or construction or installation project which lasts for more than 12 months.

The question of what may constitute a PE has been the subject of various judicial decisions worldwide. For example, an interesting decision was handed down by the Supreme Court of India (the Supreme Court) on 24 April 2017 in the case of Formula One World Championship Ltd v Commissioner of Income-tax, International Taxation Delhi, 2017, where the Supreme Court confirmed that Formula One World Championship Limited (FOWC) had a PE in India in respect of the Grand Prix motor racing event conducted at the Buddh International Circuit in India. It was held that FOWC was liable to pay tax on the business income attributable to such PE in India.

The relevant facts, key issues, arguments made by the respective parties and decision of the Supreme Court are summarised below.

FACTSFOWC is a company incorporated and tax resident in the United Kingdom (the UK). In terms of multiple agreements entered into between the Fédération Internationale de l’Automobile (the FIA), an association of the world’s leading motoring organisations and the governing and regulatory body for all motorsports worldwide, Formula One Asset Management Limited (FOAM) and FOWC, FOAM licensed all commercial rights in the FIA Formula One World Championship (the F1 Championship) to FOWC for a period of 100 years with effect from 1 January 2011. As a result, FOWC, being the commercial rights holder (CRH) in relation to the F1 Championship, is entitled to enter into contracts with promoters for purposes of hosting, promoting and staging the Grand Prix Formula One (F1) racing events. Stated differently, FOWC is authorised to exploit the commercial rights in the F1 Championship directly or through its affiliates. In addition, FOWC nominates such promoters to the FIA for inclusion in the official F1 racing calendar.

On 3 September 2011, FOWC entered into a race promotion contract (the RPC) with Jaypee Sports International Limited (Jaypee), a company incorporated and tax resident in India, in terms of which Jaypee was granted the right to host, stage and promote the Formula

PERMANENT ESTABLISHMENT: INDIAN REVENUE AUTHORITY AND FORMULA ONEThe concept of a permanent establishment (PE) is a fundamental one in international tax law as it establishes the right to tax business profits of non-resident entities in the country where business activities are carried out. There is no single infallible test of invariable application regarding what constitutes a PE. However, in most tax treaties a PE is generally considered to be a fixed place of business through which the business of an enterprise is wholly or partly carried on.

“The question of what may constitute a PE has been the subject of various judicial decisions worldwide.”


One Grand Prix of India event at the Buddh International Circuit in India (the Indian Grand Prix). FOWC and Jaypee also entered into an artwork licence agreement whereby FOWC permitted Jaypee to use certain marks and intellectual property belonging to FOWC. On the same day, Jaypee entered into back-to-back agreements with three companies affiliated with FOWC, namely Formula One Management Limited (FOM), Beta Prema 2 Limited (Beta Prema 2) and Allsports Management SA (Allsports) in terms of which Jaypee transferred various rights pertaining to the Indian Grand Prix (ie Jaypee engaged FOM to generate the television feed, transferred circuit rights to Beta Prema 2, and paddock rights to Allsports). Various other agreements in relation to the Indian Grand Prix were concluded between the parties.

FOWC and Jaypee approached the Authority for Advance Rulings (the AAR) for confirmation of the tax treatment of the consideration payable by Jaypee to FOWC under the RPC. The AAR confirmed that the consideration received by FOWC would constitute a “royalty” in terms of the provisions of the Income Tax Act, 1961 (the Act) and the double tax treaty entered into between India and the UK (the India–UK tax treaty). The AAR further confirmed that the FOWC did not have a fixed-place PE or dependent agent PE in India.

FOWC approached the Delhi High Court (the High Court) to challenge the AAR’s ruling in respect of the royalty, while the Union of India Revenue Authority (the Revenue Authority) challenged the determination by the AAR that FOWC did not have a PE in India. The High Court reversed the findings of the AAR on both the above-mentioned issues and held that the amount received by FOWC would not be deemed to be a royalty. It also held that FOWC had a fixed-place PE in India and therefore, the consideration received in terms of the RPC was taxable in India.

FOWC, Jaypee and the Revenue Authority appealed to the Supreme Court.

KEY ISSUESThe Supreme Court had to determine whether a PE of FOWC existed in India. In interpreting the provisions of Article 5 of the India–UK tax treaty (which follows the OECD MTC), the Supreme Court had to decide whether:i) The Buddh International Circuit was at FOWC’s “disposal” (that

is, whether it was a fixed place of business of FOWC); andii) FOWC generated business income through conducting the

Indian Grand Prix from that fixed place.

ARGUMENTS MADE BY RESPECTIVE PARTIESFOWC and Jaypee made, inter alia, the following contentions:• The Buddh International Circuit was not at the disposal of FOWC

as Jaypee had constructed the circuit at its own expense, with its own engineers, architects and was responsible for conducting the Indian Grand Prix. Further, Jaypee was using the circuit for other events that were being organised on a regular basis. In addition, the amount of time for which the limited access to the race venue was granted to FOWC was not of sufficient duration to constitute the degree of permanence necessary to establish a fixed-place PE in India.

• Only Jaypee was liable for all acts and obligations, from construction of the circuit until conclusion of the Indian Grand

Prix. The provisions of the RPC enabled FOWC to exploit the commercial rights to the Indian Grand Prix. However, the RPC did not give FOWC the right to conduct / host the Indian Grand Prix.

• Even if one could argue that FOWC had control over the circuit, the Indian Grand Prix was a temporary model for three days (in a year) only and possession of a site for three days could not constitute a PE.

• As the commercial rights to hold the event were granted in the UK, the consideration received by FOWC in terms of the RPC was taxable in the UK.

The Revenue Authority contended, inter alia, that:• Jaypee’s only role was to host the Indian Grand Prix, while it was

FOWC and its affiliates who had complete access to the circuit at the time of construction thereof as well as at the time of the Indian Grand Prix. The Revenue Authority relied extensively on a number of agreements executed between the different stakeholders to demonstrate the flow of commercial rights in relation to the events.

• Rights granted by FOCW to Jaypee were transferred in turn to FOCW’s affiliates by way of separate back-to-back agreements which were entered into simultaneously with the RPC. Also, FOWC engaged FOM, an affiliate, to provide specified services, which indicates physical management of the business activity.

• The RPC was entered into so as to give an impression that Jaypee was vested with real control of the affairs of the Indian Grand Prix, whereas the factual circumstances were different.

RULING OF THE SUPREME COURTThe Supreme Court placed reliance on a number of examples of fixed-place PEs as expounded upon by various authors and the OECD MTC. The Supreme Court also had regard to a number of judicial decisions in India and abroad.

In order to determine which entity had the ultimate control over the Indian Grand Prix, the Supreme Court examined, in great detail, the manner in which commercial rights in relation to the Indian Grand Prix were exploited by FOWC. The Supreme Court found that the Buddh International Circuit was a fixed place, from where the Indian Grand Prix was conducted and this constituted an economic and business activity of FOWC.

With reference to the enquiry of whether the circuit was put at the disposal of FOWC, the Supreme Court held, inter alia, that:• The various agreements entered into between the relevant

parties indicated that the Indian Grand Prix was completely controlled by FOWC and its affiliates and FOWC earned income

“...to determine which entity had the ultimate control over the Indian Grand Prix, the Supreme Court examined, in great detail, the manner in which commercial rights in relation to the Indian Grand Prix were exploited by FOWC.”


INTERNATIONAL

therefrom. Accordingly, the construction of the circuit by Jaypee could not extinguish the fact that FOWC controlled the Indian Grand Prix (ie the business activity). In this regard, the Supreme Court stated:

“There cannot be any race without participating/competing teams, a circuit and a paddock. All these are controlled by FOWC. Event has taken place by conduct of race physically in India. Entire income is generated from the conduct of this event in India.

Cliffe Dekker Hofmeyr

Act sections: Income Tax Act, 1961 (India): section 195.Cases: Formula One World Championship Ltd v Commissioner of Income-tax, International Taxation Delhi [2017] 291 CTR 24 (Delhi).Tags: India, OECD Model Tax Convention on Income and on Capital.

“FOWC was liable to pay tax in India on the income earned from the Indian Grand Prix, as it had conducted business in India through a fixed-place PE. ”

Thus, commercial rights are with FOWC which are exploited with actual conduct of race in India. Even the physical control of the circuit was with FOWC from the inception, ie inclusion of event in a circuit till the conclusion of the event. Omnipresence of FOWC and its stamp over the event is loud, clear and firm.”

• The rights relating to the Indian Grand Prix outsourced by Jaypee to FOWC’s affiliates were critical to the success of the event and depended not only on the circuit and participation by teams, but also on the services that were aimed at ensuring maximum public viewership such as paddock seating, media advertising, television broadcasting etc. The income generated from these services solely accrued to FOWC’s affiliates which strengthened the view that the entire event had been taken over and controlled by FOWC and its affiliates.

• The argument that the duration for which the circuit and the associated infrastructure at the disposal of FOWC was too short was unfounded. The fact was that the race was to be held for only three days in a year and as the control of the entire event was with FOWC, this duration was sufficient to constitute a fixed-place PE.

• The construction of the circuit by Jaypee, ownership and use thereof for hosting other events at its expense was insufficient to mask the fact that the business activity was controlled by FOWC. The Buddh International Circuit was under the control and at the disposal of FOWC through which it conducted its business as the CRH.

In conclusion, the Supreme Court held that the fixed-place PE test had been satisfied. The Buddh International Circuit was a fixed place where the commercial/economic activity of conducting the F1 Championship was carried out, and “was a virtual projection of the foreign enterprise, ie … FOWC” on the soil of India.

Accordingly, FOWC was liable to pay tax in India on the income earned from the Indian Grand Prix, as it had conducted business in India through a fixed-place PE. The relevant portion of FOWC’s business income which was attributable to the PE would therefore be subject to deduction of tax in terms of section 195 of the Act, which was a statutory obligation for the payer, ie Jaypee. The Supreme Court found that the quantum of business income attributable to FOWC’s PE in India would have to be determined separately during its assessment proceedings.

CONCLUSIONThis judgment is in line with the multitude of international commentary and judicial decisions relating to fixed-place PEs. In addition, the judgment confirms that if the place of business is fixed, the permanence of such place must be evaluated having regard to the nature of the business and other relevant factors. ■


ENFORCEMENT MUST BE PROCEDURALLY FAIR AND REASONABLEIn tax administration, everything is relative. Time is not absolute. Here, when SARS requires a taxpayer to submit documents, 21 days means 21 days. However, when SARS is required to consider a taxpayer request, 21 days means one month (or more). A taxpayer has 30 business days to submit an objection to an assessment, while SARS has 60 business days to make a decision on that objection.

TAX ADMINISTRATION

W e can at least rely on the Constitution and the Promotion of Administrative Justice Act, 2000. We can find solace in the fact that SARS is a creature of statute and, as such, may exercise only the powers conferred on it by the relevant legislation.

For SARS, the Tax Administration Act, 2011 (the TAA), as interpreted and applied by our courts, is as immutable as Newton’s three laws of motion.

FIRST LAW – SARS MUST FOLLOW PRESCRIBED AUDIT PROCEDURESection 40 of the TAA empowers SARS to select a person for inspection, verification or audit “on the basis of any consideration relevant for the proper administration of a tax Act, including on a random or a risk assessment basis”.

The procedural requirements, as contemplated in section 42, may be paraphrased as follows:• In accordance with Public Notice 788, the SARS official

responsible for or involved in an audit must provide the taxpayer with a report indicating the stage of completion of the audit within 90 days of the start of the audit and within 90-day intervals thereafter until the conclusion of the audit.

• If the audit identified potential adjustments of a material nature, SARS must within 21 business days provide the taxpayer with a document containing the outcome of the audit, including the grounds for the proposed assessment.

• The taxpayer must then be allowed 21 business days to respond in writing to the facts and conclusions set out in the document.

The tax court in Mr A v The Commissioner for the South African Revenue Service (Case No. IT13726) stated as follows at [30]:“The respondent’s non-compliance with sections 40 and 42 of the TAA clearly offends both the Constitution and the principle of legality. Accordingly, the respondent’s decision to conduct an additional assessment without notice, must be set aside as it does not comply with the peremptory prescripts of the applicable legislation and it is also constitutionally unsound. In the circumstances, the assessment is found to be invalid.”

SECOND LAW – THE DECISION TO ISSUE AN ADDITIONAL ASSESSMENT MUST BE RATIONAL, NOT RANDOM

Section 92 is a mandatory provision that requires the issuing of an additional assessment if SARS is satisfied that an assessment does not reflect the correct application of a tax Act to the prejudice of SARS or the fiscus.

Holding the principles of legality and reasonableness in reverence, one would assume that a SARS official will go to adequate lengths to consider all relevant information before a declaring “I am satisfied that an additional assessment must be issued on these grounds”.

However, the Supreme Court of Appeal brought SARS to heel in no uncertain terms in the matter of SARS v Pretoria East Motors (Pty) Ltd, 2014:

“The raising of an additional assessment must be based on proper grounds for believing that, in the case of VAT, there has been an under declaration of supplies and hence of output tax, or an unjustified deduction of input tax. In the case of income tax it must be based on proper grounds for believing that there is undeclared income or a claim for a deduction or allowance that is unjustified. It is only in this way that SARS can engage the taxpayer in an administratively fair manner, as it is obliged to do.”

“Section 92 is a mandatory provision that requires the issuing of an additional assessment if SARS is satisfied that an assessment does not reflect the correct application of a tax Act to the prejudice of SARS or the fiscus.”


Unik Professional Services

Act sections: Constitution of the Republic of South Africa, 1996; Promotion of Administrative Justice Act 3 of 2000; Tax Administration Act 28 of 2011: sections 40, 42, 45, 92, 96, 179(1).Cases: Mr A v The Commissioner for the South African Revenue Service (Case No. IT13726) (as yet unreported); VZ Nondabula v The Commissioner: SARS & Another, High Court of South Africa, Eastern Cape Local Division, Case No. 4062/2016; SARS v Pretoria East Motors (Pty) Ltd (291/12) [2014] ZASCA 91.Tags: Public Notice 788 (Gazette 35733: 1 October 2012), SARS procedures.

THIRD LAW – SARS MUST ISSUE A NOTICE OF ASSESSMENTSection 96 requires SARS to issue to the taxpayer a notice of the assessment. In the case of an assessment that is not fully based on a return submitted by the taxpayer, SARS must also include in the notice a statement of the grounds for the assessment.

This requirement is so logical and self-explanatory, it almost does not merit the status of an immutable law. However, the Eastern Cape High Court discovered that in the case of VZ Nondabula v The Commissioner: SARS & Another, 2016, SARS did not hesitate to institute drastic collection procedures although no assessment had been issued:

“Once the stage provided for in section 92 is reached the first respondent is required to comply with the provisions of section 96 by issuing a notice of assessment with all the information required and provided for in section 96. I may mention that the whole of section 96 is couched in peremptory terms, meaning that the first respondent has no discretion when it comes to section 96.” [21]

“Having failed to comply with section 96 the first respondent jumped to the provisions of section 179(1) and issued the impugned Third-Party Notice and thus effectively closing down applicant’s business. This was not only unlawful but a complete disregard of the doctrine of legality which is a requirement of the rule of law in a constitutional democracy.” [22]

If SARS adhered to these rules in the exercise of its powers, as it is obliged to do, the taxpayer at the receiving end would at least be well informed and in a position to exercise their right to object to the assessment.

But even if SARS were to toe the line as far as audits go, there is one problem: The TAA bestows upon SARS the powers of inspection, verification and audit. An inspection may only be performed for the purposes listed in section 45, for instance to determine the identity of a person occupying certain premises, or to determine whether a person is registered for tax. However, audits and verifications are the actions that lead to additional assessments and tax liabilities. Section 42 determines the procedure to be followed during an audit. No

TAX ADMINISTRATION

such rules apply to verifications. A taxpayer is usually informed that a return is the subject of a verification when SARS issues a notice on eFiling requesting supporting documents. Should SARS be satisfied, upon receipt of the documents, that the current assessment does not reflect the correct application of the relevant tax Act, an additional assessment is issued. However, as SARS did not conduct an “audit”, the taxpayer is not informed of the outcome of the verification or of any proposed adjustments. The additional assessment is issued without any prior notification and if the taxpayer is not in agreement, the only option is to object to the assessment. This essentially means that a matter that could potentially have been resolved within 42 business days may now take up to twice as long (30 business days to submit an objection and 60 business days for SARS to respond) to finalise.

In Annexure C to the 2018 Budget Review (“Additional tax policy and administrative adjustments”), the Minister of Finance proposed that “a taxpayer be notified at the start of an audit as part of efforts to keep all parties informed”.

Why not use this opportunity to bring the powers of “verification” into the same orbit as “audit”? Then the rules of reasonable and procedurally fair administrative action could have universal application. ■


DOCUMENT COMPLIANCE AND NON-SUBMISSIONIn terms of the Income Tax Act, 1962 (the Act), transfer pricing adjustments are made in circumstances where multinational entities transact at prices that do not reflect prices expected to be charged if parties to the transaction were independent persons dealing at arm’s length.

B ase Erosion and Profit Shifting (BEPS) refers to tax planning strategies that shift profits from high tax jurisdictions like South Africa to locations where little or no corporate tax is being paid.

In order to provide governments with the necessary domestic and international instruments to prevent companies from paying limited amounts of taxes, the Organisation for Economic Co-operation and Development (OECD) formulated the BEPS Action Plan at the request of the G20. The BEPS Action Plan applies to all OECD member countries as well as G20 countries. In addition to this, countries that are not members of the OECD or the G20, such as South Africa, can also follow the guidelines set out in the BEPS Action Plan.

The BEPS Action Plan consists of 15 Action Points with the objective of minimising or eliminating transactions that erode or decrease a multinational entity’s tax base by routing its profits from high tax jurisdictions to low tax jurisdictions. The overriding concept of the BEPS Action Plan is that all taxable profits should be taxed once.

Among the 15 Action Points addressed in the BEPS Action Plan, Action Point 13, which provides guidance on transfer pricing documentation and country-by-country reporting (CbCR), provides one of the bigger challenges to taxpayers in terms of transparency and disclosure. In addition, several other action points build on the disclosure requirements set out in Action Point 13.

TRANSFER PRICING


ENSafrica and Webber Wentzel

Editorial comment: See also the article titled ‘Country-by-country reporting’ in Issue 2.Act sections: Income Tax Act 58 of 1962; Tax Administration Act 28 of 2011: sections 25, 210, 211.Tags: Country-by-country reporting, Transfer pricing.

The purpose of this Action Point is to re-examine transfer pricing documentation by developing rules to enhance transparency, including a requirement that multinational entities provide information to all governments in all countries in which it operates. The information to be provided to the local governments includes the allocation of income, the level of economic activity taking place in that jurisdiction, and taxes paid amongst countries in accordance with a standardised template.

As a result, Action Point 13 details a new standardised three-tiered approach to transfer pricing documentation which is made up as follows:

THE MASTER FILEA master file provides a complete picture of the multinational entity’s global operations, including an analysis of profit drivers, supply chains, group intangibles and group financing.

THE LOCAL FILEA local file assures compliance with the arm’s length principle in material transfer pricing positions impacting a specific jurisdiction by providing more detailed information relating to specific intercompany transactions.

CBC REPORTThe CbCR provides aggregated financial and tax data by tax jurisdiction to facilitate risk assessments.

This approach to transfer pricing documentation will provide revenue authorities with relevant and accurate information to perform an effective transfer pricing risk analysis. In addition, it will provide a platform on which the information necessary for a transfer pricing audit can be developed and provide taxpayers with an incentive to expressively consider and describe their compliance with the arm’s length principle in material transactions.

SOUTH AFRICAN DOCUMENTATIONSouth Africa has issued its regulations implementing the country-by-country reporting standards for multinational enterprises (MNEs) while SARS has published a Public Notice requiring the submission of the CbCR, the master file and the local file.

These regulations entrench the CbCR requirements in South Africa’s transfer pricing regime, and follow legislative changes in South Africa related to the OECD’s BEPS initiative, specifically Action Point 13.

The Public Notice explains that resident MNEs with a turnover exceeding R10 billion are required to submit CbCRs to SARS. These MNEs will also be required to prepare and file, with SARS, a master file and a local file for financial years commencing from 1 January 2016, with submissions being required 12 months after the last day of the financial year.

Therefore, the first submission deadline (for all three submissions) for December year-ends was 31 December 2017.

South African resident companies, which are not required to submit a CbCR to SARS, but which enter into cross-border related party transactions (“potentially affected transactions”) that exceed or are reasonably expected to exceed R100 million for the year of assessment without any offsetting, must submit a master file and a local file to SARS for years commencing from 1 October 2016, with submission being required within 12 months of the company’s year-end.

Therefore, the first submission deadline for master files and local files will be 30 September 2018.

Compiling a master file and local files to comply with the transfer pricing documentation retention requirements of SARS is a time-consuming process, especially where no transfer pricing policy or transfer pricing reports have been prepared before. Therefore, with the deadlines for master files and local files fast approaching, time is running out and MNEs need to attend to complying with SARS’ documentation requirements as a matter of urgency.

NON-SUBMISSION OF TRANSFER PRICING DOCUMENTATION IS AN INCIDENCE OF NON-COMPLIANCE

It has long been the position that there are no specific penalties for the non-submission of tax returns and accompanying schedules for corporate taxpayers. While sections 210 and 211 of the Tax Administration Act, 2011 (the TAA) provide for the imposition of penalties, in respect of corporate taxpayers, this would not apply until such time as SARS issues a notice to give effect to this.

Notice 480 in Gazette 41621 dated 11 May 2018 specifically relates to Gazette 41186 issued on 20 October 2017 (and extended by Gazette 41306 on 8 December 2017), which required the completion of the CbCR, a master file and a local file to be prepared by a reporting entry resident in South Africa in terms of section 25 of the TAA.

This brings the compliance to the minimum standard for transfer pricing documentation advocated in the OECD’s BEPS Action Plan full circle and finally brings in a statutory non-compliance penalty for failing to complete transfer pricing documentation in South Africa where the thresholds are met.

The impact of non-compliance as required under section 25 will result in the following administrative penalties being imposed in terms of section 210(1), read with section 211:

AMOUNT OF MONTHLY ADMINISTRATIVE NON-COMPLIANCE PENALTY

Item Assessed loss or taxable income for “preceding year” Penalty

(i) Assessed loss R250

(ii) R0–R250 000 R250

(iii) R250 001–R500 000 R500

(iv) R500 001–R1 000 000 R1 000

(v) R1 000 001–R5 000 000 R2 000

(vi) R5 000 001–R10 000 000 R4 000

(vii) R10 000 001–R50 000 000 R8 000

(viii) Above R50 000 000 R16 000

It is therefore now essential for resident MNEs required to file a CbC report, master file and/or local file to do so no later than 12 months after the last day of the reporting fiscal year of the MNE group in order to avoid being subject to a fixed-amount penalty in terms of section 210(1), read with section 211, of the TAA. ■


VALUE-ADDED TAX

THE NEW RATEAlthough the new value-added tax (VAT) rate of 15% has been in force since 1 April 2018, the VAT201 form will still have to disclose some transactions at 14% and some transactions at 15% (in the same VAT201 form).

T he dilemma of selecting the correct rate will still be with many vendors for many more months in the future.

It is likely that some of the following transactions with still be levied at 14%. These are:• Organisations issuing invoices to their existing members based

on their historical practices, for example SAIPA;• SABC TV licences issued in December 2017 for the 2018

calendar year;• Some progressive/successive/periodic supplies;• Lay-by agreements when the considerations for supply is R10

000 or less per invoice and is accompanied by the payment of a deposit;

• Contracts legally concluded for the building of residential property before 1 April 2018; and

• Non-settlement of debt – declare output tax when the 12-month period has expired (see section 22(3) of the VAT Act, 1991 (the VAT Act)).

THE CORRECT APPLICATION OF THE NEW RATE RULESIntroductionThe change in the rate has caused consternation not only in society in general but has caused anxiety amongst professional accountants and tax practitioners.

The fundamental basic time of supply rule, that is, the earlier of cash or invoice issued, still applies. During the transition period for the change in the rate, the transitional rules must be given consideration.

This article refers to the two transitional rules as Rule 1 and Rule 2.

Rule 1 – Date of delivery of goods / date services performed

With reference to goods/services delivered before 1 April 2018 but both cash received and invoice issued after 1 April 2018, the date of delivery of goods and service is relevant and determines which rate to use.

The transition rule triggers VAT based on delivery of goods and services.

Basic VAT rules will always apply but to accommodate the change in rate, specific transitional rules apply. This rule supersedes the general VAT rule in respect of which rate to use.

Rule 2 – 21-day rule – anti-avoidance ruleIn instances when the transition is completed after 21 February 2018 and before 1 April 2018, but goods/services are delivered 21 days after 1 April 2018, that is, on 23 April 2018 or beyond, the transactions are taxed at a rate of 15%.

However, if the goods/services are delivered within 21 days after 1 April 2018, that is, for example, on 15 April 2018, the transactions are taxed at a rate of 14%.

The best way to understand Rule 2 and which distinguishes it from Rule 1 is to think that it is possible to issue invoices or make payment after the Minister of Finance made the announcement on Budget Day – Wednesday, 21 February 2018 and before 1 April 2018, to avoid using the increased rate. Under these circumstances, the determination of the rate to use in the VAT201 form will be as per Rule 2. The vendor attempts to design a scheme to avoid the increase in the rate by trying to apply the basic VAT rules.

Illustrative examples are required to demonstrate the working of these two VAT rules.

ILLUSTRATIVE EXAMPLE 1:Assuming that the rate did not changea) A company sold goods worth R342 000 (VAT inclusive) to a

customer. The customer paid the amount on 28 March 2018 but the goods were invoiced and delivered on 5 April 2018.

b) A company sold goods (no delivery occurred) worth R171 000 (VAT inclusive) to a customer. The customer was invoiced on 24 March 2018 but the cash was only received on 11 April 2018.

Determine the rate at which the output tax should calculated for the VAT201 form for the period ending 30 April 2018.

Example 1 – Solution Assuming that the rate did not changea) The general supply rule will apply because the amount of R342

000 was paid on 28 March 2018. Therefore, VAT triggered on this date and if the vendor belongs to the B tax period (ending 30 April 2018), then the output tax levied will be at 14% = R42 000.

b) The customer was invoiced on 24 March 2018, hence VAT is triggered according to the general supply rule. Output taxation 14% = R21 000.

Example 1 – Solution (cont) What happens with the rate change from 14% to 15% a) Rule 1 is applicable – it refers strictly to the date of delivery of

goods. The supply date is still 28 March 2018, but the rate is determined by the date of delivery, which is 5 April 2018, so the rate is 15% and output tax levied will be R44 609 (field 1 in VAT201) – an additional amount of R2 609.

b) Rule 1 is applicable – it refers strictly to the date of delivery of goods. The supply date is still 24 March 2018, but no delivery occurred before 1 April 2018. Therefore, it is likely that delivery will occur after 1 April 2018. The rate, in this situation, equals 15% and output tax levied will be R22 304 – an additional amount of R1 304 – use the field normally used to declare output tax, that is field 1 of the VAT201 form.

ILLUSTRATIVE EXAMPLE 2Municipality X in Gauteng issues a bill on 2 April 2018 for electricity (R800 – VAT included) and a separate line item for property rates (R315 – VAT at the zero rate).


The municipality issues both electricity and property rates in arrears, that is for the period ending 31 March 2018.

What rate must be applied to this transaction? What input tax may a vendor claim – given that all items in the bill are used for enterprise purposes?

Example 2 – SolutionIt is given that the municipal bill was issued in arrears, implying that the services were rendered in the previous month, that is in March 2018.

Although no payment was made in March 2018, and no invoice was issued in March 2018, the actual consumption of the services occurred in March 2018, and therefore the rate is at 14%. This is in terms of Rule 1.

Input tax to be claimed by the vendorElectricity bill R800 × 14/114 = R98Property rates R315 × 0/114 = R0Total input tax = R98

The input tax of R98.00 can be claimed by inserting the amount in field 18 – “other” of the VAT201 form.

Illustrative Example 3Stationery sold to Company A for an amount of R15 000 (VAT excluded).

All parties are vendors. The invoice was issued and the payment was made on 30 March 2018. Delivery of stationery occurred on:a) 4 April 2018; andb) 28 April 2018.

What rate must be applied to this transaction? What is Company A’s input tax, given that the stationery is used for enterprise purposes?

Example 3 – Solutiona) As the goods were delivered on 4 April 2018, Rule 2 applies. The

stationery was delivered within the 21 days post the new rate effective date April 2018, and therefore 14% is the rate.

Input tax = R15 000 × 14% = R2 100 can be claimed in field 18 – “other” of the VAT201 form for Company A.

b) As the stationery was delivered on 28 April 2018, Rule 2 applies. The stationery was delivered after the 21-day rule, ie after 23 April 2018, and therefore 15% is the rate.

Input tax = R15 000 × 15% = R2 250 can be claimed in field 15 – “other” of the VAT201 form for Company A.

IMPORTATION OF GOODSThe correct application of the rate when importing goods/services is still providing a challenge for tax practitioners. There are no transition rules in respect of imported goods when the rate has changed.

The specific time of supply rule triggers the VAT when goods are imported. The specific time of supply rule is triggered when the goods have physically entered the country, or the goods have been entered for local consumption at the customs office.

However, the VAT Act makes reference to two situations when goods are imported. These are:• importation of goods from Botswana, Lesotho, Namibia &

Swaziland (BLNS countries); and• importation of goods from the rest of the world (non-BLNS

countries).

VALUE-ADDED TAX

IMPORTATION OF GOODS FROM BLNS COUNTRIES

Time of supply ruleThe time of supply rule is the time when goods enter South Africa – this is when goods physically enter South Africa via a designated commercial port.

The date when the goods enter South Africa will determine the rate – if the goods entered South Africa after 1 April 2018, then the rate is 15%.

VAT payable on goods imported from BLNS countries is based on the prevailing rate when goods entered South Africa. The VAT calculation is based on the custom duty value plus surcharges including the 10% uplifting charge.

When completing the VAT201 form, the following fields must be completed:• Capital goods imported – use field 14A; and• Import of non-capital goods – use field 15A.

Importation of goods from the rest of the world (non-BLNS countries)Time of supply rule

Goods imported from the rest of the world to South Africa must be cleared for home consumption by Customs & Excise – which also collects the tax.

It is possible for the goods to be cleared on the same date as the date of importation.

In practice, very often, there is a difference between the date of actual importation and the date that the goods are cleared.

The time of supply is when the goods are cleared for home consumption. The date when the goods were cleared for home consumption determines the rate.

VAT payable on goods imported from non-BLNS countries is equal to 14% or 15% of the customs duty value – plus the 10% uplifting charge on the date the goods are cleared.


IMPORTATION OF SERVICESWith reference to the importation of services, we also have two situations described in the VAT Act:• The foreign supplier of services is not registered with SARS as a

vendor; and• The foreign supplier of services is registered with SARS as

a vendor – commonly referred to as the supply of electronic services by non-residents.

The foreign supplier of services is not registered with SARS as a vendor

“Imported services” is defined as follows:• By a supplier that is not a resident of South Africa or does not

conduct business in South Africa;• The recipient of the service must be a resident of South Africa;

and• The services must be used in South Africa for the purposes of

making a non-taxable supply (for example private use).

In other words, VAT is payable when the vendor (or non-vendor) imported services are used for purposes other than the making of taxable supplies.

Time of supply ruleImported service occurs on the earlier of the dates of:• The issue of an invoice; and• The making of any payment by the recipient.

So if the “imported service” was purchased after 21 February 2018 but before 1 April 2018, the transitional rule applies. SARS will apply the 21-day rule. The applicable rate is determined by what date the service was physically (electronically) delivered to the South African resident who used the service for non-supply purposes.

The foreign supplier of services is registered with SARS as a vendor

The definition of “enterprise” has been extended to include the supply of certain electronic services by foreign e-commerce suppliers in respect of which at least any two of the following three circumstances apply:• The recipient of those electronic services is a South African

resident;• Payment for such electronic services originates from a South

African bank account; and• The recipient of such electronic services has an address

(residential, business or postal) in South Africa.

The different types of services are broadly defined as:• Educational services;• Games and games of chance;• Internet-based auction services;• Music DVDs; and• Subscription services.

The above-mentioned services must be supplied for a consideration and by means of an electronic agent, electronic communication or the internet in order to constitute “electronic services” for VAT purposes.

Non-resident suppliers of electronic services are required to register for VAT at the end of the month in which the total value of the taxable supplies exceeds R50 000 (see paragraph (b)(vi) of the definition of “enterprise” read with section 23(1A)). The non-resident suppliers of electronic services to South African residents would become liable

to register at the end of any month in which the threshold of R50 000 has been met. The foreign supplier must apply within 21 business days of becoming liable to register. Many major international suppliers of electronic services, such as Apple, Yahoo, Google, Amazon, Takealot, Oracle and IBM have applied (or would have had to apply) to SARS for VAT registration by now.

If the non-resident supplier of electronic services is registered as a vendor, the supplies concerned are not regarded as imported services (explained above). Instead, the non-resident supplier, being a vendor, will charge VAT and issue invoices under normal VAT rules, as taxable supplies, made in the course and furtherance of an enterprise carried on by that non-resident in South Africa. The vendor can deduct the VAT paid as input tax if acquired for taxable purposes.

The time of supply of electronic services is the earlier of the time that an invoice is issued by the supplier and the time that any payment is made by the recipient in respect of that supply. By referring to the new rate rules, the vendor must determine which rate will apply in their given circumstances.

EXPORT OF SERVICES/GOODS WITH REFERENCE TO SECOND-HAND GOODS AS WELL

Generally, the export of goods and services to a resident of a foreign country is zero-rated.

The only exception to the rule is when second-hand goods are exported, and notional input tax has been claimed as per the VAT Act by the exporter of the second-hand goods.

In other words, the exporter of the second-hand goods will have to levy output tax and the rate will be equal to the rate used on the original purchase price – the output tax will equal the notional input tax claimed by the vendor exporting the goods, irrespective of the selling price of the second-hand goods to the non-resident client. ■

SAIPA

Act sections: Value-Added Tax Act 89 of 1991: “electronic services”, “enterprise”, “imported services”; section 23(1A).Tags: VAT, VAT rate increase 2018.

“Generally, the export of goods and services to a resident of a foreign country is zero-rated.”

Documents

CPD 60mins TAX CHRONICLES...TAX CHRONICLES MONTHLY COMPANIES Addressing form IT14SD TRANSFER PRICING Compliance and non-submission VAT The new rate Official Journal for the South African