Secret VAT deductions

Gerhard Badenhorst*

01 June 2009

And those Sars won’t allow just yet.

Companies have been pressing the South African Revenue Service (Sars) to allow VAT deductions on holding company expenses, corporate finance fees incurred relating to BEE transactions and company reorganisations, investment transactions and the apportionment of dividend income but have had few successes.

Victories have, however, been won on holding company expenses.

The debacle on holding company expenses began about four years ago when Sars targeted a number of these companies and disallowed the VAT they claimed on expenses, such as, JSE listing fees, publication of annual reports, shareholder communications, corporate advertisements and transfer secretary fees on the basis that these expenses are not attributable to the taxable activities of the companies concerned, but are related to the "juristic nature" of the company. This was not considered by Sars to be an enterprise activity, and therefore not deductible. In some instances Sars also disallowed corporate finance or advisory expenses incurred with regard to company re-organisations, unbundling and BEE transactions.

A large number of companies objected and appealed against the additional assessments issued by Sars.

Sars has now entered into discussions with these companies directly on an individual basis in order to reach settlement on the disputes. From these discussions Sars has indicated that it would generally accept that the following expenses, which are at least partly attributable to the taxable activities of the company:

JSE listing fees,
publication of annual reports,
shareholder communications,
corporate advertisements and
transfer secretary fees.

The VAT on these expenses can be claimed to the extent that the company makes taxable supplies. In determining the extent to which the company makes taxable supplies, Sars generally considers the revenue streams of the company concerned. However, if such revenue also includes dividend income, Sars has ruled that such dividend must be included in the formula of taxable / total revenue to calculate the percentage of VAT claimable, to the detriment of vendors who received dividend income from their subsidiaries. Submissions have been made by accountants and lawyers that dividends should be excluded from the formula because no expenses are generally incurred to generate dividend income. These submissions have not been successful.

Companies have also not had much luck on getting Sars to make a policy decision on the VAT status of corporate finance fees incurred relating to BEE transactions, ie, as to whether the VAT thereon qualifies as input tax or not.

Where costs are incurred in relation to company reorganisation and unbundling expenses, Sars requires an analysis of the various services rendered, and will apply the general VAT input tax rules to each of the underlying activities. For example, where corporate finance costs were incurred relating to the issue of shares or debentures, no input tax deduction is allowed, but where a taxable business is acquired, the VAT on the corporate finance fees will generally be allowed.

*Gerhard Badenhorst is from Edward Nathan Sonnenbergs