VAT FOR SINGLE SUPPLY OF GOODS AND SERVICES TO NON-RESIDENT ENTITIES

And just when we thought that VAT principles were done and dusted, the Supreme Court of Appeal hands down a judgement that has many tax experts shaking their heads in disbelief. Following this judgement we all need to look with new VAT eyes at the products and services that we offer.

Introduction 

The VAT Act requires a supplier of goods or services to treat a single supply of goods or services as separate supplies for VAT purposes, if the separate supplies would be subject to VAT at different VAT rates. For example, if I sell frozen “ribs and chips” to a client as a single combo, the ribs would be subject to VAT at 15% and the raw chips would be zero-rated. In the world of VAT this category of supplies is referred to as composite supplies. 

The application of the composite supply rules was tested in the British Airways case quite a few years ago. In that case the court held that an airline ticket is not capable of separation into the various activities resulting in the transport of a passenger from point A to B. A single supply of transport services is supplied, which, in the case of international transport, is fully zero-rated. After this judgement everybody (except SARS) sighed a sigh of relief and life was good! 

Until 3 April 2020 when the Diageo South Africa judgement was handed down by the SCA …

The Diageo judgement

The brief facts of the case are that Diageo supplied marketing services to a non-resident principal in respect of its product line in South Africa. As part of the overall marketing effort samples were provided at no charge to potential local clients. See where this is going!?

The way SARS looked at it

SARS took the view that VAT should be paid on the samples provided in South Africa as it formed part of a composite supply made to the non-resident. In their view the composite supply consisted of zero-rated marketing services supplied to the non-resident and standard-rated goods supplied to recipients in South Africa.

Diageo had a different idea

Diageo argued that a single supply of marketing services was applied to the non-resident. It argued that the product supplied in South Africa for no consideration was merely costs incurred in the supply of the single service (consumables) and that the composite supply rules would not apply. They relied heavily on the British Airways case to support their view.

The court’s view  

The court placed emphasis on the fact that a deeming provision in the VAT Act (section 8(15) for the technically inclined) requires the split of composite supplies. The court held that a deeming provision established a hypothesis that must be carried as far as necessary to achieve the legislative purpose. 

The court placed emphasis on the requirement that “if separate considerations had been payable” the rules applicable to composite supplies must be applied.

The court accordingly held that if a separate charge had been made for the samples provided to local potential clients, such charge would have been subject to VAT at the standard rate. Hence, section 8(15) had to be applied to standard-rate the portion of the marketing fee that related to the recovery of the cost of the free samples.

How does that impact my life?

Every person that makes zero-rated supplies of goods or services could potentially be impacted by the judgement. 

With regards to zero-rated international services, suppliers of such services now need to consider carefully whether any local supplies of goods or services take place as part of the execution of the international service agreement. If so, the potential impact of the judgment cannot be ignored. In this regard, we are of the opinion that normal overhead expenditure incurred to supply foreign services will not be impacted by the case. Where any goods or services ends up on the desk of a South African recipient in whichever way, careful regard should be had as to whether the zero-rating of such services is potentially compromised. 

And it does not only impact international transactions …

If a local supplier supplies zero-rated foodstuffs and packages the foodstuffs in a fancy reusable container, must the supplier charge VAT on the value of the container at 15% and on the value of the food at nil percent? Just asking!

Conclusion

 The judgement should not be seen as all doom and gloom. It could serve to refocus suppliers on the nature of the goods and services that they supply and the VAT rates applicable to it. Maybe this is an opportune time to ensure that your entire product line is aligned with the requirements of the VAT Act, which is a healthy exercise to enhance ongoing compliance with VAT legislation and alignment with changes in the operating environment.