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VAT implications of intra-group payments in terms of apportionment.
Gerard Soverall & Annelie Giles
PwC
Agenda
1. Challenges surrounding intra-group payments
2. Apportionment
3. Technical & accounting considerations
4. Closing statements
Tax Indaba, 2016
3
September 2016
PwC
Tax Indaba, 2016
4
September 2016
“Many people believe that where taxes are concerned, they are victims, held hostage by an inevitable process that allows them no input, no control. This passive approach becomes something of a self-fulfilling prophecy; where people believe that they lack control, they seldom try to assert control.”
– Richard Carlson
PwC
Challenges – Business perspective
Tax Indaba, 2016
5
September 2016
Non-settlement of
intra-group accounts
Group structure –
Commercial vs Tax
structure
Data accuracy &
management
Journal processing
Change of use
adjustments – Are
they identified?
Cost allocation
methods – Are they
acceptable to SARS?
Direct attribution –
Documentation is
critical
Reasonability testing
– Is it an effective
control?
Group reorganization
– Is VAT recoverable?
Non-standard
transactions –
Often overlooked
Transaction coding
PwC
Group structure
Tax Indaba, 2016
6
September 2016
Staff seconded could trigger multiple VAT registrations within a single legal entity
Cross-border vs local transactions –Different tax implications
Imported services
Intra-company cost allocations & inventory transfers between separately registered branches becoming separate taxable supplies
Multi-tier dividend distributions affecting multiple group companies’ apportionment ratios
Services physically rendered elsewhere than in SA – s11(2)(k) & s8(15)
Management fees
Separately identifiable branch and foreign main business separate “persons” for VAT purposes
PwC
Apportionment
Tax Indaba, 2016
7
September 2016
• Section 1(1) – “Enterprise”, “Input tax”
• Standard turnover-based method
• 95% de minimis rule.
• Directive to use alternative method from a future tax period / retrospective from beginning of year of assessment in which applied.
• Apportionment ratio rounded to 2 decimal places.
• Annual adjustment within 6 months after end of financial year.
VAT incurred on acquisition of
goods & services
Direct attribution(Purpose test / Intended use)
“Enterprise” activities
Dual/mixed use purposes
Non-“enterprise”
activities
Less: Non-permissible input
tax deductionss17(2)
Apportionments17(1)
No input tax deduction
Full input tax deduction
Partial input tax deduction
Not “input tax” s1(1)
PwC
SARS’ view?
Tax Indaba, 2016
8
September 2016
Apportionment method:
Should be “fair & reasonable” but is often subjective
Industry specific considerations:
Complex / No one-fits-all approach
(e.g. BASA, ASISA, SAIA)
“Closeness of the connection”
(De Beers case, MTN case)
I.e. how closely does input tax incurred relate to taxable supplies?
PwC
Distributions - Dividends
• Non-supply – Not consideration for any “supply” by shareholder to earn dividends.
• Passive shareholding – Non-enterprise activity; Limited effort involved.
• Implied correlation – Distortive component of apportionment calculation.
• Disproportionate to effort applied – No direct time, effort, cost, economic activity.
• Denominator – Inclusion in apportionment calculation is unique to South Africa (DTC).
Tax Indaba, 2016
9
September 2016
Business structure Industry considerations
• BASA method – Certain adjustments to denominator.
• Equity instruments disguised as debt Dividends (s8F and 8FA)
• Characteristics associated with debt Interest (s8E or 8EA)
• Purpose of holding company?
• How much shareholding effort involved?
• Active investment company.
• Active trading company with minimal shareholding activity.
Dividends in specie
• Distribution to the beneficial owner of a share in any form other than in cash.
• e.g. Distribution of trading stock or a capital asset.
• Supply of goods.
PwC
Dividends in specie - Distributor
Tax Indaba, 2016
10
September 2016
Policy design?
s1(1) “Enterprise” For a consideration
s10(23) – Supplies for nil consideration
s10(4) – Supplies between connected persons
Deemed nil value Deemed open market value
Apportionment ratio
Apportionment ratio
Deemed taxable supplies
s18(1) – Change in use adjustment
s10(7) – Deemed open market value
Apportionment ratio
VAT blockage
Mismatch?
Taxable supplies OR
PwC
s1(1) “Enterprise” For a consideration
s10(23) – Supplies for nil consideration
s10(4) – Supplies between connected persons
Deemed nil value Deemed open market value
Apportionment ratio
Apportionment ratio
Deemed taxable supplies
s18(1) – Change in use adjustment
s10(7) – Deemed open market value
Apportionment ratio
VAT blockage
Mismatch?
Taxable supplies
Dividends in specie - Distributor
Tax Indaba, 2016
11
September 2016
Policy design?
PwC
Interest income
Tax Indaba, 2016
12
September 2016
The bigger challenge is usually data accuracy and overcoming system limitations, rather than the complexity of the relevant provisions of the VAT Act.
Apportionment method
• Gross vs Net interest
• e.g. BASA – Borrowed to on-lend (single activity; applies to all interest)
Non-monetary interest payments
• Interest payments in the form of goods or services.
• e.g. Substituting monetary interest with equity/shareholding.
• Sharia compliant financing arrangements.
Special treatment of incidental interest
• Remains subject to obtaining a directive from SARS.
• e.g. Overdue debtors accounts; Investment of surplus cash.
Foreign interest
Local interest
Zero rated service
Exempt financial service
PwC
Royalties
Tax Indaba, 2016
13
September 2016
Local royalties Foreign royalties
Zero rated service (0%)
• Section 7(1)(a)
• Section 1(1) “services”
• Section 11(2)(m)
Standard rated service (14%)
• Section 7(1)(a)
• Section 1(1) “services”
Lack of place of supply rules
• Rights used outside SA; Used inside & outside SA.
• Data accuracy is important.
Apportionment method
• Passive income – Inclusion of taxable royalty fees in apportionment calculation?<< Irrespective of recipient’s residency status >>
PwC
Management fees
Tax Indaba, 2016
14
September 2016
• Costs incurred as inputs into the making of own taxable supplies to subsidiary.
• Consideration for taxable supplies.
• Holding company acting as agent for VAT purposes on behalf of subsidiary (e.g. paying agent).
• Merely recovery of money (e.g. Legal fees recharged).
Cost recharge/disbursement
Cost reimbursement“Supply” for VAT purposes?
PwC
Management fees
Impact of BEPS
• Tax structure genuine?
Tax Indaba, 2016
15
September 2016
Value of underlying service?
• Transfer pricing adjustments / Functional analysis
50/50 Dividend Management fee policy
• Inclusion of dividends in apportionment calculation limited to management fees.
“Imported services”
• VAT registration / Self-assessment requirement?
• No de minimus rule
- Self-assessment if charge relates to a subsidiary’s whole business involving both taxable & non-taxable supplies
- E.g. system support services.
• VAT cascading where non-registered foreign holding company recharges VAT inclusive costs to subsidiary.
How much
detail is needed?
Closing statements
This publication has been prepared for general guidance on matters of interest only, and does not constitute professional
advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No
representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this
publication, and, to the extent permitted by law, PwC, its members, employees and agents do not accept or assume any
liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the
information contained in this publication or for any decision based on it.
© 2016 PricewaterhouseCoopers (“PwC”), the South African firm. All rights reserved. In this document, “PwC” refers to
PricewaterhouseCoopers in South Africa, which is a member firm of PricewaterhouseCoopers International Limited (PwCIL),
each member firm of which is a separate legal entity and does not act as an agent of PwCIL
Gerard Soverall
Partner/Director: Tax Services
Tel: +27 11 797 5004
Cell: +27 83 442 7643
Annelie Giles
Manager: Indirect Tax
Tel: +27 11 797 4239
Cell: +27 82 337 5650
