Diageo South Africa (Pty) ltd v. Commissioner for the South Africa revenue service

South Africa

03.04.2020

Sales Tax/VAT

Deeming provision had the effect of notionally separating the supply of services from the supply of goods, when in fact they were not separate supplies

Present appeal concerns the proper interpretation and application of Section 8(15) of the Value Added Tax Act 89 of 1991, in the context of a single supply of advertising and promotional goods and services (the A&P services) by the appellant, Diageo South Africa (Pty) Ltd (Diageo), a South African VAT vendor, to various non-resident entities (the brand owners).

Diageo made supplies of the A&P services to the brand owners and levied a fee for the supplies during its VAT periods ending June 2009, 2010 and 2011. Pursuant to Section 11(2)(l) of the Act, Diageo charged VAT on the said fee at zero percent. However, the respondent, the Commissioner for the South African Revenue Service (the Commissioner), invoked Section (8)(15) of the Act and maintained that Diageo had made deemed separate supplies of zero rated A&P services and standard rated goods in the form of promotional giveaways and samples that were not exported but consumed in the Republic of South Africa (the Republic).

The Commissioner assessed Diageo for additional output VAT on the goods component of the supply of the A&P services rendered by Diageo to the brand owners during the aforementioned periods.

Diageo challenged the additional assessment in the Tax Court, Cape Town (Savage J), contending that it made a supply only of zero-rated A&P services to the brand owners and that it did not make separate or dissociable supplies of both services and goods. The Tax Court disagreed and held that the supply of promotional goods, as a portion of the single A&P service was, by virtue of Section 8(15), a cognisable supply of goods capable of notional separation from the total A&P services supplied to the brand owners. This local supply of promotional goods, not exported but consumed in the Republic, was accordingly deemed to be a separate supply, and VAT at the standard rate in terms of Section7(1)(a) of the Act, was justifiably levied on these goods, with the result that the additional assessments were confirmed.

Diageo was therefore liable for the VAT output tax adjustment under Section 8(15) of the Act, in respect of the A&P services costs incurred by Diageo constituting goods not exported but consumed in the Republic. This appeal, with the leave of the Tax Court, is against that finding.

The provision of the A&P services by the Appellant, Diageo, to the foreign based brand owners comprised a single supply of goods and services, which, if they had been supplied separately, would have attracted a different rate of tax and for which a single consideration was payable. The jurisdictional requirements of Section 8(15) of the Act were therefore satisfied with the result that the deeming provision had the effect of notionally separating the supply of services from the supply of goods, when in fact they were not separate supplies. Furthermore, there can be no justification for importing into Section 8(15) of the Act, a requirement derived from foreign authorities, as the appellant would have it, that the deeming provision may apply only to a single supply of economically divisible, independent and hence dissociable supplies of goods and services.

Accordingly, Diageo’s criticism of the approach of the Commissioner and the Tax Court to the interpretation of Section 8(15), that it produced an artificial and insensible result and a commercially unreal outcome, cannot be justified. The meaning of Section 8(15) of the Act is clear. Its purpose is to ensure that in a case like the present the appellant and other similarly positioned VAT vendors fulfil their obligation to pay VAT at the standard rate on the goods that they have supplied.

The Appellant is accordingly liable for the VAT output tax adjustments under Section 8(15) of the Act in respect of advertising and promotional costs incurred by the Appellant constituting goods, not exported but consumed in the Republic. Appeal dismissed.

Tags : Goods Supply Tax Payment

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