Value-added tax and corporate transactions : the dragons slumber : part 1

• Date: 01 March 2020
• DOI: 10.10520/EJC-1ceb402d95
• Published date: 01 March 2020
• Author: Carryn Alexander,Des Kruger
• Record Number: btclq_v11_n1_a4
• Pages: 18-35

18 © SIBER INK

Value-Added Tax and

Corporate Transactions:

THE DRAGONS SLUMBER: PART 1

DES KRUGER* • CARRYN ALEXANDER†

ABSTRACT

Tax considerations are always front of mind in any corporate transaction,

whether it is the acquisition of a business, the acquisition of shares in the

target company owning the business, or even the raising of funds for use in

a business by way of a share issue or loan. While the value-added tax (VAT)

considerations are often not considered crucial because most corporate trans-

actions will be either exempt (as the exempt supply of f‌inancial services) or

zero rated (the supply of an enterprise or part thereof as a going concern),

this article explores the very many VAT issues that do in fact arise in these

circumstances.

While the sale of a business (enterprise or part of an enterprise) may be

zero rated under section 11(1)(e) of the Value-Added Tax Act (VAT Act), there

are many issues to consider before one can say that the relevant transaction

will necessarily meet the requirements of that section. These are discussed in

detail below with reference to both South African and foreign jurisprudence.

Where the business (enterprise or part thereof) disposed of is engaged in

making both taxable and non-taxable supplies, the transaction may still be

zero rated, but the purchaser in these circumstances will need to account

for VAT under section 18A of the VAT Act. There are also other requirements

that must be met before the transaction may be zero rated, such as the seller

ensuring that it is in possession of the prescribed documentary proof.

Should the corporate transaction incorporate an issue, sale or exchange of

shares, the transaction will be treated as an exempt supply of f‌inancial services

in terms of section 12(a), read with the def‌inition of ‘f‌inancial services’ in

section 2(1) of the VAT Act. The major issue that arises in these circumstances,

and which has been the subject of numerous foreign cases and two reported

cases in South Africa, is whether or not the parties are entitled to claim as input

tax the VAT paid by them on professional services provided to them in relation

to the corporate transaction. While not explicitly stated by the Supreme Court

of Appeal in the seminal De Beers case (see below), but more explicitly stated

by the Tax Court in ITC 1744 (see below), our courts appear to have adopted

the direct and immediate link test as adopted in the European Union (and

other jurisdictions). In essence, in order for the VAT incurred on transactional

advice services to qualify as input tax, the relevant party to the corporate

transaction will need to be able to show that the services in some manner

were linked to the general taxable operation of the enterprise carried on by

the vendor acquiring the services.

* Consultant, Webber Wentzel.

† Senior Associate, Webber Wentzel.

DES KRUGER • CARRYN ALEXANDER

Value-Added Tax and Corporate Transactions

19

© SIBER INK

The next article will canvass the very many interesting VAT considerations

that arise when a transaction is implemented using the so-called corporate

rules provided for in sections 42, 45, 44 or 47 of the Income Tax Act, 1962,

and more specif‌ically section 8(25) of the VAT Act that specif‌ically applies

when one or other of the specif‌ied corporate rules are adopted.

Introduction

There is often a misconception that corporate transactions involving the

issue or sale of shares is value-added tax (VAT) neutral as the issue or sale

of shares is an exempt supply for VAT purposes under section 12(a), read

with section 2(1)(d), of the Value-Added Tax Act Value-Added Tax Act 89

of 1991 (VAT Act). It is also frequently assumed that the zero rating of the

disposal of a business as a going concern is a foregone conclusion if the

specif‌ic requirements of the proviso to section 11(1)(e) of the VAT Act are

met. These assumptions are not necessarily correct in all circumstances.

There are many other VAT issues that arise when a corporate trans-

action, whether a merger, acquisition, or any other commercial activity

involving the disposal of assets or the raising of f‌inance to fund such trans-

actions, is undertaken.

This article discusses the many VAT issues that need to be considered

when parties embark on a corporate transaction.

It is assumed for the purposes of the discussion that all the parties are

registered vendors, unless otherwise indicated.

All references to sections are to sections of the VAT Act unless otherwise

stated.

Sale of a business

General

Very many corporate transactions involve the acquisition of the target’s

business operations rather than the acquisition of the target entity — mostly

driven by the desire of the purchaser to start with a clean slate. Where the

relevant business operations to be disposed of include assets that comprise

goods as def‌ined,1 the matter is straightforward as it is clear that the supply

of the goods will be subject to VAT.

While the supply of intangible assets in these circumstances is regarded

by some as a grey area, this should not be the case given the very broad

def‌inition of ‘services’.2 ‘Services’ is very broadly def‌ined as ‘anything done

or to be done, including the granting, assignment, cession or surrender of

any right or the making available of any facility or advantage, but excluding a

1

Section 1(1).

2

Section 1(1).