XYZ Co v Commissioner for the South African Revenue Service

• Jurisdiction: South Africa
• Judge: Davis J
• Judgment Date: 13 June 2011
• Docket Number: VAT 382
• Hearing Date: 13 June 2011
• Court: Tax Court

Davis J::

Introduction

[1]

This appeal arises from assessments issued by respondent in terms of the Value Added Tax Act 89 of 1991 ('the Act') which assessments were contained in a letter of 18 October 2004. The assessments relate to appellant's tax periods from March 2001 to January 2002.

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Davis J:

[2]

The dispute between the parties which arises from these assessments are whether the respondent was correct;

1.

In determining that certain services acquired by appellant from a foreign supplier were imported services as defined in the Act and as being the subject of value added tax ('VAT') in terms of s 7(1)(c) of the Act.

2.

In determining that the VAT paid by appellant on certain services acquired by appellant from local suppliers did not constitute input tax as defined in the Act and hence did not qualify to be deducted from appellant's output tax in arriving at the amount payable by appellant to respondent.

Factual Background

[3]

Much of the narrative is common cause. Prior to the implementation of the relevant transactions in May/June 2001, the shares in appellant were linked to depository receipts representing an interest in shares issued by ABC Co, a Swiss company. A share in appellant and a depository receipt to which it was linked constituted a so called linked unit. The linked units were listed on various

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Davis J:

exchanges including the Johannesburg stock exchange (JSE) the London stock exchange (LSE) and the Swiss exchange (SWX).

[4]

By way of summary, appellant's main trading activities were the mining and selling of diamonds from South Africa. ABC CO and its subsidiaries owned diamond mining interests elsewhere in the world. The main trading activities of appellant were thus the mining and selling of diamonds. However, its subsidiaries operated further diamond businesses and also held an investment of 117 086 985 shares in DEF PLC , an English company whose shares were and still are listed on the JSE, LSE and the SWX. It appears that another company in the XYZ group, GHI Holdings, owned a further 27 196 890 DEF PLC shares. This cumulative shareholding constituted approximately 35.4% of the issued share capital of DEF PLC.

[5]

Among the XYZ linked unit holders were DEF PLC, KLM a company incorporated in Luxembourg and DSW, a company incorporated in Botswana. These three companies held 32.3%, 2.6% and 5% respectively of the shares in appellant. Their combined stake of 39.8% represented 159 395 536 shares in appellant. The remaining 240 563 239 shares (60.2%) were held by a large number of institutional and other investors.

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Davis J:

[6]

In November 2000 DEF PLC, KLM and DSW proposed, as a consortium, that appellant enter into a transaction in terms whereof the other unit holders in appellant and ABC CO would have the interests in appellant eliminated and a new company, to be established by the consortium, would become the holding company of both appellant and ABC CO. This new company, BCD was to be incorporated in Luxembourg.

[7]

In November 2000, the boards of both XYZ companies resolved to establish an Independent Committee of Directors ('ICD') to consider and advise the boards as to whether the consortium's offer was fair and reasonable to independent unit holders and to assist in negotiations with the consortium. The ICD were authorised to appoint and consult with NMR as independent financial advisors, NMR being an English advisory services company.

[8]

At the same time, various advisors in South Africa were appointed, including HSBC Investment Services (Africa) (Pty) (Ltd) ('HSBC') the firms of attorneys known as Webber Wentzel Bowens ('WWB') and Edward Nathan and Friedland ('ENF') together with the auditing and advisory firm Deloitte and Touche

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Davis J:

Advisory Services ('Deloittes'). All of these parties were referred to during the dispute as the local suppliers of local services.

[9]

After months of negotiations, on 30 April 2001 the consortium made a final and improved offer. NMR considered that this offer was fair and reasonable to independent unit holders. The ICD then advised the boards that, in its opinion, the offer was fair and reasonable and the boards accordingly advised the independent unit holders.

[10]

In essence the final offer constituted the following:

The shareholding of the independent unit holders in XYZ (approximately 60.2%) would be eliminated through a distribution to them of DEF PLC shares, being all of the shares held by appellant in DEF PLC, together with some additional DEF PLC shares and cash, such that for each linked unit, the holder would receive 0.446 of an DEF PLC share, $15.35 in cash plus a further cash amount of $1.30 which constituted the final dividend of DEF PLC for the year ending 31 December 2000.

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Davis J:

[11]

This final offer reflected an assumed total value of XYZ of $18.7 billion, of which $9.4 billion was attributed to the 35.4% shareholding in DEF PLC and the balance of $9.3 billion to XYZ ' remaining assets.

[12]

The transaction was implemented through a scheme of arrangement pursuant to s 311 of the Companies Act 61 of 1973 ('the Companies Act'). The court granted leave to convene a scheme meeting on 3 April 2001 and the offer, as improved, was accepted by the requisite majority of independent unit holders at the scheme meeting on 4 May 2001. The scheme was then sanctioned by the court on 18 May 2001 and implemented shortly thereafter.

[13]

In effect, the scheme constituted a buy back leg and a cancellation leg. Briefly these can be described thus:

1.

In terms of the buy back leg, appellant acquired from all unit holders including the consortium 1% of their shares in appellant in consideration for which it distributed to them pro-rata 130 380 071 DEF PLC shares plus a dividend of $1.30 per share which was attributable to the DEF PLC shares.

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Davis J:

2.

In terms of the cancellation leg the, balance of the shares in appellant held by independent unit holders were cancelled in consideration for which the latter received $15.35 in cash together with a further allocation of DEF PLC shares, such that each unit holder received inclusive of the DEF PLC shares received under the buy back leg, 0.446 DEF PLC shares per linked unit. It is not necessary to traverse the mechanics of the calculations used to determine the shares so allocated. Suffice to say, the additional shares were in the amount of 28 872 400.

[14]

On 07 June 2001, NMR issued an invoice to appellant in the amount of $19 895 965 for the services rendered to by it in connection with the transaction. This constituted a portion of NMR's total charges, in that the balance was invoiced to ABC CO. Appellant settled this invoice at a rand cost of R 161 064 684.

[15]

In the assessment of 18 October 2004 respondent determined that the NMR services were imported services in terms of the Act and assessed the sum of R22 549 055.76 to be payable by appellant as VAT in terms of s 7(1)(c) of the Act. Over the period of March 2001 to January 2002, the local suppliers rendered invoices to appellant for services rendered in connection with the transaction. These suppliers included VAT in their invoices and appellant treated this VAT as input tax in making its own VAT returns. In the assessment of 18

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Davis J:

October 2004 respondent determined that the VAT did not qualify as input tax and raised assessments, thereby, in effect, disallowing input tax in the amount of R7 021 855.48.

[16]

Appellant lodged an objection against these assessments in a letter of 1 February 2005, which objection was disallowed by respondent on 8 September 2005. It was against this decisions that appellant noted an appeal on 14 October 2005.

The relevant provisions of the Act

[17]

Before canvassing the basis of the present dispute, it is useful to set out those sections of the Act which proved to be central to the determination of this case.

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Davis J:

[18]

Although it was common cause that the appellant, as a registered vendor, carried on an enterprise defined in s1 of the Act, whether that definition was applicable to the transaction described above was the subject of a key dispute. Enterprise is defined, inter alia, as follows:

"(a)

in the case of any vendor, any enterprise or activity which is carried on continuously or regularly by any person in the Republic or partly in the Republic and in the course or furtherance of which goods or services are supplied to any person for a consideration, whether or not for profit, including any enterprise or activity carried on in the form of a commercial, financial, industrial, mining, farming, fishing, municipal or professional concern or any other concern of a continuing nature or in the form of an association or club…

Provided that-

(i)

anything done in connection with the commencement or termination of any such enterprise or activity shall be deemed to be done in the course or furtherance of that enterprise or activity;…

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Davis J:

(iv)

any activity carried on by a natural person essentially as a private or recreational pursuit or hobby or any activity carried on by a person other than a natural person which would, if it were carried on by a natural person, be carried on essentially as a private or recreational pursuit or hobby shall not be deemed to be the carrying on of an enterprise;

(v)

any activity shall to the extent to which it involves the making of exempt supplies not be deemed to be the carrying on of an enterprise;…"

[19]

Section 12 of the Act deals with exemptions and provides, inter alia;

"The supply of any of the following goods or services shall be exempt from the tax imposed under section 7(1)(a):

(a)

the supply of any...