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DECEMBER 2015 – ISSUE 195

CONTENTS

INTERNATIONAL TAX

2469. Permanent establishment rules

2470. Collation of information -

international tax standard

VALUE-ADDED TAX

2474. Zero-rating on sale of

commercial property

PUBLIC BENEFIT

ORGANISATIONS

2471. Conduit to associations of

persons

SARS NEWS

2475. Interpretation notes, media

releases, rulings and other

documents

TAX ADMINISTRATION

2472. Notice of judgment for tax debt

2473. Voluntary disclosure relief

INTERNATIONAL TAX

2469. Permanent establishment rules

Where a foreign company renders professional services to a South African

company in South Africa, it is important that the foreign entity considers

whether, as a result of rendering such services, the foreign company will create

a permanent establishment in South Africa. The reason why this becomes

important is because where a foreign company creates a permanent

establishment in South Africa, South Africa will, under the provisions of a

Double Tax Agreement (DTA) concluded with another country, be entitled to

subject that foreign entity to tax on the profit attributable to that permanent

establishment created in South Africa.

 

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In the case of AB LLC and BD Holdings LLC v CSARS, [2015] 77 SATC 349,

heard in February 2015, the Tax Court had to determine whether AB LLC and

BD Holdings LLC (AB and BD) had created a permanent establishment in

South Africa, and as a result thereof, were liable to tax in South Africa. The

case involved two corporations incorporated in the United States of America

and the court therefore had to consider the provisions of the DTA concluded by

South Africa and the United States of America.

Article 7(1) of the DTA concluded by SA and the USA provides that the profits

of an enterprise of the USA shall be taxable only in the USA, unless that

enterprise conducts business in South Africa through a permanent establishment

located in South Africa. Furthermore, the DTA provides that where business is

carried on through a permanent establishment, the profits of the enterprise may

be taxed in South Africa, but only to the extent that they are attributable to that

permanent establishment.

Article 5(1) of the DTA in turn provides as follows:

“for the purpose of this Convention, the term ‘permanent establishment’

means a fixed place of business through which the business of an enterprise

is wholly or partly carried on.”

In addition thereto, Article 5(2) of the DTA provides that the term ‘permanent

establishment’ includes especially-

“(k) the furnishing of services, including consultancy services, within a

contracting state by an enterprise through which employees or other

personnel engaged by the enterprise for such purposes, but only if activities

of that nature continue (for the same or connected project) within that state

for a period or periods aggregating more than 183 days in any 12 month

period commencing or ending in the taxable year concerned.”

 

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The court had to decide how the DTA should be interpreted and whether it was

necessary for AB and BD to have met the requirements of both Articles 5(1)

and 5(2)(k) of the DTA.

The taxpayer contended that it is necessary that a permanent establishment be

created first under Article 5(1) and only once that has occurred, is it then

necessary to take account of the provisions of Article 5(2)(k) of the DTA. SARS

on the other hand, argued that if AB and BD fell within the provisions of Article

5(2)(k), a permanent establishment exists and it is not necessary that AB and

BD meet the requirements of Article 5(1) of the DTA.

The court also had to consider the manner in which the 183 days in any

12 month period commencing or ending in the taxable year concerned should be

determined under Article 5(2)(k). AB and BD contended that the 183 day

requirement found in Article 5(2)(k) must be for a “12 month period

commencing or ending in the taxable year concerned”. Thus, when an entity

spends less than 183 days in any 12 month period commencing or ending in a

taxable year in South Africa, then that entity cannot be said to have created a

permanent establishment in this country. AB and BD were present in South

Africa from February 2007 and the third phase of the consulting assignment

ended during May 2008. The Judge made the point that since 1 May 2008, no

employees of AB and BD were present in South Africa and that the Appellant’s

financial year commenced on 1 January 2007 and ended on 31 December 2007.

AB and BD accepted that it had been present in South Africa for more than 183

days during the 2007 tax year. The taxpayers argued that insofar as the 2008 tax

year is concerned, SARS could not count any of the days already taken into

account when determining the days that it was present in South Africa during

the 2007 tax year. On the basis that AB and BD were only in South Africa from

1 January 2008 to 1 May 2008, it was not in South Africa for 183 days during

 

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that tax year. It was therefore argued that SARS could not tax the profits

derived during that tax year. As far as the 2009 tax year was concerned, the

court made the point that it was common cause that AB and BD had no

presence in South Africa during that year. The taxpayers therefore argued that it

was only in 2007 that it met the 183 day rule as set out in Article 5(2)(k).

SARS contended that the presence of AB and BD in South Africa for the 2008

and 2009 years was established beyond doubt. SARS contended that as the

Appellant was in South Africa during the calendar year 1 January 2007 to

31 December 2007 and 1 January 2008 to 31 December 2008, it was in South

Africa for two tax years, that is 1 March 2007 to 28 February 2008 in respect of

the 2008 tax year and 1 March 2008 to 28 February 2009, that is the 2009 tax

year. At paragraph 47, the court indicated that the 183 day period should be

calculated forwards from 1 March 2007 to 28 February 2008 as this is the

commencing of the fiscal year and then again backwards from 28 February

2009 to 1 March 2008, as that is in respect of the ending of the fiscal year.

SARS conceded that this results in some days being double counted. SARS’

counsel contended that SARS is not only allowed by the treaty to double count

the days, but that it was actually contemplated by the parties to the DTA and in

support thereof drew attention to the OECD commentary which deals with this

point. Unfortunately, the commentary referred to Article 15 of the Model Tax

Convention on Income and on Capital which deals with income from

employment and does not in any way refer to the determination of whether a

permanent establishment has been created as envisaged in terms of Article

5(2)(k). It is therefore questioned whether it is appropriate to rely on

commentary dealing with income from employment in determining how Article

5(2)(k) should be interpreted.

 

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Vally J, in his judgment handed down on 15 May 2015, reached the conclusion

at paragraph 30 that Articles 5(1) and 5(2)(k) cannot be read disjunctively. He

expressed the view that as a result of the usage of words ‘includes especially’

Article 5(2)(k) of the DTA should be read as specifying those specific activities

which will be regarded as creating a permanent establishment in South Africa.

The Tax Court reached the decision that taking account of the number of days

spent by AB and BD’s staff in South Africa, it met the time requirement

specified in Article 5(2)(k) of the DTA and for that reason a permanent

establishment had been created in South Africa. The court also reached the

conclusion that AB and BD had a fixed base in the boardroom of its client in

South Africa, and had therefore established a fixed place of business in South

Africa while rendering services to its client in South Africa.

At paragraph 37 of the judgment, the court refers to the interpretation of

Articles 5(2)(k) and 5(1) as set out in the Technical Explanation, which

document the court viewed as offering an insight into the understanding of the

signatories to the DTA, namely South Africa and the United States. It is

important to note that the Technical Explanation issued on the South African /

United States DTA is not available on the SARS website and can only be

located on the website of the Internal Revenue Service. There is no indication in

the Technical Explanation itself or in any other documentation that the

Technical Explanation has been accepted or adopted by the Commissioner:

South African Revenue Service. The introductory paragraph of the Technical

Explanation states as follows:

“the Technical Explanation is an official guide to the Convention. It reflects

the policies behind particular Convention provisions, as well as

understandings reached with respect to the application and interpretation

of the Convention.”

 

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The court refers to the fact that the Technical Explanation makes it clear that in

considering the furnishing of services by an enterprise as dealt with in Article

5(2)(k) the analysis or interpretation accorded to the place of work set out in

Articles 5(2)(a) to 5(2)(f) is not applicable. It indicates further that the

Technical Explanation states that “in the case of furnishing of services this does

not have to occur within a ‘fixed place of business’ (Article 5(1)). Thus, once

the provisions of Article 5(2)(k) are met, there is no need to further examine

whether the provisions of Article 5(1) have also been met to determine whether

the existence of a permanent establishment has been proved.”

It would appear that the court took the view that the Technical Explanation on

the DTA under consideration is binding in South Africa, but this does not

appear to be the case in other countries. In the Canadian case of Haas Estate v

The Queen [1999] 53 DTC 1294 Margeson JTCC states at paragraph 30 as

follows:

“[30] The Federal Court of Appeal [in Canada (Attorney General) v

Kubicek Estate 1997, 51 DTC 5454] observed that:

‘There is no international tradition or procedure for an exchange of

subsequently bargained documents as determinative of treaty interpretation.

The Technical Explanation is a domestic American document. True, it is

stated to have the endorsation of the Canadian Minister of Finance, but in

order to bind Canada it would have to amount to another convention, which

it does not. From the Canadian viewpoint, it has about the same status as a

Revenue Canada interpretation bulletin, of interest to a Court but not

necessarily decisive of an issue.”

It is unfortunate that the court did not deal with the status of the Technical

Explanation in South Africa and on what basis the interpretations set out therein

should bind the courts of this country. Furthermore, the court did not refer to the

rules of interpretation of treaties as set out in the 1969 Vienna Convention on

 

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the Law of Treaties. It is clear that the Technical Explanation has not been

adopted as part of the DTA concluded with the United States in conformity to

the provisions of the Constitution or the provisions of the Income Tax Act 58 of

1962 (the Act), itself. The question that does arise is how many similar

documents or memoranda of understanding exist between SARS and other

revenue authorities insofar as the interpretation of DTA’s are concerned.

In the case of Ben Nevis Holdings (Ltd) and Another v Commissioner for HM

Revenue and Customs [2013] EWCA CIV 578, the court indicated that

memoranda of understanding concluded by contracting states may have an

important bearing on the position of taxpayers and that it is in the interest of

fairness to taxpayers that such memoranda of understanding should be readily

available to the public.

As indicated above, the Technical Explanation is only available on the website

of the Internal Revenue Service and not SARS’ web pages, and if SARS wishes

the public of South Africa to be aware of the Technical Explanation, it should,

as a minimum, be published on the SARS website with a clear indication as to

the status that it has in the law of South Africa.

It must be remembered that Article 5(1) of the DTA, in defining a permanent

establishment, refers to a ‘fixed place of business through which the business of

an enterprise is wholly or partly carried on’. The court expressed the view that it

is not necessary that the non-resident carries out all of its business from the

fixed place of business which is established in South Africa. The court reached

the conclusion that a permanent establishment is created where AB and BD

performs only some of its obligations in terms of a contract concluded with its

client, and even if it concluded part of its business from its client’s boardroom.

The court also referred to the manner in which the 2009 assessment should be

dealt with. The court accepted that AB and BD did not have a presence in South

 

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Africa during any part of the 2009 calendar or fiscal year. The point was made

that the amount it earned in 2009 related to a success fee which it received in

accordance with the particular clause of the contract concluded with its client.

The court reached the view that the success fee constituted deferred income for

the February 2007 to May 2008 period and that it was therefore covered by

Article 7(1) of the DTA, which provides that the profits of an enterprise made in

the state where it held “a permanent establishment shall be taxable in that state

if the profit was attributable to that permanent establishment”. The court

therefore reached the conclusion that the success fee was directly related to the

permanent establishment and was therefore correctly assessed to tax thereon.

In assessing AB and BD to tax in South Africa, SARS levied tax on the fees

derived by AB and BD in South Africa, after deducting therefrom attributable

expenditure and imposed additional tax of 100% and levied interest on the

underpayment of provisional tax in accordance with section 89quat(2) of the

Act. The court reached the decision that the additional tax was not

disproportionately punitive and therefore dismissed the appeal against the

additional tax.

Insofar as the imposition of interest is concerned, the court expressed the view

that AB and BD should have familiarised itself with the taxation laws of the

country within which it conducts its operations, and for that reason it was

decided that AB and BD had been negligent in not seeking advice regarding the

tax consequences of the contract concluded with its client. The court therefore

came to the conclusion that SARS was correct in imposing interest on the

underpayment of provisional tax.

Based on the above case, which admittedly deals with the interpretation of

articles contained in the SA and USA DTA, it is important that non-residents

 

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rendering services to clients in South Africa evaluate whether they will create a

permanent establishment in South Africa, thereby triggering income tax on the

profit attributable to the services rendered in South Africa.

Furthermore, if the non-resident creates an enterprise as envisaged under the

provisions of the VAT Act, it would also be necessary to register for VAT

purposes and charge VAT on the fees received from the resident client, and pay

that to SARS. Furthermore, where persons from abroad are sent to South Africa

to render the services that may, depending on the circumstances and the

provisions of the DTA in question, give rise to the non-resident entity being

required to register as an employer in South Africa with the obligation to

withhold and deduct PAYE from amounts paid to persons sent to South Africa

to render services here.

Clearly, any South African tax paid by the non-resident entity, would, under the

terms of the DTA, be recognised as a credit claimable against tax paid in the

home jurisdiction of the entity rendering the services in South Africa. Non-

resident employees who become liable to tax in South Africa should also be

entitled to claim such tax as a credit in their home jurisdiction under the DTA in

question.

It is therefore important that non-resident entities rendering services in South

Africa carefully consider how to plan and structure their affairs in South Africa,

so that they do not fall foul of the provisions of the Act read together with any

applicable DTA.

ENSafrica

ITA: Section 89quat (2)

South Africa / USA DTA: Articles 5(1), 5(2) and 7(1)

 

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2470. Collation of information- international tax standards

In order to provide the necessary legislative amendments required to implement

the tax proposals that were announced in the 2015 National Budget on 25

February 2015, the National Treasury (Treasury) published the Tax

Administration Laws Amendment Bill 30 of 2015 (TALAB), tabled in

parliament on 27 October 2015.

One of the important proposals relates to greater tax transparency and the

automatic exchange of information between tax administrations in various

jurisdictions in order to counter cross-border tax evasion and aggressive tax

avoidance. To this effect, section 33 of the TALAB proposes the insertion of a

definition of ‘international tax standard’ in section 1 of the Tax Administration

Act of 2011 (the TAA), and it means:

the OECD Standard for Automatic Exchange of Financial Account

Information in Tax matters;

the Country-by-Country Reporting Standard for Multinational Enterprises

specified by the Minister, or

any other international standard for exchange of tax-related information

between countries specified by the Minister,

subject to such changes as specified by the Minister in a regulation issued under

section 257.

Treasury indicated that this definition was inserted to implement a scheme

under which the South African Revenue Service (SARS) may require South

African financial institutions to collect information under an international tax

standard such as the Organisation for Economic Cooperation and Development

Standard for Automatic Exchange of Financial Account Information in Tax

Matters.

 

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The aforementioned standard encompasses the Common Reporting Standard

(CRS) that was endorsed by the G20 Finance Ministers in 2014. In order to

ensure the consistency and efficiency of this standard, certain financial

institutions must report on all account holders and controlling persons,

irrespective of whether there is an international tax agreement between South

Africa and their jurisdiction of residence or whether such jurisdiction is

currently a CRS participating jurisdiction.

This reporting requirement will ease the compliance burden on reporting

financial institutions as they would otherwise have to effect changes to their

systems and collect historical information each time South Africa concludes a

new international tax agreement or a jurisdiction is added to the CRS. Pursuant

to the proposed amendment, all reporting financial institutions are obliged by

statute to obtain the information and provide it to SARS. In addition, the

financial institutions must ensure compliance with the relevant data protection

laws.

In order to give effect to the proposed implementation of the international tax

standard, section 38 of the TALAB proposes the amendment of section 26 of

the TAA. Currently, section 26 enables the Commissioner of SARS, by public

notice, to require third parties to submit returns for a person with whom that

party transacts, i.e. employers, banks and asset managers of the taxpayer.

The TALAB proposes the insertion of subsection 3 to section 26 of the TAA,

which provides as follows:

The Commissioner may by public notice require a person to apply to register as

a person required to submit a return under this section, an international tax

agreement or an international standard.

 

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The intention of the proposed amendment is to ensure that the relevant financial

institutions register with SARS in order to comply with international tax

standards. In turn, the registration will assist SARS in the administration and the

enforcement of international tax standards.

Cliffe Dekker Hofmeyr

TAA: Section 1 definition of “international tax standard” and section 26

TALAB 2015: Sections 33 and 38

Editorial comment: Draft legislation should always be treated with care as

there is no certainty that the final legislation approved by Parliament will be

identical to the publicly issued draft.

PUBLIC BENEFIT ORGANISATIONS

2471. Conduit to associations of persons

On 18 August 2015, the South African Revenue Service (SARS) released a

draft interpretation note (Draft IN) on Public Benefit Organisations (PBOs) that

provide funds, assets or resources to other associations that use such funds,

assets or resources to carry on qualifying public benefit activities (PBAs).

PBOs play an important role in society as they relieve the financial burden on

the State in respect of undertaking PBAs. Tax exemptions and deductions are

available to assist PBOs in conducting the said PBAs and achieving their

objectives. The PBA conducted by a PBO must, in accordance with section

30 of the Income Tax Act of 1962 (the Act), be carried out in a non-profit

manner and with an altruistic or philanthropic intent.

A PBO can either conduct PBAs on its own accord, or provide funds, assets or

resources to, inter alia, an association of persons carrying on one or more PBAs

 

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in accordance with paragraph 10 of Part I of the Ninth Schedule (Ninth

Schedule) to the Act. The Draft IN seeks to provide guidance, inter alia, on:

the interpretation of ‘association of persons’ as contemplated in

paragraph 10(iii) of Part I of the Ninth Schedule; and

the monitoring requirement imposed under section 30(3)(f) of the Act on

a PBO providing funds, resources or assets to an association of persons

contemplated in paragraph 10(iii).

Association of persons

The term ‘association of persons’ is not defined in the Act, but appears in

section 30(1) of the Act and paragraph 10(iii) respectively. The Draft IN states

that the association of persons contemplated in section 30(1) of the Act ‘refers

to a formal association of persons established by adopting a legal founding

document and which may qualify for approval as a PBO’, whereas the

association of persons contemplated in paragraph 10(iii) refers to a ‘voluntary

informal association or group of persons which carries on one or more PBAs in

South Africa [which] will not qualify for approval as a PBO because it does not

have a founding document.’

In other words, the separate identification of an association of persons as

contemplated in section 30(1) of the Act and an association of persons in

paragraph 10(iii) means that the respective associations of persons differ, the

former being a formally approved PBO and the latter an informal voluntary

association of persons.

Monitoring requirement

Section 30(3)(f) of the Act states that any PBO that provides funds to an

association of persons contemplated in paragraph 10(iii), must take reasonable

steps to ensure that the funds are used for the purpose for which they were

provided.

 

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The Draft IN states that due to the fact that an association of persons (as

contemplated in paragraph 10(iii)) is not approved as a PBO and does not have

to comply with reporting requirements, it is difficult for SARS to monitor

compliance and to ensure that the funds, assets or other resources received by an

association of persons from a conduit PBO are used for the purpose of carrying

on PBAs. As a result, the responsibility has been placed on the conduit PBO

that provides the funds, assets or other resources to associations of persons, to

prove that reasonable steps have been taken to ensure that the funds, assets and

other resources have been used to carry on a PBA in South Africa. The Draft IN

further states that the steps taken by the conduit PBO will vary depending on the

particular facts and circumstances and each case will be considered on its own

merits.

It is important to note that the Draft IN provides that while an association of

persons contemplated in paragraph 10(iii) is not itself a PBO, the conduit PBO

providing funds to it, must monitor how the funds are spent to ensure that the

association of persons is using the funds for carrying on qualifying PBAs. The

monitoring requirement imposed on the conduit PBO is a prerequisite for its

continued approval as a PBO.

Cliffe Dekker Hofmeyr

SARS Draft Interpretation Note (Draft IN) on Public Benefit Organisations

ITA: Section 30 and paragraph 10(iii) of Part I of the Ninth Schedule

TAX ADMINISTRATION

2472. Notice of judgment for tax debt

Judgment was handed down in the matter between Lifman and others v The

Commissioner for the South African Revenue Service and others (case no

 

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5961/15, as yet unreported) on 17 June 2015 in the Western Cape Division of

the High Court.

The applicants were Mark Lifman and a number of close corporations of which

he was the sole member. During an enquiry in terms of section 50 of the Tax

Administration Act of 2011 (the TAA), conducted by the South African

Revenue Service (SARS) into the affairs of the applicants, it came to light that

the applicants owed SARS tax of approximately R13 million.

In November 2014, the parties had agreed that the applicants would make

payment by 31 March 2015, and SARS indicated that, if payment was not made,

it would take civil judgment against them.

The applicants also offered certain assets as security, and caveats were

registered in respect of the assets.

SARS notified the applicants in a letter dated 5 February 2015 that the tax debt

had to be settled by the end of March 2015.

On 3 March 2015, SARS sent another letter to the applicants, indicating that the

tax debt must be paid, failing which SARS would take such steps as are

available to them, including taking judgment, or if necessary, sequestration and

liquidation proceedings.

It transpired that the applicants did not pay the outstanding tax debt by the

agreed date, and SARS proceeded to take civil judgment against the applicants

on 1 April 2015 in terms of section 172 of the TAA.

 

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The applicants then brought an application for an urgent interim interdict

against SARS and the other respondents, being various sheriffs, to prevent them

from executing on the judgment.

It was argued on behalf of the applicants that it is a requirement of section 172

of the TAA that SARS first had to give at least 10 business days’ notice to the

taxpayer before judgment could be taken, and that SARS failed to give such

notice to the applicants.

It was also argued that the letter from SARS dated 3 March 2015 did not

constitute a valid notice as contemplated in section 172 of the TAA. Essentially,

it was contended that the notice could only be given after the agreed date for

payment had arrived, and no payment was made. A letter pre-dating the agreed

date for payment warning the taxpayer that legal action will be taken if payment

is not made, does not constitute a valid notice.

In addition, the applicants argued that SARS’ taking judgment in terms of

section 172 of the TAA was without sufficient reason, unfair, and arbitrary, and

therefore in breach of section 25 of the Constitution which guarantees the right

not to be deprived of one’s property. According to the applicants, the warning

letter on which SARS relied also constituted a breach of their right to just

administrative action as contemplated in section 33 of the Constitution.

SARS argued that the first requirement of section 172 of the TAA is that there

must be an outstanding tax debt, which was common cause in this matter. The

second requirement was indeed that the taxpayer must be notified, but the form

and content of such notice is not specified. It is also not specified whether the

notice must inform the taxpayer that it has an outstanding tax debt, or whether it

must inform the taxpayer that SARS intends to take judgment. SARS was of the

view that the various letters that it had addressed to the taxpayer before the

 

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agreed payment date satisfied the second requirement of section 172 of the

TAA.

Also, the letters should be viewed in the context of the relevant facts and

circumstances, particularly the fact that the parties had concluded an agreement

to the effect that the tax debt would be paid by the end of March 2015. The

applicants knew where and when to pay, even though this was not stipulated in

the letters. They had accepted liability, agreed to pay on a particular date and

did not object to any of the assessments raised.

After considering the arguments of the parties, as well as the facts pertaining to

the matter, the court held that the applicants’ interpretation of section 172 of the

TAA was incorrect.

The purpose of giving notice was to allow the taxpayer to make preparations. In

the court’s view, such preparations already started when the agreement was

entered into in November 2014, and the applicants agreed to pay. After that, the

applicants requested a deferral of payment, which SARS rejected. The letter

dated 3 March 2015 gave the applicants sufficient notice to make preparations

and to arrange their affairs. It was therefore unnecessary for SARS to explicitly

state that the applicants had 10 days from 1 April 2015 to make payment, after

which SARS would take judgment.

A further 10 days after 1 April 2015 would in any event not have made a

difference. The court thus held that SARS had fully complied with the

requirements of section 172 of the TAA, and that the applicants did not make

out a case for an interim interdict. The application was accordingly dismissed.

It is interesting to note that the court took a purposive approach to the

interpretation of section 172 of the TAA, despite the fact that specific reference

 

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is made to a 10 day notice period. The court also did not specifically answer the

question as to whether the notice only has to be given in respect of the

outstanding tax debt, or whether notice must also be given of SARS’s intention

to take judgment.

Another interesting aspect of the case was that, during the first part of April

2015, some of the applicants filed for business rescue in terms of Chapter 6 of

the Companies Act of 2008 (the Companies Act). Generally, section 133 of the

Companies Act places a moratorium on legal proceedings once a company files

for business rescue. In this matter, SARS obtained judgment on 1 April 2015,

and the relevant applicants only filed for business rescue subsequently.

The court noted that the moratorium does not apply retrospectively, and actions

by some of the respondents (being certain sheriffs) after 1 April 2015 were

therefore not in breach of section 133 of the Companies Act.

Cliffe Dekker Hofmeyr

TAA: Sections 50 and 172

Companies Act: Section 133 and Chapter 6

The Constitution of the Republic of South Africa, 1996: Sections 25 and 33

2473. Voluntary disclosure relief

The Tax Administration Act of 2011 (the TAA) currently provides for various

forms of relief in respect of disclosures made by qualifying taxpayers of their

tax defaults under the Voluntary Disclosure Programme (VDP). The Tax

Administration Laws Amendment Bill No. 30 of 2015 (TALAB) makes a

welcome proposal to widen the scope of available relief to qualifying taxpayers,

to include any penalties relating to the late payment of tax.

 

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The VDP is a formal statutory process, provided for in Part B of Chapter 16 of

the TAA, and in terms of which qualifying taxpayers can approach the South

African Revenue Service (SARS) on a voluntary basis for purposes of

disclosing their tax defaults. Upon a successful VDP application and conclusion

of an agreement with SARS, the taxpayer will enjoy relief from understatement

penalties (which could be up to 200% in severe cases) and administrative non-

compliance penalties. Additionally, SARS will not pursue criminal proceedings

against the taxpayer.

Currently, the VDP does not provide relief for late payment penalties or interest

(for example, the 10% late payment penalty for Value-Added Tax or

employees’ tax). These are generally dealt with outside the VDP process at

SARS branch office level, once the VDP process has been completed. In other

words, the VDP process, as it currently stands, does not necessarily prevent a

taxpayer from seeking relief from late payment penalties or interest. However,

the process at SARS branch office level is less formal and, in some cases, open

to subjective application of the law as it pertains to available remedies to remit

penalties or interest, in whole or in part.

The proposed amendment in the TALAB states that VDP relief will now be

widened to include late payment penalties (interest still remains excluded),

which essentially eliminates the ‘secondary’ process of attempting to obtain

relief at SARS branch office level. The proposed amendment, which becomes

effective on the date of promulgation of the TALAB (likely January 2016),

brings into play a potentially risky interim time period for prospective VDP

applicants. The question now arises whether such applicants should wait for

promulgation of the amendment?

The risk in waiting for promulgation is that VDP relief for understatement

penalties tapers down where voluntary disclosure is made after SARS has

 

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issued a notification of audit or investigation. For example, VDP relief would,

in most cases, result in no understatement penalties being levied. However,

where SARS has issued notification of an audit or investigation, it will be

entitled, depending on the severity of the case, to levy understatement penalties

of up to 75%.

It may therefore be a dangerous (and unnecessary) gamble to wait for

promulgation of the proposed amendment because SARS could, at any time,

issue a notification to a taxpayer to conduct an audit or investigation.

Cliffe Dekker Hofmeyr

TAA: Part B of Chapter 16

Tax Administration Laws Amendment Bill 2015 (TALAB)

VALUE-ADDED TAX

2474. Zero-rating on sale of commercial property

If commercial immovable property is sold as a going concern and if certain

requirements are met, then the sale can be zero-rated for value-added tax (VAT)

purposes, in terms of section 11(1)(e) of the Value-Added Tax Act of 1991 (the

VAT Act).

Among other things, it is a requirement that (i) the seller carries on an enterprise

in relation to the property and (ii) the enterprise is an income-earning activity on

the date of transfer of the enterprise.

The term ‘enterprise’ is defined widely in section 1 of the VAT Act and it is

trite that the leasing of commercial immovable property is an enterprise for

purposes of the definition.

 

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The South African Revenue Service (SARS) has issued Interpretation Note No

57 (IN 57) dealing with the sale of an enterprise as a going concern. In IN 57,

under the heading “Supply of an income-earning activity”, SARS states the

following:

“The purchaser must be placed in possession of a business which can be

operated in that same form, without any further action on the part of the

purchaser. …”

Leasing activities generally consist of, amongst others:

An underlying asset that is the subject of a lease; and

A contract of lease.

Accordingly, a vendor who conducts a leasing activity in respect of fixed

property and who intends to dispose of (supply) such leasing activity must make

provision in the contract stating that the other aspects of the leasing activity are

disposed of together with such fixed property in order to constitute an income-

earning activity. In instances where the agreement does not provide for a

property together with the lease agreements to be transferred, only the asset is

sold and section 11(1)(e) will not apply.

An asset which is merely capable of being operated as a business does not

constitute an income-earning activity. There must be an actual or current

operation. For this reason, the agreement to dispose of a business yet to

commence or a dormant business is not a going concern.

As the parties must agree that the enterprise will on the date of transfer thereof

be an income-earning activity, the zero rate can apply where the seller is, in

terms of the contract, obliged to start the business and ensure it is

income-earning before transfer thereof. However, in instances where the

purchaser takes possession of the enterprise before the date of transfer, and the

 

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enterprise is only income-earning after the date of transfer, the zero rate will not

apply.

In this regard the recent United Kingdom (UK) case of HMRC v Royal College

of Paediatrics and Child Health and another [2015] UKUT 38 (TCC) is

interesting. Under UK VAT law – like our VAT Act – there is effectively no

VAT if a business is transferred as a going concern and certain requirements are

met.

Briefly, the facts of the Royal College case were the following: A developer

owned a commercial building in London. The building was vacant. The Royal

College of Paediatrics and Child Health (Royal College) occupied other

premises elsewhere in London. The Royal College also let part of those other

premises to other organisations including the British Association of Perinatal

Medicine (BAPM). The Royal College wished to buy the building from the

developer. The BAPM and other tenants wished to move to the new building

with the Royal College and remain its tenants.

Before concluding the sale with the developer the Royal College instructed its

advisers to achieve the most VAT efficient structure for the purchase. The

advisers suggested that VAT could be saved if the sale was structured as the

transfer of a going concern; if BAPM entered into an agreement for a lease with

the developer before the Royal College agreed to buy the property then, since

the developer was carrying on a business, the transfer would be one of a going

concern.

The developer and BAPM entered into an agreement for a lease of a single

room in the building for a premium of £1,000. The agreement was conditional

on the developer concluding an unconditional contract for the sale of the

property to Royal College. The premium would be repaid if this condition was

 

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not met or if completion of the lease with the Royal College had not happened

by a certain date. Rent was only payable after completion. It appears as if the

developer did not enter into a lease agreement with BAPM; they entered into an

agreement to enter into a lease.

The Royal College granted a lease to BAPM after the sale.

The court considered the relevant legislation and authorities and held as

follows:

“It seems to me that a critical point arising…is that for a transfer to fall into the

relevant class there are two things which have to be transferred. First of course

an asset must be transferred. However something else has to be transferred as

well. That further element is referred to variously as a business, an undertaking,

or an economic activity (or part of such a thing). Merely transferring an asset on

its own will never be enough to satisfy the test. In order to work out whether the

necessary second element has been transferred, one needs to look at all the

relevant circumstances. The test is one of substance not form. The

circumstances can include the intentions of the parties.”

The court held the following: the putative tenant (BAPM) was already a tenant

of the purchaser (Royal College); the agreement for the lease and the sale were

part and parcel of the same arrangement; the agreement for the lease was not

part of the seller's business as the tenant came from the purchaser; the fact that

the Royal College subsequently granted a lease to BAPM did not mean that the

lease could be connected to the agreement between the developer

and BAPM.

The court accordingly ruled that there was no transfer of a going concern.

The attitude of the court was similar to that expressed in IN 57. Interestingly, in

the Royal College case, the court held that there could be a going concern not

 

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only if the seller transferred an existing lease to the buyer, but also if the seller

transferred a lease agreement with a putative tenant.

In many cases in South Africa where owners of commercial properties wish to

sell their properties, the properties are vacant. Without doing something further,

the properties cannot be sold as going concerns and the transactions cannot be

zero-rated for VAT purposes. Often parties in a transaction of this kind are

tempted to create a lease between the seller and a third party simply for the

purpose of creating a going concern. As the court in the Royal College case

demonstrated, the substance and not the form of the transaction will be the

deciding factor as to whether the rental enterprise is genuinely a going concern.

However, on the strength of the Royal College judgment, it appears that there

may well be a case for a going concern if a seller, prior to the sale, concludes a

lease agreement with a bona fide third party which will only take effect after the

sale and which the purchaser will take over after transfer.

Cliffe Dekker Hofmeyr

VAT: Section 1 definition of “enterprise” and section 11(1)(e)

SARS Interpretation Note No 57

SARS NEWS

2475. Interpretation notes, media releases, rulings and other documents

Readers are reminded that the latest developments at SARS can be accessed on

their website http://www.sars.gov.za.

Editor: Ms S Khaki

 

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Editorial Panel: Mr KG Karro (Chairman), Dr BJ Croome, Mr MA Khan,

Prof KI Mitchell, Prof JJ Roeleveld, Prof PG Surtees, Mr Z Mabhoza, Ms MC

Foster

The Integritax Newsletter is published as a service to members and associates of

The South African Institute of Chartered Accountants (SAICA) and includes

items selected from the newsletters of firms in public practice and commerce

and industry, as well as other contributors. The information contained herein is

for general guidance only and should not be used as a basis for action without

further research or specialist advice. The views of the authors are not

necessarily the views of SAICA.