Brief Summary

Tax Law — Value-Added Tax — Definition of 'imported services' — The Commissioner for the South African Revenue Service assessed De Beers Consolidated Mines Ltd for VAT on services rendered by a foreign advisory firm, claiming these constituted 'imported services' under the Value-Added Tax Act 89 of 1991 — De Beers contended that the services were utilized for making taxable supplies and thus not 'imported services' — The Tax Court upheld De Beers' appeal, leading to the Commissioner’s appeal. The Supreme Court of Appeal found that the Tax Court erred in its interpretation of 'imported services' and ruled that the advisory services did constitute 'imported services' and that the VAT on local services did not qualify as deductible input tax, thereby overturning the Tax Court's decision.

Comprehensive Summary

Summary of Judgment

1. Introduction

This judgment concerns an appeal and a cross-appeal arising from value-added tax (VAT) assessments issued under the Value-Added Tax Act 89 of 1991. The proceedings were heard in the Supreme Court of Appeal of South Africa (SCA) following a decision of the Tax Court, Cape Town (Davis J sitting with two assessors).

The Commissioner for the South African Revenue Service (the Commissioner) was the appellant in the main appeal. De Beers Consolidated Mines Limited (DBCM) was the respondent in the main appeal and the cross-appellant in the cross-appeal. The dispute arose from DBCM’s engagement of foreign and local professional advisors in connection with a complex corporate transaction that resulted in De Beers “effectively” ceasing to be listed (described in evidence as having “went private”).

The procedural history was that, after the transaction was implemented, the Commissioner issued assessments (18 October 2004) determining that certain foreign advisory services constituted “imported services” attracting VAT in terms of s 7(1)(c), and further determining that VAT charged by local service providers did not qualify as deductible input tax. DBCM objected (1 February 2005), the objection was disallowed (8 September 2005), and DBCM appealed to the Tax Court (notice of appeal: 14 October 2005). The Tax Court upheld DBCM’s appeal on the “imported services” issue, largely disallowed input tax on local services but allowed a partial deduction in relation to one firm (WWB) subject to apportionment. The Commissioner appealed to the SCA with leave of the Tax Court, and DBCM cross-appealed against the disallowance of the remaining local input tax.

The general subject-matter of the dispute was the VAT treatment of advisory and professional services (foreign and local) obtained to evaluate, structure, and implement a takeover and restructuring transaction, and specifically whether such services were acquired and consumed for the purpose of making taxable supplies in the course or furtherance of DBCM’s enterprise.

2. Material Facts

DBCM carried on the mining and international sale of diamonds. Prior to the transaction, DBCM’s shares were linked to depository receipts representing an interest in shares issued by a Swiss company, De Beers Centenary AG (DBAG). A DBCM share plus its linked depository receipt constituted a “linked unit” listed on multiple exchanges including the Johannesburg Stock Exchange (JSE), the London Stock Exchange (LSE), and the Swiss exchange (SWX). DBCM also held a substantial shareholding in Anglo American PLC (Anglo) (and another group company held additional Anglo shares), creating significant cross-shareholding features relevant to the transaction’s structure.

In November 2000, a consortium comprising Anglo, Central Holdings Ltd SA (CHL), and Debswana Diamond Company (Pty) Ltd (Debswana) proposed a transaction under which independent unit holders’ interests would be eliminated and a new Luxembourg company, DB Investments (SA) (DBI), would become the holding company of DBCM and DBAG. To evaluate whether the consortium’s proposals were fair and reasonable to independent unit holders, the boards established an Independent Committee of Directors (ICD). The ICD was authorised to appoint NM Rothschild and Sons Ltd (NMR), a London-based financial advisor, as independent financial advisors. DBCM also appointed various South African advisors and service providers (including attorneys and other professional firms) to assist in finalising and implementing the transaction.

After negotiations, a final improved offer was made on 30 April 2001, which NMR considered fair and reasonable to independent unit holders. The ICD advised the boards accordingly, and the independent unit holders accepted the offer at a scheme meeting convened under a scheme of arrangement pursuant to s 311 of the Companies Act 61 of 1973. The scheme was sanctioned by the court on 18 May 2001 and implemented shortly thereafter. The structure included a “buy back” leg (DBCM acquired 1% of shareholders’ shares and distributed Anglo shares and a dividend pro rata) and a “cancellation” leg (the balance of shares held by independent unit holders were cancelled for cash and additional Anglo shares). The result was that the listed linked units ceased and all the shares in DBCM and DBAG became owned by DBI, whose shareholders were Anglo (45%), CHL (40%), and Debswana (15%).

On 7 June 2001, after the transaction had been realised, NMR issued an invoice to DBCM for US$19 895 965, which DBCM paid at a rand cost of R161 064 684. Between March 2001 and January 2002, the local suppliers rendered invoices including VAT, which DBCM treated as input tax in its VAT returns.

The Commissioner assessed DBCM on 18 October 2004, determining that NMR’s services were “imported services” and assessing R22 549 055.76 VAT payable under s 7(1)(c). The Commissioner also disallowed R7 021 855.48 of input tax relating to local services. These assessments, and the characterisation of the services for VAT purposes, formed the basis of the dispute.

To the extent that the place of utilisation/consumption was argued, the court recorded that only two of five substantive ICD meetings occurred in London, while the DBCM board meetings where recommendations were received and decisions taken occurred in Johannesburg, and the scheme of arrangement was approved and implemented in South Africa. The Tax Court did not decide the “place of consumption” point because it held that the services were not imported services on the “purpose” leg.

3. Legal Issues

The central questions before the SCA concerned the correct application of statutory definitions in the VAT Act to the facts, and in particular the interaction between the definitions of “enterprise”, “taxable supply”, “imported services”, and “input tax”.

On the main appeal, the primary legal issue was whether NMR’s foreign advisory services fell within the definition of “imported services”, which depended on whether the services were utilised or consumed in South Africa otherwise than for the purpose of making taxable supplies. This required determination of DBCM’s relevant purpose in acquiring the services, and (in addition) whether the services were utilised or consumed in the Republic.

On the cross-appeal (and part of the main appeal), the issue was whether VAT charged by South African service providers was deductible as input tax, which depended on whether the local services were acquired wholly or partly for the purpose of consumption, use or supply in the course of making taxable supplies, and if partly, whether apportionment under s 17 was permissible.

The dispute was primarily one of application of law to fact: the statutory tests were not treated as uncertain in the abstract, but their correct application depended on identifying (factually) what DBCM’s “enterprise” consisted of and what the advisory services were acquired to achieve.

4. Court’s Reasoning

The SCA approached the matter by emphasising that liability for VAT on imported services and entitlement to input tax deductions are both governed by the statutory requirement that the relevant services be acquired and used for the purpose of making taxable supplies in the course or furtherance of an enterprise as defined. The court treated it as essential first to identify DBCM’s enterprise for VAT purposes and then to examine the relationship between that enterprise and the services acquired.

In interpreting “imported services”, the SCA focused on the definitional element that imported services are those utilised or consumed in the Republic otherwise than for the purpose of making taxable supplies. The court accepted that the relevant “purpose” is the purpose of the acquirer (DBCM) in obtaining the services, and evaluated that purpose against the factual context of the transaction. It rejected DBCM’s contention that NMR’s services were acquired as an overhead expense inherently connected to its ongoing mining and diamond-selling activities because DBCM was a listed company with legal obligations to shareholders.

The court drew a distinction between, on the one hand, an enterprise and its ordinary overheads, and, on the other, special duties imposed on a public company as a takeover target in the interests of shareholders in consequence of the corporate form and listing regime. It held that, in the circumstances of this case, the services were too remote from the advancement of the VAT enterprise of mining and selling diamonds to characterise them as acquired for the purpose of making taxable supplies. The court accepted the Commissioner’s submission that NMR was retained because DBCM was the target of a takeover by related parties and because the board had duties (arising from the regulatory and listing framework referred to in argument) to procure independent financial advice and report to independent unit holders on whether the offer was fair and reasonable. On this reasoning, the services were directed at enabling the board to comply with those obligations and to facilitate the transaction, rather than at producing or enhancing taxable supplies in the diamond business.

DBCM attempted to show that the transaction and NMR’s work produced operational advantages for the diamond business, including the alleged usefulness of valuation modelling, improved governance or image, and benefits from de-listing and elimination of cross-shareholdings. The SCA was not persuaded on the basis recorded in the judgment, including concessions that the model was not provided for the purpose of making taxable supplies and that other strategic operational reviews existed independently of the takeover advisory work. The court also rejected the suggestion that DBCM’s holding of Anglo shares constituted an “enterprise” activity integral to the diamond business for VAT purposes, holding that (unless operating as an investment company) investments cannot conceivably be regarded on their own as constituting an enterprise within the meaning of the Act, and that DBCM’s late interpretive argument seeking to split the definition of “enterprise” into two categories based on the word “including” was without merit.

On the place of consumption of NMR’s services, the SCA applied what it described as a practical approach. It reasoned that DBCM’s head office was in Johannesburg; the ICD resolved there to acquire advisory services; the DBCM board met there to receive the ICD’s recommendations and decide; and the scheme of arrangement was approved and implemented in South Africa. The fact that some meetings with NMR were held outside South Africa was treated as insufficient to shift consumption outside the Republic. The “compelling conclusion” was that NMR’s services were consumed in South Africa.

Turning to input tax, the SCA cited the general VAT rationale that a taxpayer may obtain credit for an appropriate proportion of input tax on overheads that cannot be directly linked to outputs, referencing the formulation in Customs and Excise Commissioners v Redrow Group plc [1999] 2 All ER 1 (HL). However, it treated the statutory gateway as decisive: input tax is deductible only where the services are acquired wholly or partly for the purpose of consumption, use or supply in the course of making taxable supplies, and apportionment under s 17 is only relevant once that threshold is met.

Applying the same reasoning used in relation to NMR’s services, the SCA held that the local professional services were likewise acquired for the purposes of dealing with and implementing the consortium proposal and discharging the associated obligations, not for the purpose of making taxable supplies in DBCM’s diamond-mining and selling enterprise. The judgment reviewed the functions performed by the local suppliers (including WWB’s work on the scheme of arrangement and related regulatory and tax matters, and other advisors’ roles connected to implementation and approvals) and concluded that they were directed at ensuring the transaction materialised. On that basis, the SCA overturned the Tax Court’s partial allowance in relation to WWB: because the services were not acquired for making taxable supplies, the premise for any apportionment and deduction fell away.

The SCA addressed the parties’ reliance on foreign income tax authorities (a Canadian decision and an Australian decision) and held that such reliance was misplaced because those cases turned on different statutes and tests (income tax deductibility), involved different facts, and did not determine the VAT questions posed by the South African Act.

5. Outcome and Relief

The SCA upheld the Commissioner’s appeal and dismissed DBCM’s cross-appeal. It set aside the Tax Court’s order and substituted it with an order that DBCM’s appeal against the Commissioner’s assessments is dismissed.

The effect was that NMR’s services were treated as imported services for which VAT was payable by DBCM under s 7(1)(c), and the VAT charged by the local service providers did not qualify as deductible input tax (including the previously partially allowed WWB-related input tax).

Costs were awarded against DBCM in both the appeal and the cross-appeal, including the costs attendant upon the employment of two counsel.

Cases Cited

BJ Services Company Canada v The Queen 2003 (TCC) 900

FCT v The Swan Brewery Co Ltd (1991) 22 ATR 295 (FCA)

Customs and Excise Commissioners v Redrow Group plc [1999] 2 All ER 1 (HL)

Legislation Cited

Value-Added Tax Act 89 of 1991

Companies Act 61 of 1973

Income Tax Act 113 of 1993

Rules of Court Cited

No rules of court were cited in the judgment.

Held

The Supreme Court of Appeal held that the foreign advisory services supplied by NM Rothschild and Sons Ltd to De Beers Consolidated Mines Limited were utilised or consumed in the Republic and were not acquired for the purpose of making taxable supplies in the course or furtherance of DBCM’s VAT enterprise. Accordingly, the services fell within the statutory definition of “imported services”, with VAT payable by DBCM under s 7(1)(c) of the VAT Act.

The court further held that VAT charged by South African service providers in connection with the transaction did not qualify as deductible input tax, because those services were likewise not acquired wholly or partly for the purpose of making taxable supplies in DBCM’s enterprise. The Tax Court’s partial allowance relating to one firm (WWB) and its referral for apportionment was therefore not sustained.

LEGAL PRINCIPLES

The judgment applied the principle that classification of services as “imported services” under the Value-Added Tax Act 89 of 1991 depends centrally on whether the services are utilised or consumed in South Africa otherwise than for the purpose of making taxable supplies, requiring identification of the acquirer’s purpose in obtaining the services and an assessment of the connection between the services and the vendor’s VAT enterprise.

It further applied the principle that the scope of a vendor’s “enterprise” for VAT purposes is a factual enquiry determined by the statutory definition, and that the word “including” in the definition is illustrative rather than creating multiple categories of enterprise. Activities such as holding shares (where the vendor is not a dealer or investment business in shares) do not, on the judgment’s reasoning, constitute an enterprise activity for VAT purposes merely because they form part of a company’s broader corporate affairs.

Finally, the judgment applied the principle that input tax is deductible only where the goods or services are acquired wholly or partly for the purpose of consumption, use or supply in the course of making taxable supplies, and that apportionment under s 17 becomes relevant only once that threshold requirement is satisfied. Services obtained to comply with takeover-related duties and to implement a restructuring transaction were held, on the facts, to be too remote from the making of taxable supplies in the relevant enterprise to qualify as deductible input tax.

Commissioner for South African Revenue Services v De Beers Consolidated Mines Ltd (503/11) [2012] ZASCA 103; 2012 (5) SA 344 (SCA); [2012] 3 All SA 367 (SCA) (1 June 2012)