VAT implications of intra-group payments in terms of apportionment. Gerard Soverall & Annelie Giles

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2 VAT implications of intra-group payments in terms of apportionment. Gerard Soverall & Annelie Giles

3 Agenda 1. Challenges surrounding intra-group payments Technical & accounting considerations 4. Closing statements 3

4 Many people believe that where taxes are concerned, they are victims, held hostage by an inevitable process that allows them no input, no control. This passive approach becomes something of a self-fulfilling prophecy; where people believe that they lack control, they seldom try to assert control. Richard Carlson 4

5 Challenges Business perspective Journal processing Transaction coding Group structure Commercial vs Tax structure Reasonability testing Is it an effective control? Non-standard transactions Often overlooked Group reorganization Is VAT recoverable? Non-settlement of intra-group accounts Change of use adjustments Are they identified? Direct attribution Documentation is critical Cost allocation methods Are they acceptable to SARS? Data accuracy & management 5

6 Group structure Separately identifiable branch and foreign main business separate persons for VAT purposes Intra-company cost allocations & inventory transfers between separately registered branches becoming separate taxable supplies Cross-border vs local transactions Different tax implications Staff seconded could trigger multiple VAT registrations within a single legal entity Management fees Imported services Multi-tier dividend distributions affecting multiple group companies apportionment ratios Services physically rendered elsewhere than in SA s11(2)(k) & s8(15) 6

7 VAT incurred on acquisition of goods & services Section 1(1) Enterprise, Input tax Standard turnover-based method Direct attribution (Purpose test / Intended use) Enterprise activities Less: Nonpermissible input tax deductions s17(2) Dual/mixed use purposes s17(1) Non- enterprise activities Not input tax s1(1) 95% de minimis rule. Directive to use alternative method from a future tax period / retrospective from beginning of year of assessment in which applied. ratio rounded to 2 decimal places. Full input tax deduction Partial input tax deduction No input tax deduction Annual adjustment within 6 months after end of financial year. 7

8 SARS view? method: Should be fair & reasonable but is often subjective Industry specific considerations: Complex / No onefits-all approach (e.g. BASA, ASISA, SAIA) Closeness of the connection (De Beers case, MTN case) I.e. how closely does input tax incurred relate to taxable supplies? 8

9 Distributions - Dividends Non-supply Not consideration for any supply by shareholder to earn dividends. Passive shareholding Non-enterprise activity; Limited effort involved. Implied correlation Distortive component of apportionment calculation. Disproportionate to effort applied No direct time, effort, cost, economic activity. Denominator Inclusion in apportionment calculation is unique to South Africa (DTC). Business structure Purpose of holding company? How much shareholding effort involved? Active investment company. Active trading company with minimal shareholding activity. Industry considerations BASA method Certain adjustments to denominator. Equity instruments disguised as debt Dividends (s8f and 8FA) Characteristics associated with debt Interest (s8e or 8EA) Dividends in specie Distribution to the beneficial owner of a share in any form other than in cash. e.g. Distribution of trading stock or a capital asset. Supply of goods. 9

10 Dividends in specie - Distributor s1(1) Enterprise For a consideration Taxable supplies OR Deemed taxable supplies s10(23) Supplies for nil consideration s10(4) Supplies between connected persons s18(1) Change in use adjustment Policy design? Deemed nil value Deemed open market value s10(7) Deemed open market value ratio ratio ratio VAT blockage Mismatch? 10

11 Dividends in specie - Distributor s1(1) Enterprise For a consideration Taxable supplies Deemed taxable supplies s10(23) Supplies for nil consideration s10(4) Supplies between connected persons s18(1) Change in use adjustment Policy design? Deemed nil value Deemed open market value s10(7) Deemed open market value ratio ratio ratio VAT blockage Mismatch? 11

12 Interest income The bigger challenge is usually data accuracy and overcoming system limitations, rather than the complexity of the relevant provisions of the VAT Act. method Gross vs Net interest e.g. BASA Borrowed to on-lend (single activity; applies to all interest) Special treatment of incidental interest Remains subject to obtaining a directive from SARS. e.g. Overdue debtors accounts; Investment of surplus cash. Non-monetary interest payments Interest payments in the form of goods or services. e.g. Substituting monetary interest with equity/shareholding. Sharia compliant financing arrangements. Foreign interest Zero rated service Local interest Exempt financial service 12

13 Royalties Local royalties Standard rated service (14%) Section 7(1)(a) Section 1(1) services Foreign royalties Zero rated service (0%) Section 7(1)(a) Section 1(1) services Section 11(2)(m) << Irrespective of recipient s residency status >> Lack of place of supply rules Rights used outside SA; Used inside & outside SA. Data accuracy is important. method Passive income Inclusion of taxable royalty fees in apportionment calculation? 13

14 Management fees Supply for VAT purposes? Cost recharge/disbursement Costs incurred as inputs into the making of own taxable supplies to subsidiary. Consideration for taxable supplies. Cost reimbursement Holding company acting as agent for VAT purposes on behalf of subsidiary (e.g. paying agent). Merely recovery of money (e.g. Legal fees recharged). 14

15 Management fees Value of underlying service? Transfer pricing adjustments / Functional analysis 50/50 Dividend Management fee policy Inclusion of dividends in apportionment calculation limited to management fees. Impact of BEPS Tax structure genuine? How much detail is needed? Imported services VAT registration / Self-assessment requirement? No de minimus rule - Self-assessment if charge relates to a subsidiary s whole business involving both taxable & non-taxable supplies - E.g. system support services. VAT cascading where non-registered foreign holding company recharges VAT inclusive costs to subsidiary. 15

16 Closing statements Gerard Soverall Partner/Director: Tax Services Tel: Cell: Annelie Giles Manager: Indirect Tax Tel: Cell: This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law,, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it PricewaterhouseCoopers ( ), the South African firm. All rights reserved. In this document, refers to PricewaterhouseCoopers in South Africa, which is a member firm of PricewaterhouseCoopers International Limited (IL), each member firm of which is a separate legal entity and does not act as an agent of IL

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