Is a voucher still the perfect gift?

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On 12 January 2021, the Gauteng High Court delivered judgement in the matter of MTN (Pty) Ltd v CSARS (79960/2019) [2021], in respect of a declaratory order that MTN sought to confirm their interpretation of the VAT treatment of certain airtime vouchers. The VAT Act distinguishes between two types of vouchers – those that can be used for unknown goods and services at the time of issue (consider, for example, a retail shopping voucher); and those vouchers that can be spent on specific goods and services (in other words, not able to be used for goods and services other than those specified).

Although the VAT consequences of the issue of the vouchers ultimately are the same, the matter becomes relevant for the time at which output tax should be paid in respect of the transaction. Section 10(18) of the VAT Act deals with general vouchers, whilst section 10(19) deals with vouchers for specified goods or services. In the case of general vouchers, the VAT output liability is delayed until such a time that the voucher has been exchanged or redeemed for goods or services – this is the case since, at the time of issue of the voucher, it is unsure what those goods or services might entail. For example, a grocery voucher that could be spent on either standard-rated items or zero-rated fresh produce. In the case of vouchers for specified goods or services, the types of goods or services are already known at the point in time when the voucher is issued, and at which time the output tax is levied. In both instances, output tax is levied on the value of the voucher – but in the former situation, the timing can be significantly delayed, depending on how long the voucher is valid for.

MTN requested the court to confirm their treatment of “airtime vouchers” which can be spent on SMSs, data, or cell phone calls; and indeed, that it constituted a general voucher as opposed to a specified voucher. The court did not agree with MTN’s interpretation and indicated that the vouchers are indeed specified since it related to “airtime”. MTN would therefore accordingly be liable for output tax at the point in time when such vouchers are issued. Unfortunately, the court did not provide sufficient insights into their reasoning and the judgement has received substantial criticism from those in the industry.

We expect this judgement to go on appeal in 2021 as it could have a significant impact on any vendors who issue vouchers to the general public.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

VAT on the recovery of employee costs

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Companies are often faced with the dilemma where employees are employed in one group entity, but another group entity pays the salaries of those employees. This is often a challenge brought on by practical reasons, amongst others, only managing one payroll system group-wide, instead of a separate payroll system for each company. The payor company then re-charges the salary costs of those employees to the relevant group company. One is often confronted with the question of what the value-added tax (VAT) consequences of the fee recovery are.

The Value-added Tax Act (VAT Act) imposes VAT on the supply of goods and services by any vendor made in the course or furtherance of the vendor’s VAT enterprise. Therefore, if a company supplies services in the form of employee-related recoveries, it would be liable to account for output VAT in respect of the supply of those services, if those services form part of its enterprise.

“Supply” includes performance in terms of a sale, rental agreement, instalment credit agreement, and all other forms of supply, whether voluntary, compulsory or by operation of law, irrespective of where the supply is affected. The broad construction of this expression means that most transactions subject to VAT will fall within the scope of this particular provision. “Services” are considered 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.

The VAT Act furthermore determines that where any vendor makes a taxable supply of goods or services to an agent who is acting on behalf of another person who is the principal for the purposes of the supply, the supply is deemed to be made to the principal.

The relevant issue to consider in these circumstances is the employment relationship. Does a company incur the employee costs as principal and then “on-charge” the costs to other group entities? Or, in the alternative, can the company be said to be an administrator, or so-called paymaster, for purposes of the payroll function? Therefore, how is the employment relationship defined? What is the substance of the employment relationship?

Suppose the employees are employed by company X (i.e. the contracts of employment are between the employees and company X). In that case, company X will be regarded as the principal recipient of the services supplied by the employees. Any recovery or on-charge of costs relating to such employees to another company will, under these circumstances, represent a charge for the supply of taxable services (the supply of the services of the employees) and will accordingly be subject to VAT.

On the other hand, where company X merely acts as the paymaster for the group, the respective employees will supply the services to the other group company as the principal recipient of the services. Under these circumstances, company X will be acting in the capacity of a paymaster Compare this, for example, to a situation where a company does not have a bank account and cannot practically pay its employees – an administrative arrangement will have to be made for that company’s employees to be paid.

Importantly, any additional fee charged to a company, by company X, for payroll administration services (i.e. not a mere recovery of the employment costs) will constitute consideration for a taxable supply and be subject to VAT (which we understand is sot currently the case).

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your adviser for specific and detailed advice. Errors and omissions excepted (E&OE).

Interest: SARS’ View on the In Duplum Rule

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The in duplum rule originated from the South African common law and has been applied through South African case law for over 100 years. The rule aims to protect borrowers from exploitation by lenders that allow and, in some cases, cause interest to accumulate unabated: leading borrowers into further indebtedness. In terms of the common law, the interest charged on a debt stops to accrue where the total amount of the unpaid interest equals the outstanding principal debt. The statutory rule goes further in its application. It provides for a limit on several costs, in addition to unpaid interest, which added together may not be more than the outstanding principal debt.

Taxpayers sometimes enter into loan arrangements with parties, where the lender that is advancing that loan to the borrower (who is in some manner related party to the lender) will advance the loan at a zero or low-interest rate for the loan arrangement to be favourable to the related party by saving on interest costs. The use of these zero or low-interest loans creates a loss to the fiscus as it often leads to for example:

  • Less PAYE collection where an employer grants a zero or low-interest loan to an employee.
  • Avoidance of donations tax where a person transfers an asset to a trust in exchange for a zero or low-interest loan.
  • Possible avoidance of dividends tax where a company grants a shareholder a zero or low-interest loan.

To counter the tax benefit as a result of the use of zero or low-interest loans, the Income Tax Act contains various anti-avoidance rules that deal with the taxation of the difference created because of these loans. One example is section 7C of the Act, which applies in respect of zero or low interest-free loan advanced to a trust by a connected person of that trust. The official rate of interest is used under this provision to quantify a donation that arises from advancing a zero or low-interest loan to a trust.

Previously, some taxpayers were relying on the in duplum rules to circumvent anti-avoidance rules in the Income Tax Act. These taxpayers rely on the in duplum rules to distort the quantification of the tax benefit derived from a zero or low-interest loan between connected parties on the difference between the amount of interest actually incurred and the amount of interest that would have been incurred at the official rate. These taxpayers claim that if a zero or low-interest loan is advanced and the unpaid interest on that loan (and other costs, in the case of the statutory rule) reaches the amount of the unpaid principal debt, the in duplum rules apply to stop the interest. Consequently, if the in duplum rules apply, then the application of the anti-avoidance rules on the tax benefit on zero or low interest-free loans must also not be applied.

However, section 7D of the Income Tax Act determines that the anti-avoidance rules dealing with zero or low interest-free loans should apply despite the application of either the statutory in duplum rule or the common law in duplum rule. Taxpayers should therefore be cognisant of any interest provisions in agreements, and that anti-avoidance mechanism will receive preference.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your adviser for specific and detailed advice. Errors and omissions excepted (E&OE).

Don’t suffer the tax consequences of waived debt

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Many natural persons or trust shareholders in companies are confronted with the unintended tax consequences of owing an amount on a loan account to the company in which they hold those shares. These tax consequences specifically relate to the “deemed dividend” which arises on interest-free loans (related to so-called “debit loans” in companies). In many cases, there is no intention to ever repay the loan account, and shareholders and companies often consider simply waiving these loan accounts.

The issue typically arises when the shareholder is not immediately subject to any of the adverse debt waiver provisions of the Income Tax Act. The shareholder often opts to absorb any tax recoupments or base cost adjustments as a result of the debt benefit which it received as a result of the waiver. On face-value, in such a case, it is therefore often presumed that a debt waiver does not have any tax consequences.

However, when debts are waived, it is critical that not only the debt waiver provisions of the Income Tax Act are considered, but also the dividends tax provisions and the donations tax provisions.

Dividends Tax

The definition of a “dividend” for income tax purposes includes any amount which has been transferred or applied for the benefit of any person, in respect of the shares of that company. Although a debt waiver is unlikely to constitute an amount transferred in respect of shares, a strong argument can be made that a debt waiver would constitute an amount applied for the benefit of a shareholder.

The debt waiver is therefore likely to result in an amount applied, which constitutes a dividend for which dividends tax is payable by the natural person or trust shareholder. This is a dividend in respect of the entire amount of the loan, not only of the foregone interest that gave rise to the issue in the first place.

Donations Tax

The debt waiver regime provides for an exclusion from its adverse tax consequences to the extent that the donations tax provisions of the Income Tax Act apply. Importantly though, this is only true if the donations tax is actually payable. By including an exemption for the donations tax provisions, donations tax should be taken into account before considering debt waivers in isolation.

To the degree that the company did not receive “adequate consideration” for a loan waiver, it will be regarded as a donation to the shareholder. When a loan is waived and a company does not receive any consideration for the loan, the argument could be made that “adequate consideration” had not been received by the company.

Therefore, despite the debt waiver provisions not triggering any immediate adverse tax consequences for a natural person or trust shareholders, one must not lose sight of potential dividends tax and donations tax implications when waiving loan accounts. It is always recommended that appropriate advice is sought before merely waiving a loan.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Insuring your tax obligations

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In addition to tax liabilities (tax capital amounts), taxpayers are also subject to an array of penalties and interests in respect of late payments, understatements, specific punitive penalties, and compliance-related penalties in terms of various tax Acts, such as the Income Tax Act, and the Value-Added Tax Act. This is often the case when there are uncertain tax positions, where taxpayers had to take a view on specific interpretations on a tax Act, or where assessments have not been finalised and there is a potential threat of penalties.

These uncertainties are often an impediment to the conclusion of transactions and deals, and one often finds in agreements that an amount has to be kept in trust (or escrow) to accommodate any potential or unforeseen tax liabilities which may arise as a result of the transaction. These amounts that have to be withheld (or “parked”) until such a time that a dispute or matter has been finalised, come at a significant interest cost and parties to the agreement do not always favour this as a standard term in agreements.

Internationally, there has been an increase in the number of instances where persons can insure their tax positions as they relate to tax capital, interests, and penalties. In other words, no amounts have to be kept back in trust/escrow, and parties are free to conclude and finalise transactions with full cash flows. Rather, instead of having the escrow amount, taxpayers insure their position by payment of a monthly premium in respects of their exposure to an insurance business. The cumulative premiums in this regard is, firstly, significantly less than the amount that has to be withheld and, secondly, does not mean an immediate cash flow in respect of such amounts. Your tax obligations are therefore fully insured, in a similar fashion to how you would insure your motor vehicle.

The South African insurance industry has not fully caught up with these international trends and there are very few (if any) comprehensive insurance products available to insure tax positions, in respect to unsure tax positions. On face-value, such insurance products appear to cater to “aggressive” or “abusive” schemes, and for taxpayers who want an “out” in respect of abuse of the tax system. However, this is not the case at all – such insurance products accommodate for ease of transaction flow, saving on transaction costs, keeping companies liquid, removing uncertainty from transactions, and facilitating deal flows without fear of adverse tax consequences.

One would hope that the South African insurance market is cognisant of international trends and that they consider making such products available locally, since the risks relating to the product can be proactively managed by both the insurers and the insured party, with the assistance of suitably qualified tax professionals.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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