Page 343 - Juta's Indirect Tax

IN 39 (2) VaLue-added tax act: InterPretatIOn nOtes IN 39 (2)
dif cult to establish if there was a suf ciently strong link between a particular payment and speci c performance of any identi able services in return for that payment. (See 4.5 on the meaning of the term ‘transfer payment’ for more details and Example 3 below which illustrates the point.)
Example 3 – Different perceptions in regard to certain payments from government
Consider a payment made by a government department to a vendor as an incentive for innovation in developing South African produced goods. The possible perceptions of the parties to the transaction could have been any of the following:
• The department may have perceived that the vendor was supplying a valuable service, in that it assisted that
department to ful l its mandate in meeting the country’s export objectives. However, the vendor‘s view may have been that there was no link between the payment and any speci c identi able service supplied in return to that department; or
• The vendor might have viewed the payment as consideration for conducting the enterprise in a particular manner which was intended to compensate for the possible sacri ce of other business opportunities. On the other hand, the department’s view may be that it was distributing the funds to that vendor as well as many others as part of its (benevolent) mandate, and therefore, the vendor did not really supply any speci c, identi able or valuable service to the department in return; or
• Neither party perceived that there was a service supplied in return for the payment; or
• Both parties regarded the payment as being consideration in respect of a speci c service supplied by the vendor to
the public authority.
This matter was dealt with in VAT NEWS 17 (August 2001 issue) to clarify that where there was an actual supply of goods or services in terms of section 7 (1) (a) to a government department, section 8 (5) did not apply, and hence the zero rate in terms of section 11 (2) (p) did not apply. In a letter from SARS Head Of ce to all SARS of ces dated 31 March 2003, the of cial interpretation on this point was set out as follows:
‘This of ce’s interpretation of the current legislation is that in the circumstances where a Government Department, Provincial or National Government makes available transfer payments, grants, subsidies or any payment to a vendor and such government department receives a bene t of either goods or services in return for making such payment, then the services supplied by that vendor will no longer fall within the ambit of sections 8 (5) and 11 (2) (p) of the Value-Added Tax Act, 1991. An actual supply of a service takes place which will be taxable at the standard rate in terms of the provisions of sections 7 (1) (a) of the Act.’
4.5 De nition of ‘transfer payment’
As previously mentioned, various attempts were made over the years to clarify the meaning of the term ‘transfer payment’. From government’s perspective, if transfer payments were taxable at the standard rate, state expenditure increased, but more VAT (government income) was collected. If transfer payments were zero-rated, state expenditure did not increase, but VAT collections would be less – the net effect on the state being the same. Initially, this term was de ned –
‘as contemplated in para 1.2.9.3 of the Manual on the Financial Planning and Budgeting System of the State
published in terms of s39 of the Exchequer Act 66 of 1975’.
In a media statement dated 28 September 1991, examples of transfer payments were given as being payments by a government body to or in respect of the Council for Scienti c and Industrial Research (CSIR), the South African Bureau of Standards (SABS), the Urban Foundation, decentralisation assistance payments, and subsidies under the General Export Incentive Scheme (GEIS). As a result of continued uncertainty, a further media statement dated 18 October 1993 was issued. The de nition as set out in the Manual on Financial Planning and Budgeting of the State was quoted as follows:
‘Transfer payments refer to amounts which will not be disbursed on goods or services by the department/ administration on whose vote they appear, but will be paid over to other bodies. Included herein ... divided in two categories, viz:
Current transfers which include grants in-aid, subsidies, contributions, nancial assistance and aid in natura to foreign countries as well as pensions and social bene ts,
Capital transfers consisting of ordinary capital transfers, acquisition of shares and loans granted.’
The de nition was amended when the Exchequer Act was repealed and replaced by the PFMA and the publishing of Treasury Regulations for departments, constitutional institutions and trading entities published in Government Gazette No. 21249 dated 31 May 2000 as follows:
‘...all transfers excluding–
(a) all division of revenue grants from the national government; and
(b) any transfers to constitutional institutions and individuals.’
The de nition subsequently referred to a ‘transfer payment’ as contemplated in regulation 8.4 of the Treasury Regulations published in terms of the PFMA.
In terms of section 214 (1) of the Constitution, the annual DOR Act is required to provide for –
(a) the equitable division of revenue raised nationally among the national, provincial and local spheres of government; (b) the determination of each province’s equitable share of the provincial share of that revenue; and
(c) any other allocations to provinces, local government or municipalities from the national government’s share of that
revenue, and any conditions on which those allocations may be made;
According to GG No. 21249 dated 31 May 2000, ‘division of revenue grants’ refers to allocations from the national government to other spheres of government as listed in Schedules 3A, (Grants to provinces) 3B (Grants for Local Government functions) and 3C (Grants still to be divided between spheres) of the DOR Act, 2000 including transfers in terms of section 16 (transfers not listed in the schedules to the DOR Act).
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