Page 464 - Juta's Indirect Tax

IN 70 VaLue-added tax act: InterPretatIOn nOtes IN 70
Whilst a nil value may be acceptable in certain cases under this provision for VAT purposes, this does not mean that a nil value will be accepted for other taxes, for example, in the case of an export to a non-resident connected person.* 5.1.6 Adjustments [section 18 (1)]
This provision operates on the basis that if a vendor acquired goods or services for taxable purposes, and later, applies those goods or services wholly for exempt, private, or other non-taxable purposes, an output tax adjustment must be made. Essentially, the purpose of this adjustment is to act as a recoupment of input tax previously deducted. The VAT adjustment is calculated by applying the tax fraction (14/114) to the open market value of the goods or services concerned.
The provision will, for instance, apply when goods initially acquired for taxable purposes are subsequently donated,† as this is regarded as a complete change in use to non-taxable purposes. However, in the case of expenses incurred to acquire promotional products such as free samples which are given to customers or potential customers as an integral part of an effort to market the vendor’s taxable products, no adjustment will arise.‡
5.2 Supplies made for no consideration
5.2.1 Introduction
If an enterprise is to be successful, or at least sustainable, it will engage in a wide range of activities to further its cause. This may involve various forms of advertising, publicity, distribution of product samples, sales promotions, competitions, special offers, giveaways, discounts, bonuses, product ‘add-ons’ etc. These activities are generally referred to as ‘marketing activities’. In carrying out its marketing activities, a vendor will sometimes make a supply of goods or services to its customers, employees or any other potential consumer without charging a consideration. In the case of associations not for gain, this may include token gifts as a way of promoting a fundraising event to solicit donations, or the production and free distribution of information booklets which promote the organisation and its cause. As discussed in 3 and 5.1, it must be established whether the supplies made in the circumstances constitute taxable supplies or non-taxable supplies. This is determined by the characterisation of those supplies as contemplated in the de nition of ‘enterprise’.
In 5.2.2 to 5.2.11, the VAT implications of supplies made for no consideration under different circumstances are discussed. As it is impractical in this Note to cover all possible situations in which supplies for no consideration can be made, the general principles which are to be applied are set out in 5.2.2 as a ‘general rule’. This is followed in 5.2.3 to 5.2.11 by a discussion of a number of different situations which demonstrate the practical application of these principles. 5.2.2 General rule
The question as to whether a vendor must account for output tax and deduct input tax on supplies made for no consideration depends on whether the supplies are regarded as being made in the course or furtherance of the vendor’s ‘enterprise’ or not. It follows that output tax must be declared on taxable supplies made, and the VAT incurred on activities which are conducted for the purpose of making those taxable supplies may be deducted as input tax.§ When exempt or other non-taxable supplies are made for no consideration, no output tax is declared and no input tax is deducted by the vendor.
The general rule is, therefore, that a supply made for no consideration by a vendor in the context of a business activity or enterprise carried on, is generally regarded as a taxable supply made in the course or furtherance of the ‘enterprise’ as de ned in section 1 (1). It is a requirement in this regard that the marketing activity and associated marketing expenses are directly attributable to the promotion of the vendor’s taxable product offerings which are usually supplied for a consideration. The effect is that the VAT incurred on the marketing efforts, including certain promotional supplies made for no consideration, may be deducted if the expenses can be directly attributed to speci c taxable supplies made for a consideration, or generally, for the purpose of promoting the vendor’s other taxable product offerings. The view is also that a promotional supply made for no consideration such as a free sample or special offer giveaway which is intended to promote a vendor’s taxable product offerings is not regarded as a ‘donation’ in the true sense of the word, as it is not purely gratuitous.
When considering the application of the general rule in this paragraph as it applies in the rest of this Note, it should be kept in mind that the VAT Act contains certain provisions which will speci cally deny input tax in certain circumstances¶ Where this is the case, it will override the general rule that input tax may be deducted. The general rule will also not apply when the supplies concerned are characterised as exempt or out-of-scope for VAT purposes, because to that extent, the supplies are not made in the course or furtherance of the ‘enterprise’.**
5.2.3 Promotional products and other ‘free’ supplies
As mentioned in 5.2.2. input tax can usually be deducted on promotional expenses incurred to make a supply for no consideration if that supply promotes the taxable product offerings of the vendor. A supply such as a free sample will therefore generally constitute a taxable supply and no output tax adjustment is required as set out in 5.1.6. The reason
* The reason for this is that there may be different factors which come into play when it concerns the income tax implications of transfer pricing matters or customs valuation issues.
† Refer to 5.1.4 – De nition of ‘donation’.
‡ Refer to 5.2.2 for the reasoning behind this conclusion.
§ As a matter of principle, output tax must be declared on a taxable supply made for no consideration, but where
the value is nil in terms of section 10 (23), the output tax is calculated as being nil. If section 10 (23) does not apply, output tax must be declared on the consideration or value of supply as determined elsewhere in section 10, or any other provision which applies. For example, in the case of certain transactions between connected persons, output tax must be declared on the open market value of the supply. In the case of enterprise assets which are subject to a change in use for non-taxable purposes (for example, when applied for own use or when donated), an output tax adjustment based on the open market value must be made.
¶ Refer to section 17 (2). For example, if the enterprise is not in the business of supplying ‘entertainment’ as de- ned, any free entertainment supplied to customers or potential customers will be denied under section 17 (2) (a).
** Refer, for example, to proviso (v) to the de nition of ‘enterprise’ in section 1 (1) which speci cally excludes exempt supplies.
456 Juta’s IndIrect tax 2016