Page 465 - Juta's Indirect Tax

IN 70 VaLue-added tax act: InterPretatIOn nOtes IN 70
is that the promotional products are disposed of with a commercial rationale in mind rather than under the condition of disinterested benevolence. Examples of promotional offerings which give rise to supplies for no consideration include the following:
(a) ‘Two for the price of one’, ‘buy two and get the third one free’, or ‘buy product X and get product Y for free’.
(b) Free products or corporate gifts awarded to loyal customers, or when purchases exceed a certain threshold.
(c) Free trials or samples of new products provided to customers or potential customers.
(d) Legal or accounting services provided to customers and indigent persons on the basis of a contingent outcome or on
a pro bono basis.
A few points to note about the supplies in (a) to (d) above:
(a) In a ‘two for the price of one’ type promotion, output tax is effectively only accounted for on the actual (discounted)
consideration received and input tax may be deducted in full if the supplies are taxable. However, if the promotion involves the supply of two or more different products which are subject to different VAT treatment, the consideration must be split between the standard-rated, zero-rated and non-taxable components.* Input tax in relation to the non- taxable components may not be deducted, or the input tax will have to be apportioned, depending on the circumstances. A split in the consideration is not required where the ‘free’ product is subject to VAT at the zero rate, for example, ‘buy a toaster and get a dozen eggs for free.’ The same rules apply to ‘add-ons’ or ‘extras’ which are advertised as being complimentary or ancillary to another product purchased at the standard rate. For example, motor dealers often include certain extras for free if a vehicle is purchased under certain conditions, or by a certain date.
(b) Free gifts such as bottles of wine or other entertainment are not regarded as taxable supplies† unless the vendor is in the business of supplying that type of entertainment for a consideration as contemplated in the rst proviso to section 17 (2) (a). The VAT treatment of ‘free’ products supplied in response to purchases above a certain threshold will depend on whether the supply is made merely because a condition of sale was met, or if the supply is made for a consideration as part of a barter transaction, or if it is a discount/rebate.‡
(c) For free samples, the general rules as discussed in 5.2.2 will apply. However, as mentioned in (b) above, this will depend on the nature of the supply and whether the free sample is representative of, or closely associated with, the taxable products which the vendor usually supplies for a consideration.
(d) The general rules as discussed in 5.2.2 will apply to legal or accounting services which are undertaken on the basis of a contingent outcome or on a pro bono basis. Once again, these supplies are regarded as integral to the making of other taxable supplies of the same type for which a consideration is usually charged to clients by the vendor. If a small fee is charged, or some of the costs are recouped once the work is complete, or the full fee is payable later upon a successful outcome, those amounts will constitute consideration for a taxable supply which is subject to VAT at the applicable rate (usually the standard rate).
5.2.4 Supplies between connected persons’
When a taxable supply is made between connected persons for no consideration, a nil value in terms of section 10 (23) may be acceptable if the conditions in section 10 (4) do not apply. For example, if a vendor makes a taxable supply for no consideration to one of its separate VAT-registered branches, a nil value will apply if the recipient would have been able to deduct the full input tax credit had a consideration equal to the open market value for the supply been charged. In other words, if the recipient is a vendor and the taxable supplies are acquired wholly for taxable use in its enterprise, a nil value may be used. However, if the recipient is not a vendor, or the taxable supplies are acquired wholly or partly for exempt or other non-taxable purposes, VAT must be declared by the supplier on the open market value in terms of section 10 (4).§ 5.2.5 Corporate social responsibility (CSR) expenses
Expenditure by a vendor in accordance with its CSR objectives is not always deductible for VAT purposes, whether it is to comply with a statutory requirement, or as part of a voluntary programme. Also, such expenditure does not always give rise to a supply of goods or services to another person for no consideration. This will depend on the facts and circumstances of the case. For example, a cash donation to a PBO may be deductible for income tax purposes if certain requirements are met, but it does not constitute a supply of goods or services and will not result in any input tax credit for the donor.
The leading case for income tax in this regard is Warner Lambert SA (Pty) Ltd v SARS.¶ In this case it was held by the Supreme Court of Appeal that the so-called ‘Sullivan Code’ expenditure in question was deductible under section 11 (a) of the Income Tax Act as it was incurred in the production of income, and found not to be of a capital nature. The expenditure was found to be incurred, not out of pure liberality (or ‘disinterested benevolence’), but was inextricably linked to motives connected to the furtherance of the taxpayer’s trading activities. Generally, the principles in the Warner Lambert case can also be applied under the VAT Act, in the sense that an expense which is incurred ‘in the production of income’ for income tax purposes, will usually also be incurred ‘in the course or furtherance of an enterprise’ for VAT purposes.** However, one should be careful to identify each expense and the purpose for which the expense was incurred. If the expense, being of a revenue nature, is not in connection with any exempt or other non-taxable purpose, the expense
* Refer to sections 8 (15) and 10 (22).
† Refer to the VAT 411 - Guide for Entertainment Accommodation and Catering for more information in this re- gard. The supply of ‘entertainment’ in such cases is regarded as being out-of-scope for VAT purposes.
‡ Refer to binding general rulings BGR 5 and BGR 6 for further information on discounts, rebates and incentives.
§ If the open market value of the supply made for no consideration is not applicable under section 10 (4), this does not necessarily mean that the supply will escape the provisions of section 73 of the Act (Schemes for obtaining undue tax bene ts), or any similar provision in another tax act.
¶ (2003) (65 SATC 347).
** This is on the understanding that the particular expense being considered is attributable to both the making of tax- able supplies under the VAT Act and the earning of taxable income under the Income Tax Act. If the expense is attrib-
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