by Jerome Veldsman
In 2001 De Beers Consolidated Mines, one of the world’s best known diamond producers and sellers, implemented a transaction whereby a new company (incorporated in Luxembourg) became the owner of the De Beers’ diamond operations, and all its associated holdings. This was the transaction pursuant to which De Beers delisted and the Oppenheimer family took De Beers private.
The transaction was complex, and De Beers employed local advisors (law firms and accounting firms) and a foreign advisor (NM Rothschild and Sons Ltd). De Beers was registered as a VAT vendor, and dealt with the VAT on the supplies of such services in the manners that would most benefit it. SARS took a different view, and only on 1 June 2012 was the matter finally resolved by a judgment of the Supreme Court of Appeal.
The amounts of VAT involved were R22 549 055 on the foreign services and R7 021 855 on the local services.
For VAT purposes, a taxable supply is a supply of goods or services by a vendor which is chargeable (by the vendor) with VAT (including zero-rated goods and services). Otherwise stated, a taxable supply is a supply of goods or services by a vendor in the course or furtherance of its 'enterprise'.
The foreign services
For VAT purposes, imported services are services acquired by a local person from a foreign supplier which services the local person (1) utilises or consumes in South Africa; and (2) acquires for a purpose other than the making of taxable supplies.
If a local person has had imported services supplied to it, the local person must pay VAT to SARS on such imported services.
In order to locate the place of consumption of the foreign services outside of South Africa, De Beers relied on the fact that several of the meetings with the foreign advisor occurred outside of South Africa. The Court held that "What is required is a practical approach to that question (the place of consumption)", and rather unsurprisingly found against De Beers on this aspect. De Beers was at the time a South African company with its head office situated in Johannesburg, and in such city the board of De Beers met to consider the transaction, and to approve the transaction.
The local services
The local advisors levied VAT, and De Beers paid such VAT to the local advisors (who on-paid the VAT to SARS).
A vendor (X) is entitled to claim an input tax (commercially, to get a refund from SARS) in respect of VAT that it (X) has paid (to another vendor(Y)) on goods or services which the vendor (X) acquired from Y wholly for the purpose of making taxable supplies.
Accordingly, with regard to respectively the foreign services and the local services, the factual question was whether, or not, De Beers acquired the services for the purpose of making taxable supplies. If it did, it would avoid the VAT, if it did not, it would suffer the VAT.
In order for the transaction to be considered and to be implemented, De Beers, as a public company, was legally obliged to appoint both the foreign and the local advisors. The Court found that the purpose of De Beers in appointing both the foreign and the local advisors was to ensure that the transaction materialised without impediment.
It was common cause that the costs of employing the foreign and the local advisors were overhead expenses of De Beers.
De Beers argued that any costs incurred for goods or services which a company is legally obliged to acquire by virtue of being a company are necessarily overhead expenses, and accordingly any such goods or services are wholly utilised or consumed by the company in the course or furtherance of its enterprise and are thus acquired for the purpose of making taxable supplies.
SARS countered that the legal obligations of a public company that is the target of a take-over are too far removed from the advancement of its enterprise to justify characterising services acquired in the discharge of such obligations as services in the course or furtherance of its enterprise.
The Court preferred SARS' approach.
De Beers also argued that its board considered that its diamond business would be better after the takeover, and therefore, on a wide interpretation of 'enterprise', the costs incurred for the transaction were in the course or furtherance of its enterprise.
SARS countered that the relevant services were unrelated to De Beer’s core activities of producing and selling diamonds, and were not directed at making any of De Beer’s businesses better or more valuable. Rather the services were in the interest of De Beer’s departing shareholders.
The Court again preferred SARS' approach.
Accordingly, the Court found against De Beers, with legal costs. The aggregate legal costs to De Beers of the unsuccessful litigation could be say R3 million, and, as it acquired the legal services other than for the purpose of making taxable supplies, it will again suffer the VAT on such services.
There are certain legal (and accounting) costs that are indeed incurred in the course or furtherance of the enterprise of a client. At the consideration stage of a transaction, if the amount of VAT will be significant, it may be prudent up-front to plan the nature and/or structure of the services appropriately.