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In Diageo South Africa (Pty) Ltd v Commissioner for South African Revenue Service 82 SATC 351, Diageo South Africa (Pty) Ltd (Diageo) established a business as an importer, manufacturer, and distributor of alcoholic beverages. Diageo entered into an agreement with foreign brand owners, whereby Diageo undertook to advertise and promote the foreign brand owners’ alcoholic products in the South Africa (SA). The performance undertaken by Diageo constituted the supply of advertising and promotional goods and services (A&P services) to the foreign brand owners. The A&P services supplied by Diageo included, inter alia –
The aforementioned was done by Diageo for brand advertisement and promotional purposes, and thus, formed part of the A&P services supplied to the foreign brand owners.
Diageo charged the foreign brand owners a fee in consideration for the A&P services supplied in terms of the agreement. However, the fee charged by Diageo did not differentiate between the goods and services supplied. In accordance with s 11(2)(l) of the Value-Added Tax Act 89 of 1991 (the VAT Act), Diageo submitted tax returns for the 2009, 2010 and 2011 tax years to the South African Revenue Service (Sars) enclosing accounts reflecting VAT levied at 0% for A&P services supplied to the foreign brand owners. The commissioner contended that Diageo made separate supplies of A&P services in the form of promotional giveaways and samples to third parties, which were consumed in SA and not exported to non-residents. Consequently, the commissioner invoked s 8(15) of the VAT Act and Diageo was assessed for additional output VAT. The Supreme Court of Appeal (SCA) was tasked with deciding the proper interpretation and application of s 8(15).
Section 8(15) of the VAT Act
Section 8(15) of the VAT Act is triggered in circumstances where a VAT vendor makes a single supply of goods or services and only one fee/consideration is payable for the single supply. In such circumstances, VAT would be levied at only one rate. However, had the VAT vendor charged a separate fee for the supply of goods and/or services, part of the supply would have attracted VAT at the standard rate and part of the supply would have attracted VAT at a rate of 0% (notional separate considerations). In such circumstances, s 8(15) operates as a deeming provision and deems each part of the single supply to be a separate supply.
The contentions of the taxpayer
Diageo contended that the facts did not trigger the application of s 8(15). In amplification of its contention, Diageo relied on foreign authorities to argue that in order for s 8(15) to apply, a VAT vendor ‘must make “separate dissociable supplies of both services and goods” or supplies that are “economically divisible, independent and hence dissociable” and which constitute “an end in itself”, not a means to achieve that end’. Diageo argued that, in terms of s 8(15), the deeming provision did not operate in circumstances where the supply of goods and/or services were economically not dissociable. Diageo contended that it was only if a single supply of goods and/or services, which constituted a combination of economically divisible, independent and dissociable supplies was made, that s 8(15) would deem separate supplies to have been made in order to levy the appropriate rate of VAT.
Diageo referred to the agreement between it and the foreign brand owners to illustrate that it did not have an obligation to supply goods but was only contracted to supply a service for the purposes of the VAT Act. This suggests that the transaction between Diageo and the foreign brand owners may have been specifically structured to ensure that the fee payable by the foreign brand owners would attract zero-rated VAT. Diageo argued that the supply of goods was not an end, but rather a means to achieve an end (the end being the advertising and promotion of the foreign brand owners’ alcoholic products in SA). Diageo contended that, although it incurred expenditure in acquiring goods to supply a service, it did not result in it supplying both goods and services. Effectively, Diageo maintained that it made only a single supply of A&P services to the foreign brand owners, and thus, the deeming provision of s 8(15) did not find application. Diageo argued that the commissioner’s approach sought to artificially dissect a single supply, the result of which, would increase its liability for VAT.
The SCA’s interpretation of s 8(15) of the VAT Act
The SCA held that s 8(15) must be interpreted in the context of ss 7(1)(a) and 11(2)(l). In terms of s 7(1)(a), a standard rate of VAT is applied on a VAT vendor’s supply of goods and/or services in the course or furtherance of an enterprise. Section 11(2)(l) is an exception to s 7(1)(a) and provides that VAT is levied at 0% in respect of a vendor’s supply of goods and/or services to non-residents. The SCA held that the purpose of s 8(15) is to cater for a situation where both ss 7(1)(a) and 11(2)(l) are triggered in a single supply of goods and/or services. The deeming provision of s 8(15) ensures that VAT is levied at the appropriate rate for the goods and/or services supplied.
The SCA held that Diageo’s reliance on foreign authorities was misplaced because it did not concern the interpretation of statutes, which provided for a deeming provision or an apportionment provision. The SCA held that ‘formulations such as “economically not dissociable”, “the supply not being an end in itself” and the question of “principal and ancillary supplies”’ as set out in the foreign authorities, had no bearing on the interpretation and application of s 8(15). The SCA held that its interpretation of s 8(15) would not lead to an artificial or insensible consequence nor result in a commercially unreal outcome.
The SCA’s application of s 8(15) of the VAT Act
The SCA found that the supply of A&P services made by Diageo to the foreign brand owners amounted to the supply of both goods and services, which were distinct and clearly identifiable from each other. The SCA observed that only a single fee was charged by Diageo for the supply of A&P services. The SCA held that had separate fees been charged by Diageo for the supply of goods and services, the supply of the services to the foreign brand owners would have attracted VAT at a zero rate and the supply of goods, which were used and consumed within SA would have attracted VAT at a standard rate. The SCA held that s 8(15) deemed each part of the supply of A&P services to be a separate supply and apportioned VAT at different rates. Therefore, the part of Diageo’s supply relating to goods which were used and consumed within SA resulted in VAT being levied at the standard-rate. Consequently, Diageo was liable for the VAT output tax adjustments under s 8(15).
Conclusion
The use of foreign authorities serves an important role in South African litigation. Section 39(1) of the Constitution permits a court to consider foreign law when interpreting the Bill of Rights. Although the judgments of foreign courts are not binding on South African courts, it does have a persuasive value. The degree of persuasion depends on certain factors, such as –
However, when interpreting legislation in SA, the starting point is the interpretative approach set out in the SCA’s judgment in Natal Joint Municipal Pension Fund v Endumeni Municipality 2012 (4) SA 593 (SCA), which requires the language of a statutory provision to be interpreted contextually, purposively, and literally.
In Diageo, this was reaffirmed by the SCA. The SCA held that the purpose of s 8(15) is to provide for a notional separation to ensure that VAT vendors fulfil their obligation to pay VAT at a standard rate on goods and/or services, which constitute a standard-rated supply. Therefore, it was irrelevant whether the goods supplied were not economically dissociable, but only incidental to the supply of the A&P services. The interpretation adopted by Diageo would have resulted in a commercially unreal outcome because all that a VAT vendor would have to do to avoid the levy of standard-rated VAT is show that the standard rated supply was only incidental to the supply, which attracted VAT at a zero rate. Such an interpretation would likely result in a myriad of transactions being structured in a specific way to ensure that the standard-rated supply is merely a subsidiary of, and not economically dissociable from, the zero-rated supply, which constitutes the whole. In such circumstances, Sars would be deprived of VAT, which it would legally be entitled to, and consequently, the purpose of
s 8(15) would be undermined. On this note, when interpreting legislation, it is important to remember the guidance provided by the SCA in the Endumeni judgment: ‘A sensible meaning is to be preferred to one that leads to insensible or unbusinesslike results or undermines the apparent purpose of the document.’
Samuel Mariens LLB (UWC) is an LLM (Tax Law) student at the University of Cape Town.
This article was first published in De Rebus in 2022 (Jan/Feb) DR 16.
