Case Law: Diageo South vs The Commissioner for the South African Revenue Service

Case Law: Diageo South vs The Commissioner for the South African Revenue Service

• 03 April 2020
• VAT
• Southern African Legal Information Institute

Heard: 27 February 2020

Delivered: 3 April 2020

JUDGMENT

Mbha JA (Petse DP, Swain, Makgoka and Mbatha JJA concurring)

[1] This appeal concerns the proper interpretation and application of s 8(15) of the Value Added Tax Act 89 of 1991 (the Act), in the context of a single supply of advertising and promotional goods and services (the A&P services) by the appellant, Diageo South Africa (Pty) Ltd (Diageo), a South African VAT vendor, to various non-resident entities (the brand owners).

[2] Diageo made supplies of the A&P services to the brand owners and levied a fee for the supplies during its VAT periods ending June 2009, 2010 and 2011. Pursuant to s 11(2)(l) of the Act, Diageo charged VAT on the said fee at zero percent. However, the respondent, the Commissioner for the South African Revenue Service (the Commissioner), invoked s (8)(15) of the Act and maintained that Diageo had made deemed separate supplies of zero rated A&P services and standard rated goods in the form of promotional giveaways and samples that were not exported but consumed in the Republic of South Africa (the Republic).

[3] Section 8(15) provides as follows:

‘For the purposes of this Act, where a single supply of goods or services or of goods and services would, if separate considerations had been payable, have been charged with tax in part at the rate 3 applicable under section 7(1)(a) and in part at the rate applicable under section 11, each part of the supply concerned shall be deemed to be separate supply.’

[4] Section 7(1)(a) of the Act levies VAT at a standard rate on the supply by a vendor of goods and services supplied in the course or furtherance of an enterprise. The zero rating provisions in terms of s 11, constitute an exception to this general rule. These include services supplied to non-residents of the Republic in terms of s 11(2)(l) of the Act.

[5] The Commissioner assessed Diageo for additional output VAT on the goods component of the supply of the A&P services rendered by Diageo to the brand owners during the aforementioned periods. Diageo’s output VAT was accordingly adjusted by the inclusion of the further amounts of R3 444 764 (June 2009), R4 631 620 (June 2010) and R5 932 209 (June 2011).

[6] Diageo challenged the additional assessment in the Tax Court, Cape Town (Savage J), contending that it made a supply only of zero-rated A&P services to the brand owners and that it did not make separate or dissociable supplies of both services and goods. The Tax Court disagreed and held that the supply of promotional goods, as a portion of the single A&P service was, by virtue of s 8(15), a cognisable supply of goods capable of notional separation from the total A&P services supplied to the brand owners. This local supply of promotional goods, not exported but consumed in the Republic, was accordingly deemed to be a separate supply, and VAT at the standard rate in terms of s 7(1)(a) of the Act, was justifiably levied on these goods, with the result that the additional assessments were confirmed. Diageo was therefore liable for the VAT output tax adjustment under s 8(15) in respect of the A&P services costs incurred by Diageo constituting goods not exported but consumed in the Republic. This appeal, with the leave of the Tax Court, is against that finding.

[7] The factual matrix against which the dispute in this appeal falls to be determined, can be summarised as follows:

(i) Diageo, which is engaged in the business of the importation, manufacturing and distribution of alcoholic beverages, entered into an agreement with foreign brand owners for the advertising and promotion of their alcoholic products in South Africa. The brand owners granted Diageo the exclusive rights in respect of the brands distributed by Diageo to use the brand owners’ trademarks, intellectual property, equipment, packages and labels in South Africa;

(ii) The brand owners invested in advertising and promotions to build and maintain brand recognition and perception, with the aim of generating sales and sustainable long term cash flow, by way of enhanced brand equity. The brand owners however did not perform or undertake these activities themselves in respect of their brands. They relied instead on Diageo which rendered these services to the brand owners in return for a fee, which was calculated with reference to the costs and expenditure incurred on advertising and promoting the brand owners’ brands;

(iii) The advertising and marketing activities consisted of a range of activities such as advertising from various channels, brand building promotions, events, sponsorships and market research. Services which were rendered by Diageo included advertising media cost and digital, website design and build, social networks and sponsorship of, amongst others, sports events. In addition, Diageo made use of promotional merchandise and packaging; alcoholic products for sampling; and branded giveaways items such as glasses, optics, towels, beer mats, lanyards, keyrings, T-shirts, aprons, caps and the like. These were given away free of charge to third parties for use or consumption within the Republic for purposes of promoting the product;

(iv) The handing out of the physical goods by Diageo in the course of rendering the A&P services to the brand owners was not an end in itself but simply another means to enhance brand equity and sales. Two categories of goods were used. Firstly, products of the brand owners namely, alcoholic beverages were taken out of the trading stock and used for product sampling or tasting. Secondly, point of sales items such as branded glasses and T-shirts were given to third parties, for no consideration. Similarly, aprons and caps were supplied to employees at no cost to them;

(v) Importantly, it was left to the discretion of Diageo how much of the budget was to be spent on, for example, promotional giveaways and samples, which particular items were to be used and in what quantities and manner they were to be used and distributed. This activity was undertaken as part of an integrated and synergetic marketing campaign as the ultimate objective was to build and maintain the brand image;

(vi) The fee charged by Diageo to the brand owners represented the cost incurred by Diageo in rendering the A&P services, which comprised the supply of both goods and services, to the brand owners. However, the tax invoices rendered by Diageo to the brand owners reflected a total fee for services rendered. It did not differentiate between goods and services. Although such fee was charged through a South African joint-venture entity, known as Brandhouse Beverages, to which Diageo had outsourced the marketing function, the supply remained one by Diageo to the brand owners. The fee was charged on the basis that it constituted a zero-rated supply of the A&P services in terms of s 11(2)(l) of the Act; and

(vii) The brand owners and Diageo split the A&P services expenditure 50:50 up to 15 percent of net sales value. The brand owners funded the balance of the A&P services expenditure in instances where it exceeded 15 percent. The portion of the A&P services expenditure funded by Diageo was accordingly limited to a maximum of 7.5 percent of the net sales values for each brand.

Please click here to read more.

This article first appeared on saflii.org.

Click here to join the monthly tax update with Prof Jackie Arendse to learn about the latest legislative amendments and court rulings.

0 COMMENTS

LEAVE A COMMENT