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[FAQ] The issue of shares as payment for debt
- 05 March 2021
- Corporate Tax
- Peter Surtees
This article is based on tax law for the year ending 28 February 2021.
Background
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Company A is based in South Africa and is registered as a VAT vendor.
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Company B is based in Singapore. Supplier X sold goods to Company B.
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Company A was invoiced by Supplier X and was paid in full by Company A.
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Company A claimed the input tax. Company A wants to be reimbursed by Company B.
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Company B does not want to pay Company A. They want to issue Company A with shares in Company B instead.
Please advise on the following:
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Is income recognised for the amount reimbursed through shares?
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Does Company A recognise an investment in Company B?
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What are the Corporate Tax and exchange controls implications?
Answer
The VAT Act
Based on your facts, Supplier X sold and supplied goods to Company B. Company A never owned the goods. The payment of the invoice to Supplier X was a service that Company A supplied to Company B. The zero rate would apply to this service in terms of section 11(2)(l) of the Value-Added Tax Act: services supplied to a person who was not resident in the Republic at the time of the service and the service was not in connection with property situated in the Republic. Company A will invoice Company B and will be paid in shares in Company B.
With regards to VAT the flow will be as set out above. Once the relationship between Company A and Company B has been reduced to a debt due, the debt is a financial service and exempt from VAT.
The Income Tax Act
Company A incurred an expense in paying Supplier X. No capital asset was created, only a debt claim. The expense was therefore revenue in nature and deductible. The invoice to Company B amounted to a recoupment of the expense and taxable under section 8(4)(a) of the Income Tax Act. If Company B had settled the claim by cash payment, Company A would have:
Dt Bank
Ct Loan
Instead, Company B issues shares as payment. Company A will have to:
Dt Share investment
Ct Loan
As to exchange controls, the payment by Company B should enter South Africa via the foreign exchange desk of the company’s banker, so that the transaction is on record with FinSurv.
Webinar Commentary
Refer to webinar commentary on the Current Issues Facing Corporate Taxpayers 2021 here.