It has been compulsory since 2017 for non-executive directors in South Africa to register for value-added tax (Vat) once their fees exceed the R1 million threshold.
A preliminary ruling by the Court of Justice of the European Union (CJEU) has sparked some debate in South Africa about the local approach to non-executive directors (NEDs) and their Vat liability.
The CJEU found that directors of a board do not act on their own behalf or under their own responsibility, and do not bear the economic risk linked to their activity.
They do not act independently, despite the fact that they are free to arrange how they perform their work, receive emoluments making up their income, act in their own name, and are not subject to an employer-employee relationship. They would therefore not be seen as a taxable person from a Vat perspective.
Victor Terblanche, director at VAT IT SA, says the current view of the South African Revenue Service (Sars) is that the non-executive director is not an employee and therefore the services are subject to Vat.
“This is based on Sars’s view that the services are supplied independently and personally by the NED together with the view that a NED is not involved in the daily management or operations of a company in terms of the King III Report.”
Therefore, any fees paid to a NED for services rendered in that capacity are not regarded as “remuneration”.
The NED is treated as an independent contractor and is obliged to register for Vat if their taxable income exceeds the R1 million threshold.
“Considering that the Companies Act does not distinguish between an executive director and a NED, it appears as if both types of directors do not act on their own behalf or under their own responsibility and do not bear the economic risk linked to their activity,” says Terblanche.
He believes the CJEU ruling may have relevance for NEDs in a South African context and should potentially be revisited by Sars to determine whether the CJEU outcome may impact its binding general ruling (BGR 41).
Matthew Besanko, indirect tax leader at PwC, says there is a subtle difference between the European legislation and that of SA.
In the European legislation there is reference to “independent activity” whereas the definition of enterprise in South African legislation is much broader and refers to “any activity”.
He says South African companies need to have non-executive directors to offer their skills independently from the company.
“Their services are offered in an impartial way to bring another layer of diligence and care to the decision-making processes.”
Besanko adds that as much as international case law provides guidance or direction on certain matters of interpretation, it has become clear in recent tax judgments that SA courts have rejected foreign case law as the local law and context must also be considered.
He therefore believes that the outcome reached in the CJEU may not necessarily apply equally in the South African context.
“In the local context, the Vat Act, the Companies Act, and the King IV Report on Corporate Governance are relevant to determine the Vat liability of non-executive directors.”
Terblanche believes the ruling by the CJEU provides a “definitive test” for independence to ensure that directors are not unnecessarily included as taxable persons for Vat purposes.
“The fact that the CJEU considered the applicant’s submission that a director acts as a member of a collective organ, which represents the legal person, may result in other tax jurisdictions taking the same view,” he adds.
Charles de Wet, tax executive at ENSafrica, says the approach followed by the CJEU makes sense. “In South Africa we are getting confused between having independent judgement when making decisions and being independent from the company.”
The decisions by directors (non-executive and executive) are made on behalf of the company and not on behalf of their own interest or for their own profit or benefit.
There is some debate whether this approach by the CJEU may have bearing on a recent decision by the Pretoria High Court in a declaratory application by Citibank SA.
The bank asked the court for clarity on its Vat liability for imported services on seconded employees from foreign Citibank offices. The court found that the seconded employees were not employed by Citibank SA and agreed with Sars that it was liable for Vat on “imported services”.