VAT CASE 1626 – Reimagining the supply of financial services

VAT CASE 1626 – Reimagining the supply of financial services

• 09 July 2020
• VAT
• PWC

Background

On 3 March 2020, the Tax Court handed down its judgment in the matter of ABC (Pty) Ltd v CSARS (VAT 1626) [2020] SARSTC. This case concerned an appeal against the VAT assessment raised by SARS against the Appellant, ABC (Pty) Ltd (‘ABC’). The background facts are as follows:

ABC’s business comprises the buying and selling of currency to inbound and outbound travellers. ABC structured its business into three divisions: head office, treasury and a branch network, with each division having a separate operational function. Treasury is responsible for setting exchange rates for the buying and selling of foreign currencies to customers – that is, it sets the rate of the currency and adds a margin thereon. This rate (inclusive of the margin) is displayed on the board in the branch for customers to buy and sell the currency. The branches are responsible for the sale and exchange of foreign currencies to customers and the head office had a supporting role. When a customer buys or sells the currency, the relevant branch processes the transaction and charges the customer a commission or fee for its services.

For many years ABC was of the view that it made both taxable and exempt supplies and therefore apportioned its input tax. ABC applied the standard turnover-based method of apportionment to determine the extent of input tax it was entitled to deduct for its business as a whole. However, ABC reviewed its business and determined that it could directly attribute the VAT incurred by it to the respective business units/activities. ABC adjusted its VAT returns to claim the portion of input tax which was previously not deducted in full by the branches on the basis that the branches made wholly taxable supplies. SARS disagreed with this approach and insisted that the VAT in question must be apportioned in accordance with the standard turnoverbased method of apportionment. SARS accordingly issued an assessment. ABC appealed this assessment in the Tax Court.

The Tax Court upheld the appeal and confirmed that ABC should apply direct attribution to the expenses incurred by its branches that made wholly taxable supplies, as opposed to apportioning the VAT incurred.

Parties’ arguments

ABC’s arguments

ABC considered the interpretation of section 2(1)(a) and its proviso. ABC contended that the exchange of currency is a financial services activity; however, in terms of the proviso, this activity is no longer deemed to be financial services where or to the extent that the consideration payable is a fee or commission.

1. ABC was further of the view that the only consideration payable and/or received was the fee or commission for its services of exchanging currency. ABC based its view on the following aspects: The terms of the contract entered into with a customer were to exchange currency at a particular rate for a commission;
2. The customer contract does not include any provision relating to the margin that may be built into the rate of exchange. Customers were therefore completely unaware of the margin;
3. The definition of consideration relates only to a supply of goods or services, and the exchange of currency is neither a supply of goods nor services. ABC argued that currency as envisaged in section 2(1)(a) and money, as defined, are virtually the same; and
4. Furthermore, the margin and/or amounts exchanged did not constitute consideration. It was argued that the exchange of money for money is not consideration, as it merely replaces one currency with another of equal value.

It therefore follows that the activity of exchanging currency merely for a commission does not constitute a financial services activity but rather a normal enterprise activity as envisaged in paragraph (a) of the definition of ‘enterprise’. As such, the commission received is therefore subject to VAT at the standard rate under section 7(1)(a).

In light of this, ABC was of the view that the VAT incurred by the branches was entirely for purposes of making taxable supplies and therefore qualified for a deduction of input tax in its totality.

SARS’ arguments

SARS argued that although the business of ABC operated in separate divisions, it was one entity and that the activities of such divisions were so interwoven and interdependent that the split was in essence artificial. As such, ABC’s main business was the exchange of currency and that if the exchange of currency did not take place at the branch, it would not have been able to or entitled to earn a commission.

SARS held the view that the exchange of currency took place at the branch and that such exchange of currency constituted financial services as envisaged in section 12(a) read with section 2(1)(a).

SARS concluded that ABC made mixed supplies and could therefore only directly attribute to the extent that it was possible within the branches to allocate expenses to wholly taxable purposes.

The judgment

The Tax Court had to determine whether ABC was correct in its approach. In doing so, the Tax Court had to consider:

• whether the exchange of currency by the branches constituted a ‘financial services’ activity under section 2(1), which qualified in terms of section 12(a) to be exempt from VAT; and
• whether the payment of a commission/ fee is ‘consideration’ as contemplated in the proviso to section 2(1).

The main question to answer was if the exchange of currency in the circumstances constituted ‘financial services’, which were exempt from VAT in terms of section 12(a). The Tax Court held that the essence of the case revolved around the correct interpretation of the proviso to section 2(1).

In determining the nature of the supplies made by ABC, the Tax Court accepted and applied the principle that the VAT consequences of a transaction must be determined by having regard to the contractual arrangements under which the supply is made. In this instance, the contract evidenced transactions with the following features:

• the agreement to exchange specified currencies,
• at a particular rate of exchange determined by ABC; and • the payment by the customers of a commission.

The Tax Court stated that the margin (whether notional or not) does not form part of the agreement between the parties and that it was unknown to ABC (i.e. the treasury and branch network) and the customer at the time of the transaction.

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This article first appeared on pwc.co.za

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