SARS nails taxpayer in new VAT ruling
A recent court ruling in favour of SARS related to tax apportionment could have far-reaching consequences for South African corporate taxpayers.
The ruling was issued by South Africa’s tax court after the taxpayer, a financial services provider (FSP), appealed SARS’s decision to deny its request for a transaction-based apportionment methodology.
The apportionment methodology relates to the way in which a business calculates how much VAT is owed to SARS when it buys supplies for both taxable and tax-exempt purposes.
In a case where a business has expenses for both taxable and non-taxable purposes, an apportionment method is used to determine how much tax is due.
The general method used is a Standard Turnover-Based (STB) method, which divides taxable supplies by the combined total of taxable and non-taxable goods and other income.
Other apportionment methods can be used, but they must be approved by SARS, and the taxpayer must show why the alternative method is appropriate.
In the latest court ruling, the FSP taxpayer approached SARS to request the use of a transaction-count apportionment method.
The taxpayer had previously used this method and requested permission to continue with the previously approved apportionment methodology.
SARS denied this request and said the FSP must use a varied turnover-based method, with the transaction-count methodology used only for IT infrastructure costs.
SARS argued that it could not approve the use of a transaction-count method because the business had expanded its functions since the last approval.
Specifically, the FSP had moved into the transactional banking market since the last apportionment method had been approved.
The taxpayer then approached South Africa’s tax court to appeal the decision—but the court upheld the methods imposed by SARS.
The decision had a significant impact on the business. While the proposed method yielded a ratio close to 80%, the mixed apportionment yielded approximately 40%.
The impact on businesses
Accounting firm PricewaterhouseCoopers (PwC) explained that the ruling against the FSP shows that businesses have an obligation to provide empirical evidence supporting different apportionment methods.
The firm said the judgment highlights that an apportionment method must fairly reflect how mixed expenses are used, and that the business has the onus to prove this.
“The vendor, not SARS, bears the onus of proving it, on clear, reliable, and auditable evidence,” the firm said.
According to the Tax Administration Act, a business must prove that a proposed apportionment method is both fair and reasonable on the balance of probabilities.
In the recent case where the business lost the appeal, PwC said the FSP did not have enough evidence to back its proposed methodologies.
“It led to no empirical evidence, no cost analysis and no study of resource allocation or auditable data,” it said.
The firm said that transaction-based apportionment methods could be vulnerable in the future because they rely on subjective decisions.
“Methods driven by transaction counts may be vulnerable where exempt activities remain the main economic driver of the business,” it said.
“Turnover is drawn from audited records, whereas transaction counts rest on subjective choices.”
PwC said that in the future, businesses should be prepared for more work when requesting a different apportionment method.
“Materially more work may be needed with management, finance teams, and advisers to build the factual record, cost analysis, and support required to persuade SARS and, if necessary, a court,” the firm said.
“The case highlights that a method will not be accepted simply because it gives a higher VAT recovery. It must be fair, reasonable, and supported by facts.”
“This decision has immediate relevance for vendors in the financial services industry and could impact other vendors that are using or considering applying for a specific apportionment method.”
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