ARTICLES

The deductibility of value added tax on costs incurred to raise share capital: A critical analysis of the ITC 1744 case

Die aftrekbaarheid van belasting op toegevoegde waarde op kostes aangegaan om aandele uit te reik: 'n Kritiese ontleding van die ITC 1744-saak

Pieter van der Zwan^I; Madeleine Stiglingh^II

^IBcom (Hons), Mcom Taxation, Chartered Accountant (SA) Senior lecturer, School of Accounting Sciences, North-West University
^IIBcom (Hons), Mcom Taxation, Dcom Taxation, Chartered Accountant (SA) Professor and Head of Department of Taxation, University of Pretoria

OPSOMMING

Maatskappye gaan dikwels wesenlike kostes aan by die uitreik van aandele om bedrywighede te finansier. Tans voer die Suid-Afrikaanse Inkomstediens (SAID) aan dat belasting op toegevoegde waarde (BTW) aangegaan op aandeeluitreikingskoste nie aftrekbaar is nie. Hierdie siening is gebaseer op die ITC 1744-saak. Die uitspraak in die ITC 1744-saak is gebaseer op die mening uitgespreek in 'n Europese hofsaak wat in 1994 beslis is. Sedertdien het die European Court of Justice (ECJ) in 'n aantal sake die aftrekbaarheid van BTW op aandeeluitreikingskoste oorweeg en beslis dat insetbelasting in sekere gevalle aftrekbaar sal wees. In hierdie artikel word die vraag gestel of argumente soortgelyk aan die argumente gevolg deur die ECJ in Suid-Afrika aangevoer kan word. Gebaseer op die ontleding van die argumente in die ECJ-beslissings, binne die konteks van die Suid-Afrikaanse wetgewing, word aangevoer dat daar gebiedende gronde bestaan om in Suid-Afrika te argumenteer dat 'n aandeeluitreiking nie 'n lewering daarstel nie en dat aandeeluitreikingskoste as 'n algemene bokoste beskou kan word. Hierdie argumente kan die SAID aanmoedig om die siening wat tans gehuldig word by die aftrekbaarheid van BTW op aandeeluitreikingskoste in Suid-Afrika, te hersien.

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* The authors acknowledge the valuable feedback and input to the article by Ferdie Schneider, Pierre-Pascal Gendron, Eugen Trombitas, Micheal Evans, Jolayne Trim and Piet Nel.
1 Du Toit et al Corporate Finance: A South African Perspective (2010) 336.         [ Links ]
2 For example, a placement fee of 20 per cent of the proceeds received from the share issue was incurred in the case of ITC 1744 65 SATC 154 for a placement of shares in the venture capital market.
3 Gasparotto "Achieving clarity on VAT for holding companies" (2008) International Tax Review March 2008.
4 VAT is levied on the supply of these services in terms of s 7(1)(a) Value Added Tax Act 89 of 1991 (the VAT Act). The proviso to s 2(1) specifically excludes activities relating to the issue of shares from the definition of financial services to the extent that it attracts a fee, commission, merchant's discount or similar charge. These financial services are therefore not exempt from VAT in terms of s 12.
5 For example, share issue costs of R114 (including VAT) are reduced to R100 if input tax can be deducted. If input tax cannot be deducted this cost remains at R114. The deductibility of input tax therefore reduces the cost to the company paying the share issue costs by 12.28 per cent (calculated as R14/ R114).
6 Firer et al Fundamentals of Corporate Finance (2004) 505.
7 65 SATC 154.
8 Idem 158.
9 European Court Reports PI-0983 ("BLP Group Plc case").
10 ITC 1744 158.
11 De Koker Silke on South African Income Tax (2010) § 25.4.
12 Badenhorst et al Ensight (2010) February 2010, available at http://www.ens.co.za/newsletter/briefs/taxFeb10entitlement.html (accessed 201011-20); Silver "Share transactions - A VAT chance?" Deloitte Tax News 2 2010, ( http://www.deloitte.com/assets/Dcom-SouthAfrica/Local%20Assets/DocumentsTTax%20News%202%20of%202010.pdf'(accessed 2010-11-20); Schneider "Tax authorities adopt more practical approach for financial services" KPMG Global Indirect Taxes (2009); PricewaterhouseCoopers "Holding company expenses - Have you over-claimed input VAT?" VAT Alert (2009) 2009-11-05.
13 The views expressed in the judgments were in terms of the Sixth Council Directive 77/388/EEC of 1977-05-12 on the harmonisation of member states' laws relating to turnover taxes - Common system of value added tax: uniform basis of assessment Official Journal L 145 13/06/1977 P 0001 -0040 (hereinafter referred to as the "Sixth Directive"), the statute that governs VAT in the European Community.
14 Stewart & Bernier "Deductibility of VAT on the cost of issuing new shares" International Tax Review September 2004.         [ Links ]
15 ITC 1744 156.
16 Definition of input tax in s 1 VAT Act.
17 This view of the company was based on the assumption that the issue of shares is an exempt supply in terms of s 12(a) & s 2(1)(d) VAT Act. This assumption proved to be contentious in the ECJ cases discussed in Part 3 of this article.
18 ITC 1744 156.
19 1996 STC 372 (hereinafter referred to as the " UBAF Bank case").
20 Article 1 7(2) of the Sixth Directive.
21 ITC 1744 158.
22 Supra.
23 ITC 1744 158.
24 ITC 1744 158. The ECJ judgments subsequent to the BLP Group Plc case established the principle that issuing shares is not a supply and can therefore not be exempted. This casts some doubt on whether Conradie J's view that the principles laid down in respect of the transfer of shares could similarly be applied in the context of share issues was appropriate.
25 ECJ Case C-16/00 (hereinafter referred to as the "Cibo case").
26 Cibo case § 9.
27 Refer to the discussion of the Cibocase in the KapHagcase below.
28 Cibo case § 14.
29 Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes - Common system of value-added tax: uniform basis of assessment.
30 Cibo case § 41. A similar view was put forward with reference to the South African context by Connell "Holding Companies to account: The expense apportionment conundrum" 2004 SALJ11 7.
31 Cibocase 26 § 22.
32 Idem § 24.
33 Idem § 27 & § 29.
34 Idem § 31.
35 Idem § 33.
36 ECJ Case C-442/01 (hereinafter referred to as the "Kap Hag case").
37 Idem § 12-15.
38 Idem§ 22.
39 Idem§ 24 & § 42.
40 Idem 34 § 25.
41 Idem 34 § 41.
42 Article 13B(d)(5) of the Sixth Directive exempts "transactions, including negotiation, excluding management and safekeeping, in shares, interests in companies and associations, debentures and other securities" from VAT.
43 ECJ Case C-465/03 (hereinafter referred to as the "Kretztechnikcase").
44 Idem § 12-14.
45 Firer et al 158.
46 Kretztechnik case § 15.
47 Idem § 24-28.
48 Idem§ 20.
49 Idem§ 36.
50 Idem§ 38.
51 ECJ Case C-437/06 (hereinafter referred to as the "Securentacase").
52 Idem § 13.
53 Idem§ 28.
54 Idem§ 29.
55 Idem § 17.
56 Idem§ 25.
57 Idem 49 § 31.
58 ECJ Case C-29/08 (hereinafter referred to as the "SKF case").
59 Idem§ 20-24.
60 Idem 56 § 73.
61 Idem 56 § 73.
62 Illustrated by the KapHag, Kretztechnik and Securenta cases.
63 Illustrated in the SKF case.
64 Held in the Cibocase, and applied in the Kretztechnik, Securentaand SKF cases.
65 Illustrated in the Kretztechnikcase and applied in the Securentacase.
66 De Koker § 25.4. In the case of ITC 1853 The Taxpayer (2011) 135 (ITC 1853 case) it was reiterated that it should be considered whether arguments followed in other jurisdictions were decided under comparable VAT or GST legislation if similar arguments are put forward in the South African VAT context.
67 Myburgh & Schneider Managing VAT(2007) 3.
68 Schenk & Oldman Value Added Tax: A comparative approach (2007) 112.
69 Refer to the Kretztechnik & Securenta cases.
70 S 7(1)(a) VAT Act.
71 As the object of the article is to consider the deductibility of VAT incurred on share issue costs, the discussion will be limited to an analysis of the nature of share issues in South Africa. Hence, the nature of admission of a partner into a partnership will not be considered in the South African context.
72 Definition of supply in s 1 VAT Act.
73 Goods & Services Tax Act 41 of 1985 ("GST Act").
74 Blue Circle Cement Ltd v CIR 1984 2 SA 764 (A).
75 62 SATC 97 ("Shell's Annandale case").
76 2002 3 SA 111 (Tk HC).
77 Databank Systems Ltd v CIR [1987] NZLR 312 (HC).
78 Rotorua Regional Airport Ltd v CIR(2010) 24 NZTC 23, 979 (HC).
79 Pacific Tawling Ltd & Anor v Chief Executive of the Ministries of Fisheries & Anor (1999) 2 NZLR 388.
80 Commissioner of Inland Revenue v New Zealand Refining Co Ltd(1997) 18 NZTC 13,187 (CA).
81 Trombitas "GST Fundamentals: Supply and out-of-scope transactions" in Taxation issues: Existing and emerging (ed Maples & Sawyer ) (2011).
82 2001 STC 192 (Ct. App. 2001)(UK).
83 HMRC Business Brief'12/2005 (2005-06-15).
84 Definition of supply in s 1 VAT Act.
85 Definition of exempt supply in s 1 VAT Act.
86 s 12(a) VAT Act.
87 Definition of financial service in s 1 VAT Act.
88 s 2(1)(d) VAT Act.
89 There have been instances where provisions in South African tax legislation have been drafted to specifically refer to an item, while that item was not within the scope of the provision. An example of such drafting was s 64B(5)(c) of the Income Tax Act 58 of 1962 that, prior to the amendment by the Revenue Laws Amendment Act 74 of 2002, exempted liquidation dividends declared from profits of a capital nature from STC. In terms of paragraph (a) of the definition of a dividend, liquidation distributions made from profits of a capital nature were specifically excluded from a dividend as defined. S 64B(5)(c) therefore exempted a transaction that was never a dividend from STC, a tax that was only levied when a dividend was present.
90 This is the reason provided by the Australian tax authorities for viewing the issue of shares as a supply (Evans "Capital raising costs - the wrong side of the mirror?" 2007 The Tax Specialist 126).
91 The Australian Goods and Services tax system [A New Tax System (Goods and Service Tax) Act (1999)] uses the words "financial supplies" as opposed to "financial services" in the South African legislation. The definition of financial supplies states any provision of an interest in an equity as a form of property is a financial supply.
92 Refer to the Cibo, Kretztechnik and Securenta cases.
93 Definition of input tax in s 1 VAT Act.
94 s 16(2) VAT Act.
95 s 16(3)(a)(i) VAT Act.
96 s 17(1) VAT Act.
97 Art 17(2) Sixth Directive.
98 Article 2(1) Sixth Directive.
99 Definition of taxable supply in s 1 VAT Act.
100 Ibid. 7 at 157.
101 In terms of s 3A(1) New Zealand GST Act input tax is defined as "tax charged under s 8(1) on the supply of goods and services made to that person, being goods and services acquired for the principalpurpose of making taxable supplies" (own emphasis). Neither the VAT Act nor the Sixth Directive requires goods or services to have been acquired for the principalpurpose of making taxable supplies in order to be able to deduct input tax. It is submitted that this requirement may impact significantly on whether a direct link is required between the goods or services acquired and the input tax incurred, as was illustrated by the judgment in the case of the CIR v Trustees in the Mangaheia Trust and Trustees in the Te Mata Property (2009) 24 NZTC 23 711.
102 De Koker § 25.4.