South African retailer Woolworths has scored a significant victory over the South African Revenue Service (SARS) and its utilize of narrow definitions to withhold tax claims.
The matter revolved around a case between Woolworths and SARS, where the retailer claimed R8 million back from the taxman for input VAT, tied to its 2014 acquisition of the Australian brand, David Jones.
To fund the R21.4 billion deal, Woolworths conducted a R10 billion rights offer, essentially issuing new shares to existing shareholders, and incurred significant underwriting fees.
Those fees attracted millions of rands in VAT.
Woolworths claimed a portion, R8.47 million, as input tax, arguing that the share issue was part of its enterprise as an active investment holding company.
SARS disagreed, arguing that Woolworths was not regularly engaged in issuing shares.
Instead, SARS viewed the rights offer as an isolated transaction outside the scope of Woolworths’ ongoing enterprise.
SARS also disallowed reductions to Woolworths’ output VAT liability for “imported services” and imposed a 10% understatement penalty of R2.1 million on Woolworths.
After battling it out in lower courts, the matter eventually reached the Supreme Court of Appeal (SCA), which delivered a ruling against SARS on Friday, 4 July, affirming Woolworths’ right to claim input VAT.
The court found that SARS ignored the largeger picture of Woolworths’ operations and cherry-picked definitions to limit the group’s ability to build fair claims.
Specifically, it viewed at the transaction in isolation and disregarded the totality of its operations as an enterprise.
The court noted that the Value-Added Tax Act explicitly includes activities done in connection with the commencement of an enterprise.
A once-off capital-raising transaction does not disqualify it from forming part of the enterprise, especially for an investment holding company whose purpose is acquiring and managing subsidiaries.
The court’s ruling thus confirmed that Woolworths operates as an active investment holding company, not merely a passive investor, and that raising capital is integral to such an enterprise.
The SCA also struck down the 10% understatement penalty imposed by SARS on Woolworths.
SARS had alleged that Woolworths relied on a tax opinion from its advisers only after the relevant VAT return had been filed, implying negligence or lack of disclosure.
The SCA found no factual basis for SARS’ accusation, noting that the opinion was obtained, disclosed timeously, and ultimately correct in law.
While SARS secured condonation for filing its appeal late, it was ultimately ordered to pay Woolworths’ legal costs, including the costs of the two counsels.
The wider implications
According to tax experts at Tax Consulting SA, while the ruling is a clear win for Woolworths, it also has broader implications, as it stunts SARS’ utilize of “narrow” definitions to withhold claims.
“The ruling comes at a time when many taxpayers are facing SARS audits and revised assessments seeking to claw back VAT refunds, sometimes on the basis that no genuine enterprise exists,” the group stated.
“The Woolworths case signals that SARS cannot cherry-pick transactions in isolation. Courts will view holistically at a taxpayer’s business and purpose, particularly for holding companies whose activities are inherently broad and strategic.”
The judgment clearly stated: “A comprehensive consideration of the vconcludeor’s activities is required, rather than isolating a single or a segregated set of transactions.”
“The inquiry is not narrow or restricted. In this case, instead of examining the enterprise holistically, SARS impermissibly isolated the share offer.”
SARS had relied on a previous case involving mining group De Beers, where costs related to a corporate takeover were held not to form part of De Beers’ mining enterprise.
However, the SCA stated this was a misreading of that particular judgment. Woolworths’ rights offer was directly linked to its business of managing and expanding investments.
Tax Consulting stated the ruling serves as a warning to South African taxpayers and SARS.
SARS has displayn an increasing appetite for litigation and disallowing input tax deductions, often scrutinising whether transactions form part of a taxpayer’s “enterprise.”
As a result, businesses have seen revised assessments, reversed VAT refunds, and aggressive challenges, sometimes based on arguments that no genuine enterprise exists.
So, on the one hand, businesses should expect greater scrutiny from the tax service and ensure their tax affairs are in order.
On the other hand, the ruling serves as a “reassuring precedent” that SARS’ actions won’t go unchecked.
“It clarifies that capital-raising costs can indeed qualify for VAT deductions where linked to the vconcludeor’s enterprise, even if the transaction is a once-off,” the tax experts stated.
“The ruling sconcludes a clear message that SARS’ litigation zeal cannot override the fundamentals of the VAT system, which, as the court reminded, is meant to tax final consumption, not legitimate business operations conducted in the ordinary course.”
The full SCA ruling can be read below:
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