A recent decision by the Court of Justice of the European Union (EU), relating to the Value Added Tax (Vat) treatment of directors’ fees, shines the light on South African national legislation.
It creates an opportunity to relook our own interpretation and to determine whether it is really necessary to levy Vat on directors’ fees, says Charles de Wet, tax executive at ENSafrica in response to the court decision.
The European case involves a lawyer based in Luxembourg who acts as a director on the boards of several companies. The case was highlighted in a PwC article, published late in December last year.
The case
The lawyer is remunerated by way of a percentage fee and does not charge Vat on his services. Following an audit, the tax authorities challenged his Vat position and argued that his activities should be subject to Vat as it relates to “economic activity” as defined in the EU Vat directive. He appealed the Vat assessment raised on his fees.
The lawyer argued that a member of a board of directors does not carry out his activities independently, but as a “member of a collective organ which represents the legal person”.
Such activity would only be considered independent if the person concerned performed the activities “in his own name, on his own behalf and under his own responsibility”, and where he bears the economic risk associated with carrying out those activities.
The lawyer submitted that the economic risk associated with the activity of the members of the board as a collective body is borne by the company, and not by the director himself.
The court had to consider whether a director of a public limited company is carrying out an “economic” activity and more specifically, whether the percentage fees can be regarded as remuneration paid in return for services provided to that company. The court was also asked to consider whether a director is acting “independently”.
The court found that in the situation of a public limited company, the director does not assume any risk independently.
The PwC article highlighted the fact that it is the “body of members” that is liable and not the members personally.
An economic activity should be recognised if the director receives a predictable compensation for his services with a certain degree of permanence. In this case, the duration was a maximum of six years.
Although it was common to only pay director’s fees if the company was in a profit-making position, an economic activity would still be characterised if the shareholders allocate remuneration even though the company would not be profit-making, the PwC article added.
The court concluded that even though the director had no subordinate relationship with the company, he was still not acting independently and would, therefore, not be seen as a taxable person from a Vat perspective.
The SA law
In South Africa, independent directors’ have been charging Vat for their services since the South African Revenue Service (Sars) issued a binding general ruling in February 2017.
In terms of the ruling, non-executive directors had to register and account for Vat when their fees exceeded the R1 million Vat threshold in a 12-month period.
Sars classifies them as independent contractors rather than employees.
However, the EU not only considered whether the director’s relationship with the company was similar to an employer and employee, but also whether his activities were conducted in his own name, on his own behalf, and under his own responsibility.
De Wet explains that, in essence, the court found that the director was taking decisions on behalf of the company and, therefore, not independent from the company, although he was not in an employee-and-employer relationship.
“This case does offer us the opportunity to reconsider our own interpretation of the Vat treatment of directors, and whether it is necessary for directors to register, charge and account for Vat.”
Wider consideration
De Wet says if the approach of the EU court was followed in the contentious case between Sars and Citibank, the outcome might have been different. In that case, Sars raised a Vat assessment on foreign assignees’ salary costs.
Citigroup SA is a branch of the global group of companies, Citigroup, and Citigroup Global Markets is the wholly owned subsidiary of Citigroup Financial Products. They employ individuals who are seconded from other entities within the Citigroup.
Citigroup SA and Citigroup Global Markets asked the court for clarity whether they should be liable for Vat. They argued that the seconded employees were their employees because they placed their “productive capacity” at the disposal of the South African entities. They also argued that they had the right to supervision and control over the seconded employees for the duration of their secondment.
Sars argued that it was not a question of whether the seconded employees were employees in terms of the South African law. The foreign Citibank entity paid the salary and the SA companies reimbursed them for the payments made directly to their seconded employees.
Sars argued the local companies were liable for Vat on “imported services”. The court agreed with Sars.
Amanda Visser is a freelance journalist who specialises in tax and has written about trade law, competition law, and regulatory issues.
Disclaimer: The views expressed in this article are those of the writer and are not necessarily shared by Moonstone Information Refinery or its sister companies. The information in this article does not constitute financial planning, legal or tax advice that is appropriate to every individual’s needs and circumstances.
