Whether VAT Ruling issued by Commissioner for the South African Revenue Service to the first applicant should be declared unlawful and set aside; whether the respondent should be directed to issue a VAT Ruling allowing the second applicant to register for VAT as envisaged in the definition of "enterprise" in section 1(1), and whether the second applicant should be directed to, upon registration, account for VAT at the zero rates on services supplied to the first applicant under section 11(2)(o) and (k).

Background

Wenco International Mining Systems Limited (“Wenco Canada”, “first applicant”) is incorporated and has its principal place of business in Canada. It specialises in the development of software for the mining industry and supplies its clients with management systems software, maintenance, safety, and machine guidance to manage mining operations. Wenco set up a local branch in South Africa (‘Wenco SA’,  “second applicant”). Although Wenco SA (SA branch of Wenco Canada) is also incorporated in Canada, Wenco SA has its principal place of business and registered address in Centurion, South Africa.

 

 

Wenco SA is responsible for rendering services such as training, system support, site visits, and installation to South African and other African clients of Wenco Canada. These services are rendered by Wenco SA for and on behalf of Wenco Canada. Wenco SA charges Wenco Canada a management fee for the rendering of these services. All contracts between Wenco Canada and its clients are concluded and signed in Canada. The dispute that was the subject of the application centred around the interpretation of the definition of ‘enterprise’ in section 1(1), read with section 8(9), of the VAT Act.

Wenco’s case

Wenco Canada had made an application to the CSARS for a VAT ruling confirming that:

  1. On the basis that Wenco SA carries on an ‘enterprise’ in South Africa, Wenco SA (and not Wenco Canada) should register as a VAT vendor in South Africa; and
  2. Wenco SA should account for VAT at the zero rate on the services it supplies to Wenco Canada. Pursuant to the application for the VAT ruling, CSARS issued a ruling concluding that Wenco Canada was required to register as a VAT vendor in South Africa in respect of its own activities (i.e. those conducted by the local branch); and that Wenco Canada, once registered for VAT, was required to charge VAT at 15% for services rendered in SA to its SA clients, and VAT at 0% to its clients outside of SA.

The applicants (Wenco Canada and Wenco SA) argued that in the context of their operations, Wenco SA and Wenco Canada function separately and, as such, should be recognised as separate persons for VAT purposes. It was therefore argued that Wenco Canada should not be required to register for VAT in South Africa, on the basis that its South African activities are conducted by Wenco SA. Accordingly, it was argued that Wenco SA should register for VAT and levy VAT at 0% on its supplies to Wenco Canada.

SARS' case

SARS argued that Wenco Canada conducts a continuous and regular activity in South Africa by using locally situated resources and that it is in the course or furtherance of this activity that Wenco Canada, in exchange for consideration, provides software and training services to clients within and outside of South Africa. Accordingly, SARS argued that the activities of Wenco Canada could not be attributed to the local branch.

Judgement and court decision

The Court reviewed the agreement between the applicants and stated that, although the activities of Wenco SA could constitute the physical act of rendering services in South Africa, from a legal viewpoint it appeared that the position of Wenco SA was merely that of an agent acting on behalf of Wenco Canada in SA.

Accordingly, the Court held that Wenco SA was not required to be registered as a VAT vendor and that Wenco Canada, therefore, had the obligation to register for VAT in South Africa and charge VAT at 15% for services rendered in South Africa to its South African clients and VAT at 0% to its clients outside of South Africa.

VAT pointers

The decision has significant VAT implications for entities that have adopted structures similar to that of the applicants. Based on the decision, there is now a disparity between branch and subsidiary structures. In future, many non-resident companies may have to deregister their South African local branches for VAT purposes and register for VAT in South Africa. It is also unclear how SARS intends to deal with existing registrations in the context of similar structures.

International collaboration

Debt management