South Africa: Deductibility of VAT on fees paid non-executive directors

South Africa: Deductibility of VAT on fees paid

The South African Revenue Service issued guidance on the value added tax (VAT) treatment of fees paid to non-executive directors. The guidance—Binding General Ruling 41—is effective 1 June 2017.

1000

Related content

In general, non-executive directors earning fees in excess of R1 million for any 12-month period are liable for VAT registration and will be required to charge VAT on their fees for services rendered. A matter that also deserves consideration is whether the company receiving the supply of services from the non-executive director is permitted to deduct the VAT incurred.

Deductibility of input VAT for fees paid non-executive directors

Under South Africa’s VAT law, a vendor may deduct input tax, provided that certain documentary requirements are satisfied. Input tax is the amount of VAT incurred on goods or services acquired by the vendor wholly for the purpose of consumption, use or supply in the course of making taxable supplies, or to the extent that the goods or services are acquired for taxable purposes. “Taxable supplies” are supplies on which VAT is levied at 14% or 0%.

When a non-executive director charges VAT on services provided to a vendor, it must be determined whether or not those services were acquired by the vendor for the purposes of making taxable supplies. When the services relate, for example, to the issue of shares, loan financing, or the transfer of a debt security, they will be acquired for an exempt purpose, and not a taxable purpose. Alternatively, when the services are acquired for Board of Director committee activities that relate both to operational and financial matters, it could be argued that the expense cannot be directly attributed to either taxable or exempt supplies. It must then be determined what the VAT recovery percentage of the vendor is, as the VAT incurred may not be deductible in full.

Another potential complication is that shareholders approve the non-executive directors’ fees. It follows that when the VAT incurred may not be deductible by the company concerned, the VAT incurred will become a cost and, in turn, be regarded as an additional expense incurred by the company. Such expense may not have been approved by the shareholders, as the assumption may have been that the approved directors’ fees would be net of VAT. The question would then be how this would be managed at the shareholder level so that companies are not in breach of the Companies Act.

 

Read a June 2017 blog item posted by the KPMG member firm in South Africa

The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.

Connect with us

 

Request for proposal

 

Submit

KPMG's new digital platform

KPMG International has created a state of the art digital platform that enhances your experience, optimized to discover new and related content.