SCA Rules on Woolworths Input Tax for Capital Raising

The Supreme Court of Appeal of South Africa (SCA) dismissed the appeals submitted by the South African Revenue Service (SARS) in the case between SARS and Woolworths Holdings Limited, an investment holding company listed on the stock exchange. The central issue was whether Woolworths Holdings was entitled to deduct input tax on the underwriting services it acquired for a rights offer used to raise capital to finance its acquisition of the Australian retailer David Jones Limited in 2014.

Facts of the Case and SCA Reasoning

In 2014, Woolworths Holdings acquired David Jones for 21.4 billion (around USD 1.23 billion), funding the deal through existing cash reserves, new debt facilities, and a ZAR 10 billion (around USD 576 million) fully underwritten renounceable rights offer made to both resident and non-resident shareholders. To complete this transaction, the company engaged both domestic and foreign service providers for underwriting and financial advisory services, incurring substantial fees.

Subsequently, the company claimed VAT incurred on these services as input tax, apportioning it between taxable and exempt supplies based on the residence of the shareholders. More specifically, the portion of the rights offered to non-resident stakeholders was treated as a zero-rated taxable supply. In contrast, the portion provided to resident shareholders was considered an exempt financial service.

However, SARS rejected this appropriation, denied the input tax deduction, and imposed VAT on foreign services as imported services, adding a 10% understatement penalty in the process. The main reason for this was that SARS determined that Woolworths Holdings did not engage in share-issuing activities regularly or continuously enough to constitute an enterprise for VAT purposes.

In proceedings preceding the one before the SCA, the Tax Court disagreed with SARS' decision, finding that Woolworths Holdings was an active investment holding company engaged in acquiring and managing subsidiaries and raising capital to fund its acquisitions. The SCA confirmed this reasoning, emphasizing that Woolworths Holdings was not a passive investor but an active investment holding company engaged in managing, financing, and expanding its group structure.

On the issue of imported services, the SCA concluded that the services provided by foreign providers were not imported services under the VAT Act since they were used in making taxable supplies in the course of the company’s activity. Consequently, Woolworths Holdings was not liable for additional VAT on these services.

Conclusion

The case between the SARS and Woolworths Holdings Limited provides valuable guidance for investment holding companies on the VAT treatment of capital-raising and investment-related expenses, emphasizing the need to demonstrate a clear link between the expenditure and the enterprise’s taxable activities. 

However, due to the specifics of the case, the ruling is narrow in its scope, which is confirmed by the SCA, which distinguished this case from the earlier CSARS v De Beers Consolidated Mines Ltd, where VAT on takeover-related expenses was found non-deductible because De Beers’ enterprise consisted of mining and selling diamonds, not investment or capital management.

Source: South African Revenue Service