Commissioner for the South African Revenue Service v De Beers Consolidated Mines Limited

De Beers Consolidated Mines Limited (DBCM), a diamond mining and selling company, was the target of a takeover by a consortium comprising Anglo American PLC, Central Holdings Ltd (controlled by the Oppenheimer family) and Debswana. DBCM engaged NM Rothschild & Sons Ltd (NMR), a London-based company, as independent financial advisors to advise its board on whether the consortium's offer was fair and reasonable to independent unit holders. The transaction was implemented through a complex scheme of arrangement under s 311 of the Companies Act 61 of 1973, involving a buyback leg and a cancellation leg. DBCM also engaged various South African service providers (attorneys, auditors, brokers) to assist with the transaction. NMR invoiced DBCM US$19,895,965 (R161,064,684) for its services. South African service providers charged VAT which DBCM treated as input tax. SARS assessed that: (1) NMR's services were 'imported services' subject to VAT of R22,549,055.76; and (2) VAT charged by local service providers did not qualify as deductible input tax (R7,021,855.48). DBCM objected, appealing to the Tax Court which ruled in its favor.

• Whether foreign advisory services rendered by NMR constituted 'imported services' under the Value-Added Tax Act 89 of 1991
• Whether such services were 'utilized or consumed in the Republic otherwise than for the purpose of making taxable supplies'
• What constitutes an 'enterprise' for VAT purposes
• Whether services acquired to comply with statutory obligations to shareholders in a takeover are acquired 'for the purpose of making taxable supplies'
• Whether VAT on local advisory services qualifies for deduction as 'input tax'
• Where services were consumed when meetings took place both in South Africa and abroad

The appeal was upheld with costs (including costs of two counsel). The cross-appeal was dismissed with costs (including costs of two counsel). The order of the Tax Court was set aside and substituted with: 'The appeal against the assessments made by the Commissioner for the South African Revenue Service is dismissed with costs, including the costs of two counsel.'

For VAT purposes, an 'enterprise' means the actual commercial activities carried on continuously or regularly in the course of which goods or services are supplied for consideration. Services acquired by a company to enable it to comply with statutory obligations to shareholders in relation to a takeover (such as obtaining independent financial advice on fairness) are not acquired 'for the purpose of making taxable supplies' within the meaning of the Value-Added Tax Act, even where the company is legally obliged to obtain such services. Such services are acquired for purposes of the takeover transaction and compliance with duties to shareholders, not for the purpose of the operational enterprise (in this case, mining and selling diamonds). The same principle applies to determining whether VAT paid on services constitutes deductible 'input tax' - the services must be acquired for the purpose of consumption, use or supply in the course of making taxable supplies in the enterprise. Services are 'utilized or consumed in the Republic' where the recipient company is headquartered in South Africa and key decisions utilizing the services are made in South Africa, even if some meetings with service providers occur abroad.

The Court noted that the facts of the case were unique and hardly likely to be duplicated, and that conclusions were based on the curious facts of this particular case. The Court observed that Canadian and Australian income tax cases dealing with deductibility of takeover-related expenses were not applicable, as they dealt with different statutory tests under income tax legislation rather than VAT principles. The Court commented on peculiar features of how the transaction was structured (including the 1% buyback designed to utilize s 311 of the Companies Act and avoid US tax consequences, the artificial nature of the scheme, and the lower approval threshold). Navsa and Van Heerden JJA noted that DBCM's management could hardly be said to lack incentive or suffer from low morale given it was an internationally renowned and successful company, and that its disclosure as a public company was in any event extremely limited. The Court emphasized that the rationale behind VAT is to allow credit for input tax on overheads (costs properly incurred in the course of business which cannot be linked with any supplies to customers), citing the English case Customs and Excise Commissioners v Redrow Group plc [1999] 2 All ER 1 (HL).

This case provides important guidance on the interpretation of key VAT concepts in South African law: (1) The meaning of 'enterprise' under the VAT Act is limited to the actual commercial activities carried on for consideration, not all activities a company undertakes; (2) Services acquired to comply with statutory obligations to shareholders (such as obtaining fairness opinions in takeovers) are not acquired 'for the purpose of making taxable supplies' even if the company is legally obliged to obtain them; (3) The place of consumption for 'imported services' is determined practically based on where the recipient is located and where decisions utilizing the services are made; (4) The concept of 'overhead expenses' that form part of an enterprise does not extend to special duties imposed on companies in the interests of shareholders as individuals; (5) The decision draws a clear distinction between the operational VAT enterprise and corporate governance obligations arising from choice of corporate form. It emphasizes a purposive approach to determining whether services are acquired for making taxable supplies, focusing on the actual commercial purpose rather than indirect or incidental benefits.