Updated BGR 41
On February 10 2017 the South African Revenue Service (SARS) issued Binding General Ruling (BGR) 41, in which it ruled that non-executive directors (NEDs) should register and account for value added tax (VAT) on their directors' fees where the fees exceed the VAT registration threshold of R1 million in a 12-month period, as they considered to be independent contractors rather than common law employees. BGR 41 took effect on June 1 2017.
On May 4 2017 SARS issued an updated BGR 41 in which it determined that, in accordance with Section 23(4)(b) of the VAT Act (89/1991), the VAT registration liability date for NEDs was June 1 2017. The updated BGR 41 further clarifies that where NEDs were already registered for VAT, but had neither levied nor accounted for it on their directors' fees, they must have started charging and accounting for VAT on such fees by no later than June 1 2017.
The appointment of a director, including an NED, is a statutory appointment under the Companies Act (71/2008), which also prescribes the role, function and duties of such a position. The question remains as to whether an NED, in merely performing his or her statutory duties, carries on an 'enterprise' as defined in the VAT Act for which the NED must register for VAT. Nonetheless, in view of SARS's ruling – until a court rules otherwise – an NED who receives directors' remuneration in excess of the R1 million VAT registration threshold must have registered and accounted for VAT as of June 1 2017 in accordance with the updated BGR 41 or risk being held liable for the VAT, penalties and interest.
In determining the liability date of June 1 2017, SARS may not have considered that Section 66(9) of the Companies Act provides that directors' remuneration may be paid only in accordance with a special resolution approved by the shareholders within the previous two years. Thus, a company cannot increase its directors' remuneration without its shareholders' prior approval by way of a special resolution. The directors' remuneration paid to NEDs who were required to register for VAT from June 1 2017 will be considered to be VAT inclusive in terms of Section 64 of the VAT Act unless prior shareholder approval for an appropriate increase was obtained before that date.
Section 67 of the VAT Act provides for a VAT amount to be levied in addition to a fee charged for services where:
- VAT has been imposed for the first time on such services in accordance with the VAT Act; or
- the VAT rate has been increased.
In SARS's view, directors' fees paid to NEDs have always been subject to VAT and thus no amendment to the VAT Act is required. Rather, SARS has merely advised with regard to Section 23(4)(b) of the VAT Act that NEDs need only to register and account for VAT from June 1 2017. Accordingly, the VAT on directors' fees paid to NEDs is not imposed for the first time in terms of the VAT Act, as contemplated by Section 67 therein, and a NED will thus be unable to rely on this provision.
Questions have also arisen with regard to the VAT position of non-resident NEDs. A person must register for VAT if he or she carries on an 'enterprise' (ie, an activity on a continuous or regular basis in or partly in South Africa during the course of which goods or services are supplied for a consideration). This means that only activities carried on in South Africa will give rise to VAT registration. In the absence of any specific place-of-supply rules in the VAT Act, it is open to interpretation as to where activities in relation to the supply of services are rendered.
SARS has ruled that an NED carries on an enterprise in the form of the supply of services. However, the nature of these services is not described. If the services rendered are considered to be the preparation for and attendance of board meetings, certain services – such as the review of papers in preparation for a board meeting while the NED is not present in the country – could be regarded as having been supplied outside South Africa. If the non-resident NED attends a board meeting in a foreign country by way of a video conference, a further question arises as to where such services are rendered. The NED's enterprise could therefore be considered to be rendered partly within and partly outside South Africa and, where the directors' fees attributable to the services rendered in South Africa are less than R1 million for a 12-month period, the non-resident NED may not have to register for VAT.
The VAT position of a South African NED serving on a foreign company's board is equally uncertain with regard to the obligation of such NED to register for VAT. If required to register, such directors' remuneration may qualify for the zero rate, but the burden of the VAT registration and submission of VAT returns will remain.
Although BGR 41 fails to provide clarity with regard to the above matters, NEDs may apply to SARS for a BPR to clarify their VAT status and obligation to register for VAT where their scenario is not specifically addressed in BGR 41.
For further information on this topic please contact Gerhard Badenhorst at Cliffe Dekker Hofmeyr by telephone (+27 11 290 7000) or email ([email protected]). The Cliffe Dekker Hofmeyr website can be accessed at www.cliffedekkerhofmeyr.com.