VALUE-ADDED TAX

2132. Consumer Business Industry

November 2012 - Issue 158

Treatment of rebates and discounts

It is common in the FMCG industry (fast moving consumer goods) for wholesalers to grant allowances to retailers in the form of discounts, rebates and incentives.

These allowances may either result in the previously agreed consideration for a supply being altered, or may represent payment by the supplier for a supply of services by the retailer.

In the first instance, the wholesaler (supplier) would be obliged to issue a credit note to the recipient of the discount. In the latter instance, the recipient of the payment (the retailer) would be obliged to issue a tax invoice to the wholesaler in respect of the service rendered.

To the extent that zero-rated goods had been supplied, an alteration of the price would have no VAT effect, whereas a rebate comprising consideration for the supply of a service would allow the party paying the rebate an input tax deduction, whereas the recipient would have to account for output tax.

Where standard rated goods or services are the subject of the sale, the same net VAT effect will result, whether the rebate constitutes a discount or consideration for a separate service.

The supporting documentation will, however, not be the same in each instance – the one case requiring a credit note and the other a tax invoice.

It is often difficult to establish whether a rebate is granted in order to alter previously agreed consideration for a supply or whether there is payment for a supply of services. It was in order to address this uncertainty that SARS issued Binding General VAT Ruling (BGR) No. 6 in 2011.

In order to establish whether any payment has been made in respect of, in response to or for the inducement of the supply of a service, one would normally ask whether the recipient has actually been paid to do something.

Perhaps illustrating just how difficult it is to determine whether a rebate is paid in respect of “something done”, or as an alteration to the purchase price, SARS has opted to distinguish rather between variable and fixed allowances, the first being considered an alteration to a previously agreed price and the latter, consideration for a separate service.

In terms of the BGR, a variable allowance is granted to a retailer where the retailer is obliged to satisfy certain conditions stipulated in the terms of trade agreement. Examples of variable allowances include guaranteed allowances, early settlement allowances, growth rebates, advertising allowances, swell allowances, category management allowances, incentive discount/trade rebates, franchise store allowances, broad-based range scorecard allowance, house/brand/quality assurance allowances and bulk allowances.

These allowances would typically be calculated as a variable of the value of purchases or sales.

Fixed allowances, on the other hand, are considered to be payment for actual services rendered. These allowances include a new store allowance, a major refurbishment allowance, a specific promotional/Gondola/Ad hoc allowance and a post-recession allowance.

In proposing this distinction, SARS seems to have opted for a pragmatic approach that would render greater certainty as opposed to a principled approach. It is difficult, for instance, to see how payment for the undertaking to exchange information (e.g. category management allowances) would not be consideration for something done, even though it is agreed upon upfront as a variable allowance.

Similarly, it is hard to see how a post-recession allowance paid to a retailer to decrease the effects of a recession could be payment for “something done”, simply because it is a fixed allowance and not variable. It does not appear as if the retailer would actually undertake to “do something” in return for this receipt and it may well simply be a reduction in the price of the goods purchased in order to allow the retailer to weather the recession.

Difficult questions as to whether or not a rebate constitutes payment for a service or an alteration to an agreed price may, however, now be avoided by structuring the rebate as either a variable or fixed allowance, based on the distinction in the BGR.

The BGR does indicate, however, that the rebates listed do not constitute an exhaustive list. When specific rebates are agreed upon that fall outside the list in the BGR, contracting parties would probably be well-advised to carefully consider the nature of the rebates in question.

In this regard, the distinction made by SARS does not seem well-founded in law and SARS would technically only be bound by the BGR relative to the items explicitly listed in the BGR. The mere fact that a rebate is made variable, as opposed to a fixed allowance, may not always be enough to guarantee that it would not be seen as consideration for the making of a supply.

A further complexity that SARS has not addressed in the BGR is the finding of the court in GUD Holdings (Pty) Ltd v Commissioner for the South African Revenue Service [2007] 69 SATC 115 where it was held that an early settlement discount does not so much constitute a discount as it does a late payment penalty.

Whereas the granting of a discount would require an adjustment to the VAT accounted for on the original supply, the payment of a penalty brings into question whether VAT should have been accounted for at all on the part of the payment that constitutes the penalty.

Unallocated deposits and duplicate payments

At a time of austerity measures all round, it is interesting to note how often vendors still receive duplicate payments or cash deposits that they are unable to allocate to any specific supply.

A year or two ago, SARS recognised the frequency and magnitude of such payments and pronounced that it too would want its share where the overpayments were not refunded.

Section 8(27) of the Value Added Tax Act No 89 of 1991 was introduced in 2006. This section provides that where any amount is received –

such excess amount shall be deemed to be consideration for a supply of services performed in the course or furtherance of that vendor’s enterprise.

Output tax would therefore have to be accounted for in respect of such excess amount in the period in which the end of the four month period fell.

To the extent that the amount is subsequently refunded, the vendor may claim the tax fraction of such amount as a deduction.

The example used in the Explanatory Memorandum issued by SARS at the time of the amendment refers to a customer who makes a payment on receipt of a tax invoice for a taxable supply, with the same payment being made later on receipt of a statement. Clearly, the excess payment in this example would relate to the making of a taxable supply and section 8(27) would apply.

It is not so clear, however, whether or not unallocated deposits could be said to have been received in respect of a standard rated taxable supply. In this situation, vendors may well be able to formulate a reasonable argument why such receipts would not be subject to VAT at 14%.

In this context, however, it is important to note that if and when questioned by SARS, the onus will be on the taxpayer to demonstrate why such receipts were not subjected to VAT.


Deloitte
VAT Act: Section 8(27)
Binding General Ruling: BGR 6