Declaratory relief in tax matters

A question that may arise when a taxpayer applies for an advance tax ruling is whether remedies are available should the South African Revenue Service (“SARS”) decline to issue the ruling requested (or where it issues a ruling contrary to what was applied for - as in the matter discussed below).

In Mobile Telephone Networks (Pty) Ltd v Commissioner for the South African Revenue Service[1], Mobile Telephone Networks (Pty) Ltd (“MTN”) sought a private binding ruling from SARS in terms of section 41B of the Value-Added Tax Act (“VAT Act”).

The ruling sought was to the effect that the sale of pre-paid vouchers could be dealt with in terms of section 10(18) of the VAT Act. SARS ruled that section 10(19) of the VAT Act applied.

Historically, MTN accounted for VAT in respect of the supply of prepaid vouchers on the basis provided for in section 10(19) of the VAT Act.

Factual background

MTN explained that it supplied two types of vouchers:

• ????????a voucher which specified the goods which could be obtained by using the voucher. An example given was a data voucher where what is purchased is the right to use the volume of data purchased; and
• ????????prepaid vouchers which have a rand value and can be used to access a wide range of services offered by MTN (referred to as airtime vouchers).

Nature of MTN’s prepaid vouchers

MTN submitted the following with respect to the prepaid vouchers:

• ????????airtime was not something in and of itself (it should be construed as a right to the supply of services)
• ????????when activated, the subscriber can access any services on the network (up to the value of the voucher);
• ????????as services are used or acquired such services are billed for, at the then applicable tariff, and paid for by allocation or redemption of the available pre-paid funds attributed to the subscriber;
• ????????the pre-paid amount is effectively currency from which the subscriber pays for the services selected from time to time.

MTN explained its administrative process, in respect of pre-paid vouchers, as follows:

“MTN ‘credits a sum of money equal to the face value of the voucher to a ledger account linked to the relevant SIM card …’ This was referred to by MTN as the subscriber’s ‘main wallet’. When the subscriber accesses a service on the network, MTN debits the cost of that service from the balance in the ‘main wallet’.”

MTN compared the pre-paid vouchers to retail vouchers issued by a shop or shopping centre (issued for a rand value which allow the purchase of any goods stocked by that shop or shopping centre up to that value). MTN submitted that such vouchers functioned effectively as currency when presented for the purchase of a selected item (similar to its pre-paid vouchers).

Legislative background

Section 10 of the VAT Act provides rules to determine the value of supplies made.

Section 10(18) and 10(19) of the VAT Act respectively provide as follows:

“(18)?????Where a right to receive goods or services to the extent of a monetary value stated on any token, voucher or stamp (other than … any token, voucher or stamp contemplated in subsection (19)) is granted for a consideration in money, the supply of such token, voucher or stamp is disregarded for the purposes of this Act, except to the extent (if any) that such consideration exceeds such monetary value.

(19)???????Where any token, voucher or stamp … is issued for a consideration in money and …. which by usage or arrangement entitles the holder to specified goods or services, without any further charge, the value of the supply of the goods or services made upon the surrender of such token, voucher or stamp is regarded as nil.”

???????????????(bold wording reflects our emphasis)

The effect of the above provisions is as follows:

• ????????section 10(18) triggers VAT at the time the voucher is used to procure goods or services (and not at the time the voucher is supplied);
• ???????section 10(19) triggers VAT at the time the voucher is supplied (and VAT is not triggered at the time the voucher is surrendered).

MTN submitted that the difference between subsections 18 and 19 were that the former provision dealt with vouchers that specified value (rather than goods or services) and that the latter provision dealt with vouchers that specified the goods and services (rather than value). This difference was accepted by SARS (in principle).

SARS submitted that the questions that had to be answered were as follows:

• ????????whether prepaid vouchers constituted goods, or whether what could be exchanged for the voucher constituted goods or services that are specified by usage or arrangement; or?
• ????????whether a prepaid voucher was the voucher itself i.e., a form of currency that could be exchanged for an unspecified number of goods and services.

SARS contended that prepaid vouchers fell within the former category.

Issues before the Supreme Court of Appeal

The issues before the Supreme Court of Appeal were as follows

• ????????whether a declaratory order was appropriate in the circumstances; and

• ????????if appropriate, whether SARS’ ruling was incorrect.

SARS challenged the declaratory relief on three bases, being that (i) the relief amounted to a review, (ii) an appeal, or (iii) an objection to its ruling. SARS submitted further that none of these challenges were competent.

Review

SARS submitted that MTN’s prayer 3, seeking to set aside its ruling, was not competent as decisions of functionaries may only be set aside in review proceedings (generally speaking) and no review proceeding was brought. It contended further that, in any event, the ruling could not be reviewed because the definition of administrative action in the Promotion of Administrative Justice Act (“PAJA”) requires the action in question to have a direct, external and final effect[2]. In this matter SARS ruling would only have effect once applied in an assessment. Therefore, this ruling was not subject to review under PAJA.

MTN conceded that the ruling did not constitute administrative action and was therefore not reviewable under that statute. MTN contended, however, that if the declarators were granted and the ruling SARS issued not set aside, the ruling would remain intact.

A ruling, however, binds SARS.[3]

SARS submitted that it could withdraw a ruling (unless to do so would prejudice MTN which would not have been the case in this matter) and would do so if it was contrary to declarations made by a Court. MTN accepted this and that it was not entitled to set aside the ruling issued by SARS as prayed for in its prayer 3.

Appeal/objection

SARS contended that the ruling was not appealable to the Tax Court or the High Court (as section 32 of the VAT Act did not provide for rulings to be subject to objection and appeal).

MTN accepted this. It submitted, however, that its declaratory relief did not constitute an appeal.

SARS also contended that the VAT Act did not make provision for a taxpayer to object to a ruling.

SARS submitted that, in terms of section 83 of the Tax Administration Act, a ruling only applies to a taxpayer when it is put into effect (once a return has been submitted and the ruling applied). At that point, an objection could be lodged. SARS submitted that that was the appropriate course for MTN to have taken.

MTN contended that its application for declaratory relief was not, in effect, an objection to the ruling. Instead, MTN submitted, its application was an approach to the High Court to declare its rights.\

The Supreme Court of Appeal held that this particular matter must be decided based on whether MTN made out a case for the High Court to entertain its application for declaratory relief (and not whether the application constituted an impermissible objection).

Declaratory relief in tax matters

The Supreme Court of Appeal upheld the principle in Commissioner for the South African Revenue Service v Langholm Farms (Pty) Ltd[4] that “there was nothing objectionable in … seeking clarity on an issue of statutory interpretation and “[T]hat is exactly the situation for which declaratory orders are made and seeking one in the context of a taxing statute was endorsed by the Constitutional Court in Metcash.”

In the Metcash[5] case the Constitutional Court confirmed that a Court would have jurisdiction to grant declaratory relief if the Commissioner for SARS:

• ???????erred in law;
• ???????misapplied the law;
• ???????acted capriciously;
• ???????acted in bad faith; or
• ???????failed to apply the proper legal test to any particular set of facts.

Kriegler J, in Metcash, approved of the principle that “where the dispute involved no question of fact and is simply one of law the Commissioner and the Special Court are not the only competent authorities to decide the issue – at any rate when a declaratory order such as that in the present case is being sought.”

SARS’ accepted that declaratory relief was competent in tax matters but submitted that its ambit was narrow. SARS submitted that MTN’s case did not meet the requirements.

Scope of declaratory relief in tax matters

After reviewing cases that dealt with declaratory orders in a tax context, the Supreme Court of Appeal noted the following:

• ????????in the Langholm Farms case a discrete legal question had arisen in circumstances where the facts were clear, complete and uncontested (which meant the dispute was ripe for a declaration of rights);
• ????????in the Friedman and Others NNO[6] case the factual position was similarly clear (the legal question was whether a testamentary trust was a person as defined in the Income Tax Act);
• ????????in Chancellor, Masters and Scholars of the University of Oxford[7] case, the Commissioner for Inland Revenue (as he was called then) did not dispute the facts or provide any additional material facts (the question was whether the appellant was liable to pay income tax on income derived from the activities of its publishing branch);
• ????????in the Shell Southern Africa Pension Fund[8] case, no affidavits were filed by the Commissioner for Inland Revenue in answer to the application for a declaration as there was no factual dispute or lack of clarity (where the issue was whether payment of a lump sum to a dependant of a member of the pension fund at the discretion of the fund’s committee constituted gross income or remuneration); and
• ????????in the Shell Annandale Farm[9] case, the question was whether Shell was liable for payment of VAT on compensation received for expropriation (where the Commissioner for SARS was content to argue based on the facts put up by the applicant).

Having reflected on the above cases, the Supreme Court of Appeal held that the above matters demonstrate that proceedings for declaratory relief in tax matters are entertained in only limited circumstances i.e., where there were clear and uncontested facts which is the bare minimum requirement for a Court to entertain declaratory relief.

A Court will decline to exercise its discretion to grant a declaratory order for public policy reasons. One such public policy reason is the possible opening of floodgates for applications to Court where legal certainty is sought from a Court prior to the application of a new strategy.

Application to MTN’s facts

SARS submitted that the factual position was not clear, MTN dealt with the matter in the abstract, and MTN did not put up sufficient facts to enable the Court to determine MTN’s entitlement to apply section 10(18) of the VAT Act. In particular, MTN did not put up facts relating to:

• ????????how vouchers are purchased;
• ????????what information is provided to customers;
• ????????the manner in which vouchers are actually used by customers;
• ????????given technological changes and data usage, it was not clear what airtime connoted.

SARS pointed to the terms and conditions (relating to pre-paid vouchers) which defined airtime as follows:

‘“Airtime” means the prepaid value which when loaded onto your mobile device enables you to make or receive calls and/or send or receive SMSs and/or allows you to utilise internet services or content services on the MTN network.’

The initial/first part of the “airtime” definition suggests that airtime is prepaid credit in the amount pre-paid by a customer to MTN (despite the reference in the definition to it being loaded onto the customer’s device).

SARS pointed further to the definition of Digital Services which read as follows:

‘Digital consist of content subscription services that allow MTN subscribers to subscribe to and consume Digital services such as Gaming, Video, Text based notification services etc in exchange for a daily/weekly/monthly/once off fee settled via airtime payment’

SARS alleged that the definitions of Airtime and Digital Services, when read together, suggested that airtime is a commodity (what is acquired by way of the prepaid vouchers) which can be utilised to obtain the other services offered by MTN.

This seems unlikely to have been MTN’s intention.

SARS’ argument was bolstered by the phrase, in the Digital Services definition, settled via airtime payment. This argument found favour with the Supreme Court of Appeal.

SARS also alleged that MTN offered an extensive range of ‘services on the network’ to holders of prepaid vouchers and that these were constantly expanding and that the cost of these services was those applicable when the service was accessed and the ruling price at the time the service was accessed would be deducted from the subscriber’s airtime balance (not the price applicable when the prepaid voucher was purchased). SARS contended therefore that the services were not specified (and therefore the prepaid vouchers did not qualify for VAT treatment as provided for in section 10(19) of the VAT Act).

The Supreme Court of Appeal also noted that considerable difficulty was experienced during the argument in clarifying the nature of airtime, how the pre-paid vouchers function in practice, and whether the services were specified by usage or arrangement.

The Supreme Court of Appeal considered the factual position to have been opaque.

The Supreme Court of Appeal disagreed with the High Court’s finding that ‘no … further facts or information would alter the respondent's [SARS’] legal view’ and that the declaratory application was properly before the High Court.

The Supreme Court of Appeal summed up the position by stating the following:

“it is doubtful whether this matter warranted the exercise of the discretion of the high court to entertain the grant of declaratory relief. It was a classic case of MTN wishing to obtain clarity from the high court on whether it could depart from its prior practice of treating the pre-paid vouchers as falling under s 10(19) and apply a new approach of treating them as falling under s 10(18). It seems to me that the nature of the dispute lent itself more properly to resolution by use of the special machinery of the TAA [Tax Administration Act] set up for that purpose. To hold otherwise might well result in a deluge of similar applications.”

Conclusion

MTN’s appeal against the High Court’s dismissal of its application for declaratory relief was therefore dismissed (albeit for reasons different to those of the High Court).

This case highlights the importance of ensuring that:

• ????????a taxpayer’s commercial terms and conditions are clear;
• ???????a taxpayer’s facts are clear when approaching SARS for an advance tax ruling;
• ???????a taxpayer’s facts are clear and not capable of being contested when approaching a court for declaratory relief in tax matters;
• ????????applications for declaratory relief in tax matters are brought in appropriate circumstances (circumstances contemplated in the Metcash case to overcome public policy considerations ).

Nevertheless, in appropriate circumstances, a taxpayer may approach a Court for declaratory relief where SARS refuses to issue a binding private ruling applied for.

[1] 805/2021 [2022] ZASCA 142 24 October 2022

[2] The relevant parts of the definition of administrative action are:

‘. . . any decision taken, or any failure to take a decision, by-

(a) an organ of state, when- (i) exercising a power in terms of the Constitution or a provincial constitution; or (ii) exercising a public power or performing a public function in terms of any legislation; or

(b) a natural or juristic person, other than an organ of state, when exercising a public power or performing a public function in terms of an empowering provision,

which adversely affects the rights of any person and which has a direct, external legal effect . . .’.

[3] Section 82(1) of the Tax Administration Act which provides:

‘If an “advance ruling” applies to a person in accordance with section 83, then SARS must interpret or apply the applicable tax Act to the person in accordance with the ruling.’

[4] [2019] ZASCA 163?

[5] Metcash Trading Limited v Commissioner South African Revenue Services and Another [2000] ZACC 21

[6] Friedman and Others NNO v Commissioner for Inland Revenue: In re Phillip Frame Will Trust v Commissioner for Inland Revenue 1991 (2) SA 340 (W) at 341I-J. The judgment of McCreath J was confirmed by the Supreme Court of Appeal in Commissioner for Inland Revenue v Friedman and Others NNO [1992] ZASCA 190.

[7] Chancellor, Masters and Scholars of the University of Oxford v Commissioner for Inland Revenue [1995] ZASCA 157; 1996 (1) SA 1196 (SCA)?

[8] Commissioner for Inland Revenue v Shell Southern Africa Pension Fund 1984 (1) SA 672 (A)

[9] Shell’s Annandale Farm (Pty) Ltd v Commissioner, South African Revenue Service 2000 (3) SA 564 (C).