Dispute around recycled gold may have sparked proposed scrapping of zero-rating relief.
National Treasury’s sudden proposal to scrap a decades-old value-added tax (Vat) provision on gold – before the Constitutional Court rules on its validity – has jolted the industry.
At stake is whether recycled gold sold to the South African Reserve Bank (Sarb), SA Mint, and commercial banks qualifies for zero-rating, a decision with heavy cost implications for the affected entities.
The interpretational question before the Constitutional Court is whether gold supplied to the three specific entities, in a prescribed form, must be zero-rated or whether the section operates to exclude second-hand (recycled) gold from the zero-rating provision.
Refunds on gold
Lueven Metals disputed the refusal by the South African Revenue Service (Sars) of its Vat refunds on the sale of gold to the three entities. These refunds had been permitted in the past.
The matter proceeded to the high court for a declarator on the correct interpretation of the relevant section of the Vat Act – Section 11(1)(f).
The high court agreed with Sars on its interpretation but the Supreme Court of Appeal vacated the high court decision, with the matter proceeding to the Constitutional Court.
The section reads that the supply of gold in the form of bars, blank coins, ingots, buttons, wire, plate or granules or in solution, which has not undergone any manufacturing process other than the refining thereof or the manufacture or production of such bars, coins, ingots, buttons, wire, plate, granules or solution to the three entities would be charged with tax at a rate of 0%.
Changed interpretation
Lueven pleaded that Sars had “impermissibly and in contravention of the Tax Administration Act” changed its interpretation and application of the section.
This was done “in circumstances where a binding class ruling applied, where Lueven was a class member, and where the zero-rating of a supply of gold to specific entities” was a practice generally prevailing.
Sars argued that the “factual foundation” for the contention that it changed its interpretation was based solely on the binding ruling.
The binding class rulings, Sars contended, cannot change the meaning of the act, nor are they relevant to the interpretation of the specific section.
Lueven maintained that the initial interpretation – held for about 30 years – was that mined gold and recycled gold supplied to the Sarb, SA Mint and commercial registered banks qualified for zero-rating.
Sars argued that there was not “shred of evidence” that it interpreted and applied the legislation in the manner in which Lueven alleged.
Not all gold is ‘gold’
Sars argued that it was never the intention of the legislature to allow for second-hand gold to qualify for the zero-rating. Only virgin gold qualifies.
Lueven argued that all gold, supplied in accordance with the specifications, to the specific entities, had been and should be Vat-free.
The gold trader contended that Sars gave effect to the purpose of the section – to zero-rate the supply of gold to the three entities – consistently and formally for many years. It formalised its (initial interpretation) by recording it in consecutive binding class rulings.
However, the current literalist interpretation excludes refined recycled gold. It is not only in principle problematic, but it also produces purposelessness, absurd results and redundancy in practice.
Requirements
The requirements, Lueven held, are that the supply must be to the Sarb, the SA Mint or a bank; it must be of gold, and the gold being supplied must be in one of eight forms.
“This is the extent of the subsection,” it said. “The subsection does not impose any further requirement for gold being supplied to the recipients to be zero-rated.”
Sars, in its written submissions to the Constitutional Court, argues that the gold supplied by Lueven to Absa has undergone a prior refining and manufacturing process into a form not prescribed (second-hand gold jewellery) before being refined into the allowed form.
Hence, the suppliers of the disqualified gold cannot benefit from the zero-rating provisions.
In its submissions, Sars highlights the words: “which has not undergone any manufacturing process other than the refining thereof or the manufacturing or production of the bars …” and that any other historical form of manufacturing is “expressly excluded”.
Disqualifying some gold
Sars also argues that Lueven’s contention that the refining process “eradicates” the historical process is “inherently flawed, or illogical”.
The refining process cannot erase the fact that Lueven refined second-hand gold.
Lueven says this new attempt to disqualify refined recycled gold is untenable, unworkable and unbusinesslike.
ENS tax executives Charles de Wet and Annelie Giles warn that the scrapping of the section will have serious cost implications for the Sarb, the SA Mint and banks.
The gold they acquire for investment and reserve purposes will be 15% more expensive, they may not be able to claim a full input tax deduction depending on the purpose of the acquisition, and the residual Vat will be a final cost to them.
This article was republished from Moneyweb. Read the original here.