South African Airways Division Finance - Taxation 4th Floor, Block A

Airways Park, Jones Road

OR Tambo International Airport South Africa

1627

Tel: 27 11 978-3684

Fax: 27 11 978-6596

Email: tariqueghole@flysaa.com

03 October 2017

The South African Revenue Service Nieuw Muckleneuk

Brooklyn Pretoria

Dear Sir,

South African Airways Soc Ltd (SAA) VAT No: 4260170990

Binding VAT ruling application relating to the deductibility of Input VAT incurred on expenses relating to delayed flights by SAA

Introduction

Ruling request

SAA Soc Ltd, hereby request a binding VAT ruling relating to the deductibility of Input VAT incurred on expenses relating to delayed flights by SAA for customers.

Sections of the Act referred to in this application

The relevant provisions of the Value- Added Tax Act No 89 of 1991 referred to in this application are:

The definition of the term ‘entertainment’ in section 1 of the VAT Act

Section 17(2)(a)(iii) of the VAT Act

Documents

Please find attached the following supporting documentation:

Directors

DC Myeni* (Chairperson), MGT Ramano* (Deputy Chairperson), MM Zwane (Acting Chief Executive Officer), P Nhantsi (Interim Chief Financial Officer), SS Buthelezi*,HP Maluleka*, M Malunga*, MS Mbatha*, TN Mgoduso*, N Moola*, AH Moosa*, JG Sepamla*, BS Tshabalala*, MP Tshisevhe*.

*Non-Executive Director

Company Secretary – RN Kibuuka

South African Airways SOC Ltd Reg. No. 1997/022444/30

Annexure A - Disclosure of required information. This annexure sets out the information required to be submitted in accordance with section 79 of the Tax Administration Act (TA Act).

Annexure B - A letter in terms of section 87(1) of TA Act whereby SAA consents to the publication of the ruling by SARS.

Annexure C - The proposed draft ruling.

Factual Background

Background

In the airline industry there are events and obstacles beyond the control of the airline, for example inclement weather or air traffic delays resulting in delayed flights. These events are inevitable in the airline industry and are experienced by all airlines across the world. Due to these delays, there are expenditures that airlines have to incur to minimise the inconvenience of the customer and also to ensure

that the customer will in fact make use of the airline’s services when a flight is delayed and need to be rescheduled. Examples of such expenditures by SAA are accommodation and meals to customers. In the case of SAA where a domestic flight is delayed by more than 2 hours, or 4 hours for a regional or international flight, SAA will provide the customer with accommodation, meals and refreshments.

Detailed description of the transaction

The question relevant to our ruling is the following: Is SAA entitled to claim Input VAT on expenses incurred by them on behalf of the customers, due to the delayed flights, e.g. accommodation expenses and meals paid to customers? The invoices for the accommodation and meals are made out to SAA, and are paid by SAA.

Relevant provisions of the Act

It is our opinion that the Input VAT incurred by SAA in respect of accommodation and meals for customers due to delayed flights, can be claimed in terms of Section 17(2)(a)(iii) of the VAT Act from 1 April 2014. Our reasons for this conclusion are set out in detail below:

The relevant sections of the Act are:

Section 1 definition of entertainment means:

“ the provisions of any food, beverages, accommodation, entertainment, amusement, recreation or hospitality of any kind by a vendor whether directly or indirectly to anyone in connection with an enterprise carried on by him”

Section 17(2)(a)(iii) stipulates that :

“ Notwithstanding anything in this Act to the contrary a vendor shall not be entitled to deduct from the sum of the amounts of output tax and refunds contemplated in section 16(3), any amount of input tax -

(a) in respect of goods or services acquired by such vendor to the extent that such goods or services are acquired for the purpose of entertainment : Provided that this paragraph shall not apply where -

(iii) such goods or services consists of entertainment supplied by the vendor as operator of any conveyance to a passenger or crew member in such conveyance during a journey, where such entertainment is supplied as part of or in conjunction with the transport service supplied by the vendor where the supply of such transport service is a taxable supply.

Tax implications

This ruling will entitle SAA to claim back the VAT on expenses incurred due to delayed flights, which is included in the definition of entertainment, i.e. accommodation expenses and meals paid on behalf of customers since 1 April 2014.

Application of the law

General

The provision of accommodation and meals falls under the definition of entertainment in terms of section 1 of The VAT Act. Therefore the meals and accommodation incurred by SAA for delayed flights are seen as entertainment for VAT purposes.

In the airline industry it is inevitable that flights will be delayed due to factors beyond the control of the airline, for example inclement weather, air traffic delays and technical issues with aircraft. As a result of this, SAA has to incur expenses like accommodation and meals to customers when flights are delayed.

Section 17(2)(a)(iii) refers to : “entertainment supplied by the vendor as operator of

any conveyance to a passenger or crew member in such conveyance during a

journey..”

The word “conveyance” is defined in the Oxford Illustrated Dictionary as: “ the process of taking somebody from one place to another”

The word “journey” is defined in the Oxford Illustrated Dictionary as: “An act of travelling from one place to another”

There are various scenarios where SAA incurs accommodation and meals relating

to delayed flights, but in all cases these expenditures are incurred “during a journey”.

There will be instances where there are delayed flights relating to an international

flight with a domestic leg, for example, a passenger is intended to fly from Cape Town to Johannesburg and then straight from Johannesburg to London on a connecting flight from SAA. It may happen that the flight from Johannesburg to London is delayed and SAA has to arrange accommodation for the passenger in

Johannesburg. Clearly this is considered “during the journey” as the journey has not

been complete at this point.

When a flight that is not a connecting flight, is delayed, it is still SAA’s responsibility to ensure that the passenger can continue his journey by arranging and paying for accommodation for the passenger, as well as for meals during this delay period, as SAA has already received consideration for the service and declared Output VAT to SARS. If SAA does not do this, the journey cannot be completed for which the passenger has already paid for.

Section 17(2)(a)(iii) further refers to : “ .. where such entertainment is supplied as

part of or in conjunction with the transport service supplied by the vendor ..”

The word “in conjunction” is defined in the Oxford Illustrated Dictionary as : “together with”

We are therefor of the opinion that the service provided by SAA will fall within the requirements of section 17(2)(a)(iii). SAA has incurred these entertainment expenses as part of the whole process to fly a customer from one place to another. These expenses incurred due to the delayed flights, are very closely linked to the transport service supplied by the vendor, as it is inevitable that an airline will incur these expenses due to factors beyond their control.

Applicable case law

The view that entertainment expenses relating to delayed flights are claimable, is supported in the United Kingdom case of British Airways plc 16446 [2000] BVC 2207.

British Airways had an arrangement whereby airside food outlets provided food to passengers of delayed flights. British Airways did not itself provide anything other than inflight catering. Where there was a delay, an announcement was made to passengers that vouchers of a specific vendor were available and could be used at airside restaurants.

In a second decision of the VAT Tribunal (after the matter was referred to the High Court and referred back to the VAT Tribunal), it was decided that the input tax should be allowed to British Airways which paid a second entity to supply its passengers with food and drinks.

We have also received confirmation from New Zealand Inland Revenue, that these expenses for accommodation and meals relating to delayed flights, are claimable for GST purposes if the airline is registered for GST. They have confirmed and agreed that these expenses are incurred in the course of the taxable activities of airlines and are therefore claimable for GST purposes in New Zealand. We enclose the relevant confirmation and contact details of New Zealand Inland Revenue.

This view is also supported in Australia, where it has been confirmed that these expenses will be claimable as an input tax credit for GST purposes, provided that the airline is a registered vendor, and that these expenses will not be considered as entertainment.

Conclusion

The United Kingdom case of British Airways plc 16446 [2000] BVC 2207 has supported the view, that Revenue Offices across the world has agreed that entertainment expenses incurred by airlines with delayed flights, are claimable. This is due to the fact that these expenditures are inevitable in the airline industry.

New Zealand Inland Revenue has also agreed that these expenses are incurred in the course of the taxable activities of airlines and are therefore claimable for GST purposes in New Zealand. This view is also supported in Australia.

With the change in legislation of section 17(2)(a)(iii) with effect from the 1 April 2014, it is our view that the expenses what SAA incur with delayed flights, in the form of accommodation and meals provided to customers, form part of the expenses during the customer’s journey from one place to another and therefore these expenses are claimable for VAT purposes with effect from 1 April 2014.

Should you require any additional information or have any questions regarding this application, please contact the writer.

Yours sincerely,

Tarique Ghole Indirect Tax Manager Tel : 011 978 3684

E-mail: tariqueghole@flysaa.com

ANNEXURE A

Disclosure of required information

Detailed below is the information required to be submitted in accordance with section 79 of the Tax Administration Act.

Applicants

Applicant’s postal address and telephone number – section 79(4)(a)

SAA Soc Ltd Private Bag X13

OR Tambo International Airport 1627

Telephone Number (011) 978 3684

Applicant’s representative’s postal address and telephone number – section 79(4)(b)

Ruth Kibuuka Public Office

South African Airways Soc Ltd Private Bag X13

OR Tambo International Airport Kempton Park Johannesburg 1627

Telephone Number (011) 978 1736

Reasons why the proposed ruling should be granted – section 79(4)(h)

We request that the proposed ruling should be granted, so as to enable the applicant to claim the Input VAT on accommodation expenses and meals incurred by SAA on behalf of the customers, due to the delayed flights from 1 April 2014.

Statement in terms of section 79(4)(i)

This ruling application has fully considered the relevant statutory provisions and case law and it is considered that this ruling is consistent with such provisions and law.

Statement in terms of section 79(4)(j)

Commented [LM1]: Tarique, I don’t see how this response addresses section 79(4)(j) requirements?

To the best of the applicant’s knowledge and the applicant’s representative’s knowledge, the same or substantially the same issue upon which this ruling has been sought, is not the subject of an audit examination, investigation, ruling application, appeal or other proceedings currently before SARS, or the courts, involving the applicant or any connected person relating to the applicant. This ruling will entitle SAA to claim back the VAT on expenses incurred due to delayed flights, which is included in the definition of entertainment, i.e. accommodation expenses and meals paid on behalf of customers since 1 April 2014.

Commented [AVW3R2]: Have changed it

Commented [LM2]: Shouldn’t “k” come before “o”?

Commented [LM4]: Is this not duplicated with 4. above?

S Description of the information which the applicant believes should be deleted

All references to the applicant’s name should be deleted from the final ruling prior

to publication, in order to protect the applicant’s confidentiality.

To the best of the applicant’s knowledge and the applicant’s representative’s

knowledge, the same or substantially the same issue upon which this ruling has been sought, is not the subject of an audit examination, investigation, ruling application, appeal or other proceedings currently before SARS, or the courts,

involving the applicant or any connected person relating to the applicant.

Statement in terms of section 79(4)(n)(o)

To the best of the applicant’s knowledge and the applicant’s representative’s

knowledge, the applicant is fully tax compliant for all applicable taxes.

6.        Description of the information which the applicant believes should be

Commented [LM6]: Shouldn’t “k” come before “o”?

deleted from the final ruling prior to publication – section 79(4)(k)                

All references to the applicant’s name should be deleted from the final ruling prior to publication, in order to protect the applicant’s confidentiality.

Commented [AVW8R7]: All the disclosure requirements are addressed in either the letter itself and annexure A-C

Commented [LM7]: What about the rest of the disclosure requirements of section 79?

ANNEXURE B

Letter of consent

Person to whom this ruling applies

This ruling applies to SAA Soc Ltd, VAT registration number, 4260170990.

Relevant tax laws

Section 79(4)(i) and 87 of The Tax Administration Act.

Consent

The applicant herewith consents to the publication of the Advance Tax by SARS in accordance with section 87 of the Tax Administration Act, provided that the publication is in such a form as it does not reveal the identity of the applicant. Prior to the final publication, SARS will provide a draft copy of the edited ruling for review and comment. It is understood that SARS’ determination regarding the published ruling is final.

ANNEXURE C

The Draft Ruling Letter

Person to who this ruling letter applies

This ruling letter applies to SAA Soc Ltd, VAT registration Number, 4260170990.

Relevant Tax Laws

All legislative references are to the Value-Added Tax Act No 89 of 1991 (The Act). This specific ruling has been requested in respect of section 17(2)(a)(iii) of the Act.

Description of the proposed transaction

SAA pays Input VAT on expenses incurred by them on behalf of customers, due to the delayed flights, e.g. accommodation expenses and meals. The invoices for the accommodation and meals are made out to SAA, and are paid by SAA. SAA is requesting a ruling from SARS in order to claim this Input VAT.

Specific Conditions and Assumptions

Section 78(3) of The Tax Administration Act provides that a binding private ruling may be made subject to the conditions prescribed in the ruling.

An Input deduction will only be allowed if SAA has in its possession a valid tax invoice as stipulated in section 20(4) and 20(5) of The VAT Act.

Ruling

The ruling made in connection with the proposed transaction is as follows:

SAA will be entitled to an input tax deduction on accommodation and meal expenses incurred by them on behalf of customers due to delayed flights. These expenses are incurred in the course of the taxable activities of SAA, and are therefore claimable for VAT purposes in terms of section 17(2)(a)(iii) of The VAT Act.

Period for which the ruling is valid

This binding private ruling will be valid with effect from 1 April 2014 and will be valid for a period of 5(five) years from the date of the ruling.