An analysis of the VAT consequences of customer loyalty programmes

Abstract

South Africa adopted a general anti-avoidance rule (GAAR) as one of its methods to combat innovative tax avoidance schemes into which taxpayers may enter. Since the South African GAAR was introduced for the first time in 1941 it has undergone numerous amendments due to weaknesses highlighted by its failures in court. However, since its most recent amendment in 2006, the efficacy of the South African GAAR is in doubt, as not all of its requirements have been subjected to judicial interpretation and application. This study aims to determine the effectiveness of the South African GAAR when compared to that of its New Zealand counterpart by employing a ‘Structured Pre-emptive Analysis’ (SPA) to identify the weaknesses in the South African GAAR.

A SPA is a multimethod qualitative approach that combines doctrinal and reform-oriented approaches. The study was carried out in three phases. Doctrinal research was used in Phase 1 to obtain an understanding of the South African and New Zealand GAARs, in order to understand how they should be interpreted and applied, as well as to identify weaknesses and make suggestions for improvement in both. Reform-oriented research was conducted in Phase 2 where the South African GAAR was applied to a case from New Zealand, in order to propose amendments to the South African GAAR. In Phase 3, triangulation was used in order to compare the findings gained in Phases 1 and 2 and thus validate the findings of the research.

The comparison performed between South Africa and New Zealand revealed that guidance should be provided in order to address the uncertainties in the interpretation and application of the South African GAAR, so as to prevent inconsistencies that may limit its efficacy. In addition to this, the South African GAAR should be consolidated into a three- part enquiry instead of the current four-part enquiry, which may be achieved by considering the tainted elements as part of the tax benefit requirement, instead of a separate fourth requirement that would make the South African GAAR more onerous to apply. Lastly, the sole or main purpose requirement should be amended so that it need not be the sole or main purpose to avoid tax, but rather one of the purposes, provided that it was not merely incidental.