The South African Revenue Service (“SARS”) issued a binding private ruling (“BPR 315”) in accordance with sections 78(1) and 87(2) of the Tax Administration Act[1] on 10 January 2019. This ruling determines the application of the definition of “future expenditure” in section 24C(1) of the Income Tax Act[2] to a commodities purchase agreement.
The applicant (a resident company) and a non-resident subsidiary (Opco) will enter into an intercompany agreement for the supply of purchaser credits representing quantities of certain commodities mined by Opco. The applicant will, in turn, sell these purchaser credits to the purchaser (also a non-resident company) in terms of a 40-year purchase agreement.[3]
The purchaser must pay an advance payment to the applicant for the sale and delivery of the credits. No portion of this payment will be refunded and the applicant must use it to finance the expenditure it will incur in fulfilment of its contractual obligations.
The purchaser will also make production payments upon the delivery of the credits in cash. The purchase agreement allows for a detailed calculation of these payments with certain amounts to be credited against the advance payment amount. Any advance payment remaining at the end of the contract term will be applied as an additional purchase price for credits already supplied under the contract.
As amounts are taxed at the earlier of receipt or accrual, the advance payment will be included in the applicant’s taxable income in the year in which it is received.
Section 24C provides relief to a taxpayer who has received an advance payment, in terms of a contract, and who will incur expenditure under that contract in the future. The allowance cannot exceed the amount received or accrued in terms of the contract and must be added back to the taxpayer’s taxable income in the following year. The allowance is furthermore at the Commissioner’s[4] discretion and taxpayers must accurately estimate the expenses that need to be incurred in order to meet their obligations under the specific contract. However, a calculation that is based on the ratio that the total estimated expenditure bears to the estimated gross income to be derived from the contract (i.e. the contract’s gross profit percentage) is generally accepted.
In this ruling, SARS confirmed that the expenditure to be incurred to acquire the credits will be future expenditure as envisaged in section 24C(1). However, no ruling was made on the determination of the allowance as contemplated in section 24C(2) or any pricing and transfer pricing aspects.
[1] No. 28 of 2011.
[2] No. 58 of 1962. Any subsequent references to “sections” are to the sections of this Act.
[3] The contract may be extended for successive 10 year periods until Opco ceases to operate.
[4] Commissioner for the South African Revenue Service (“SARS”).
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)
