Evaluating alternative VAT apportionment approval mechanisms for implementation in South Africa

Abstract

The apportionment methodology, as it relates to input tax under the South African VAT system, is often criticised by authors as being impractical or contentious. The prescribed standard turnover-based method, which is the only pre-approved method in South Africa, does not seem to yield a fair reflection of the tax application of all entities. However, alternative apportionment methods are granted with prospective effect which may be counter-intuitive and unjust. Therefore, it was valuable to consider the possibility of implementing an alternative apportionment methodology, or elements thereof, by investigating the methods adopted in other countries. For this reason, the VAT system implemented in South Africa as it relates to input tax was analysed in detail, specifically focussing on the apportionment methodology and the complications relating thereto. This was followed by an in-depth analysis of the GST apportionment methodology applied in Australia and New Zealand, respectively. The analysis of the systems implemented in the respective countries allowed for a comparison to be drawn between the various apportionment systems. This comparison was based solely on the principles of a good tax system relevant to VAT which is also discussed in this study. The comparison revealed that none of the apportionment methodologies conforms to all the principles regarded as being relevant to a value-added tax and consequently all three systems can be adjusted to better adhere to these principles. The evaluation further revealed that there is a trade-off between the various principles as and when applied to each apportionment system and the interested parties. Therefore, on the basis of the comparison between the apportionment methodology implemented in South Africa, Australia, and New Zealand, respectively, and specifically focussing on the principles of a good tax system, it was evident that none of these systems provide optimal results. In the end it came down to which system balances the interests of the taxpayer and the interest of the fiscus the best, rather than to prove the single most optimal system. It was further remarked that the apportionment methodology that balances these interests the best varies for each country by reason of the different tax policies adopted by the tax authorities of the respective countries. It was then concluded that South Africa's VAT apportionment methodology provides a satisfactory balance as it protects both the interests of the taxpayer and the interests of the fiscus in the long term. Nevertheless, this study revealed that an element of the New Zealand apportionment system may be valuable to consider for implementation in South Africa.