South Africa: Clarification of VAT apportionment calculations

South Africa: Clarification of VAT apportionment

Section 17(1) of South Africa’s value added tax (VAT) law provides that when a vendor acquires or imports goods or services partly for consumption, use or supply in the course of making taxable supplies and partly for another intended use, that vendor may claim input tax only to the extent that such goods or services are acquired for the purposes of making taxable supplies.


Binding General Ruling 16 (Issue 2) (BGR16) is the only pre-approved method of apportionment (the standard turnover-based method) that vendors may apply, provided this method yields equitable results. If it does not yield equitable results, the vendor is required to request approval from SARS in terms of section 41B of the VAT Act, to use an alternative method of apportionment.

Alternative apportionment methods are issued at the discretion of SARS. If SARS were to notify a vendor in writing that the tax authority refuses to approve the alternative method of apportionment applied for by a vendor, that vendor may file an objection.

A clarification of the position of the South African Revenue Service (SARS) regarding apportionment rulings is that these rulings do not constitute an “official publication” of the tax administration.

KPMG observation

The experience of tax professionals is that SARS—since the inception of VAT—has developed various “guiding principles” (informal principles not published in any official publication, but consistently applied when considering alternative apportionment methods). Tax professionals and SARS have relied on these guiding principles in an effort to track new developments, to aim for fairness and presumably to address tax evasion. Experience shows that SARS most often shares some of these guiding principles with taxpayers to assist them in formulating applications which SARS is likely to consider appropriate under the circumstances.

Another matter is that all income—including dividends received in respect of non-supplies—is to be included in the denominator when applying the standard turnover-based method per BGR 16. Since this guidance is a “public notice,” it appears that the SARS policy is to consider all non-taxable receipts, including dividends. Presumably for this reason, it has been perceived that SARS has endeavoured to recognize this income in alternative apportionment methods. Historically, this treatment has varied from including net dividends received, averaging dividends over three years, or limiting dividends to management and administrative fees, etc., depending on the circumstances of the vendor.

Such guiding principles may not be applied in all circumstances because they may not give effect to an equitable result in all instances. If a vendor seeks to rely on any one of these guiding principles, but the opinion of SARS is that these do not give effect to an equitable result, SARS may disallow the application.

According to recent informal conversations with officials, SARS is in the process of formulating policy with regards to certain principles associated with apportionment methodology that in turn would be released for public comment before being finalized. 

Read a November 2020 report [PDF 355 KB] prepared by the KPMG member firm in South Africa

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