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COMMENTARY: GCT and sponsorships

Published:Sunday | January 11, 2015 | 12:00 AM
Everald Dewar

My audit manager in Montego Bay appears to be having sleepless nights about GCT instructions he received from Tax Administration Jamaica (TAJ) concerning sponsorships.

He is faced with the reality that nowadays sponsorship events involve not a straight donation, but offering donors benefits in return for their contribution.

This means that the sponsors making a contribution had some associated advertising exposure - on the night of the event, their names are displayed along with a booth on the premises. They would also receive priority treatment, complimentary tickets and VIP parking.

While the market value of such benefits is usually what it would have cost if the sponsor were to have paid for it, TAJ has taken the view that GCT is applicable on any contribution that the sponsor would have made on the basis that the full amount was consideration for benefits received.

I do not agree with this view and recently made a social call on renowned GCT specialist Norris Miller and had a discussion on the very topic.

He explained that where a contribution is made on condition that the sponsor's name is advertised or promoted or if they receive some benefits, for example, free tickets or free advertising space on the booth, then that contribution is the consideration for a supply made in the course of business by the event holder and is subject to GCT.

To put all of this in plain language, what the specialist is saying is business people are not in the habit of giving away something for nothing.

It seems, then, that the event holder would have to account for GCT on the total contribution even though it is apparent that, by far, the greater part of the contribution is in the form of a donation towards the event. In that regard, the donation is not a supply.

Benefits as inducement

In other words, it is not payment made for services, therefore, any benefit is merely an inducement for the target to act as sponsors.

TAJ seems to disagree and is holding that the invitation to sponsor is an offer that is accepted by payment of the amounts, and if there is an express term in the contract that the event holder undertook to provide the benefits, then this is conclusive evidence that there is a bargain and something is paid for something received.

If it is possible to apportion contributions between donation and the consideration for benefits, then it is only that part of the consideration that relates to a benefit received by the sponsor that is subject to GCT.

This is contemplated in the GCT Act, where it provides: "If the supply is not the only matter to which the total consideration applies, then the value of the supply shall be taken as that part of the consideration applicable to the supply."

What the act is saying is that the supply of a benefit may exist, but it may not be the only matter to which the sponsorship sum in money relates and, therefore, the consideration can be apportioned to separate the elements.

However, what Miller is saying is that all of the sponsorship sum is subject to GCT.

This has wider implications and will affect contributions or subscription to charities, voluntary non-profit organisations, local groups and associations, service clubs and organisations whose goal is to further the interests of its members to include various societies.

It would not exclude churches staging fundraising activities.

This should also affect fundraising dinners where the ticket price is far in excess of the value of the meal provided.

At the moment, professional bodies, such as the ICAJ, which receive annual subscriptions from members and whose benefits provided in return are clearly small in relation to the amount of the subscription, are instructed to account for output tax on the full subscriptions.

It is my opinion that you should not pay GCT on that element in the subscription which do not relate to the value of benefits that may be received.

It is as though the members have bought the rights to valuable benefits, but GCT should not be imposed on something to be obtained in the future.

Furthermore, where the value of the benefits received is trivial in relation to the subscription, then apportionment of the subscription into its GCT and non-GCT elements is applicable in this case.

n Everald Dewar is senior taxation manager at BDO Chartered Accountants in Kingston.