Business Law & Tax (July 2022)

BUSINESS LAW&TAX

A REVIEW OF DEVELOPMENTS IN CORPORATE AND TAX LAW

Plan to unlock tax benefits of green energy production

• To take advantage of the attractive allowances, mining companies need careful tax planning

Ntebaleng Sekabate, Kristel van Rensburg & Olivia Bernstein ENSafrica

The 2022 Junior Mining Indaba focused on, among others, therevival of mining exploration in SA.

This wasafter thedepartmentof mineralresources& energy publishedthe ExplorationStrategy fortheMining Industryof SAon April14 2022,which setout thesteps tobetaken bythegovernment, togetherwith relevant social partners,to increase SA’s share in global exploration spend to at least 5%.

Akey weaknessidentified in the document is energy instability, andthe department indicated the need to

increase energy generation, with afocus onclean energy sourcesin SA’stransition toa low carbon economy.

The issueof increasing energy generation has been topicalfora numberofyears, and in2021 PresidentCyril Ramaphosa announcedthe government’s intentionto increase the threshold for embedded self-generationof electricity from 1MW to 100MW

This wasa surprising

SELF-GENERATION, IF IMPLEMENTED, WOULD ASSIST MINING COMPANIES TO REDUCE THEIR TOTAL GREENHOUSE GAS EMISSIONS

development,but a welcome one.The announcementwas followedby theamendment ofSchedule2 oftheElectricityRegulation Act,2006, unlocking significant opportunities in the private sector to introduce additional capacity for thegeneration of renewable energy.

This is of particular significance in the mining industry. Miningentities arenow allowedto equipthemselves tomeet pressingenergy needs inan environmentof erratic supply,and toobtain certaintyon priceincreases in the long term.

This newfoundenergy freedomwill unlocksignificant new investment in the mining space. TheMinerals Council SA expectsthis developmentto leadtoadditionalshort- andmedium-

FIT FOR PURPOSE

term investmentof about R27bn. Furthermore,a constant powersupply will enable miningcompanies to continue withtheir operations uninterrupted,reducing lost productiontime and saving millions as a result.

Inaddition, itwas announced duringthe 2022 budget speech thatthe carbon tax would beused as a compliance mechanismfor the carbonbudget regime (introduced bythe Climate Change Bill).

Self-generation, if implemented, wouldassist mining companies toreduce their total greenhousegas emissions byintroducing renewable energysources, thereby moving closerto net-zero

emissions andavoiding a hefty carbon taxbill in the long run.

Thecost savingspresented bya steadyenergy supply,aswellasadecreased carbon taxliability, arecomplemented bythe provisions ofthe IncomeTaxAct no58 of1962 (ITA)that mayallow mining companiesto deduct many ofthe capitalcosts involved toproduce renewable energy.

Thoughthe ITAcontains various capitalallowances that may be used, these provisions areniche andcomplex.To takeadvantage ofthe attractive tax allowances, carefultax planninganda consideration ofthe relevant requirements must coincide

with the planning of any power generation plant.

An example of such a consideration iswhether the project’s financingwill be through local or foreign funding.Thismayaffectwherethe assets arebest placedwithin the group, andwhether the interest limitationor transfer pricing rules might come into play. These rules may prevent themining company from deductingits interest expenses.

Another keyconsideration is the composition of the group structure.In this regard, questionssuch as whetherthe plantis bestheld in aspecial purposevehicle,

BUSINESS LAW & TAX

LATERAL THINKING

Conscience for corporates

• Business Law & Tax editor Evan Pickworth talks to Lerisha (Lee) Naidu, who has been appointed as managing partner of Baker McKenzie in Johannesburg, effective from July 1 this year

EP: Beforewe discuss yournew role, could you tell usa little about howit all started?

LN: Istarted outmy career wanting tobecome ahuman rights lawyerand anadvocate forchange, butI soon came to understandthat the transformative projectis not confinedto NGOsandcivil society groups.My parents always encouragedawareness, discourseand frank debate. Theyinvested inour education andtravel locally and abroad, even if that meant debt and struggle. I havehadthe benefitofsupport andmentorship throughout mycareer from inspirational leadersin the industry whoshaped my approach to legalwork and myviewof theworld. Where Iamtodayhasbeentheproduct of a group effort.

One ofmy firstlegal roles was asa legalresearcher for deputy chiefjustice Dikgang Moseneke ofthe Constitutional Court. He told me that businesses neededa social conscience todrive SA’s transformation, andI made thedecisiontojointhecorporate world to dojust that. I hadalways beeninsistent I would pursue a career in human rights work in the fullness of time, but had wantedtoget acorporategig under my belt.

EP:Whatareaoflawdidyou choosetopractisein?

LN:I soonfound thatcompetitionlaw wasavery goodfit forme. Asalawyer ina democratic dispensation that is comparatively young, practising inthis areaallows me toengage incases that wereand arepioneeringand precedent-setting. Thisis particularly the case for competitionlaw, wherethelayers of jurisprudenceare still forming. Competitionlaw is atthe forefrontofnational transformationas itis coreto

the healthof theeconomy and to everyday consumers, whose socioeconomic rights are of paramount importance in a deeply unequal society. I am now thehead of the antitrust & competition practice atBaker McKenziein Johannesburg. I am exceptionally proud of my team, comprising a group of impressive lawyerswho have, together and individually,made notablestridesin themarketinourrepresenta-

tionof clientsonpioneering and precedent-setting cases.

EP: Whatis yourvision for the firmas youtake up this role?

LN: As aforemost thought leader on leadership discourse, Simon Sinek has madethe pointthat “[t]here are leaders andthere are thosewho lead.Leadershold a positionof influence.Those who lead inspire us”

It istherefore notnecessarily my vision for the firm that countsbut rathermy ability to inspire a compelling shared vision that is embraced by our clients and our people alike.I therefore reference our vision with conscious purpose.

Ourvision isto builda foundation of shared values that are notjust espoused but lived and that underpin everythingwedo fromcollaborating with our clients and partners, building highperformance teams,encouraging social impact, maximising learning and devel-

opment and fostering innovation and thinking outside of the box to engendering spaces of excellence, underpinnedbyinclusion,diversity, collaboration, friendship, genuine belonging and fun!

Ourvision isto findcommonalitiesin thevisionsof ourclients so we journey with themnot justas aserviceproviderbut asatrue and trusted partner.

Our vision isto have meaningful relevance,both

locallyand regionally,includingon importantmacro issuessuch assustainability, youth empowerment,innovation,social justice,equality and transformation.

And it is therefore, in this context, thatthe hymnsheet version of our shared vision should be situated.With all thisbeing said,we willcollectively striveto bethe global lawfirm of choicein subSaharan Africa,bringing valuetoour clientsandpeople, tothe country andto the region.

EP: Whatvalues willyou espousein yourmanaging partnerrole?

LN: Respect,transparency and accountability, integrity andhonesty,compassionand empathy,client andpeoplecentricity, passion,collaborationand teamwork,social responsibility and conscience, authenticity,friendship,inclusion andbelonging, innovation, drive,ownership andagency, globalcitizenship,empowering othersand

humility. Itis not aclosed list but itis anindispensable one our mostoptimal formof success depends on it.

EP: What do you want to achieveas managingpartner?

LN: I ameager to work towardsactualising aspace that Ihad hoped forat the very beginning one that embraces andencourages ourtruest andbestselves, creatingan environmentout of whichwe willdeliver teamsofworld-classlawyers to our clientsand conscious contributors to our society. Growing in alaw firm requiresgrit andresilience but holding on until now will allowsome spacetoinfluence and directits continued course,employing newand differentstrategies thatare people-centricin thefirst instance.

EP: Tell usabout who you are when you are not at work.

LN:Iam aproudSouth Africanand African,believing passionatelyin theuniqueness andmagic ofthis continent and itspeople. Making a difference,both withinand outsideof work,bringsme personal fulfilment.In asocietythat isdivided anddeeply fractured by a legacy of entrenchedoppression, itis oftenthe incrementalgains that are a more realistic measure of progress. For me, the headspace that keepsme goingis my naturaloptimism thatevery day takesus marginallyforward and mydeep desire to be part of the progress. I experiencegreat fulfilmentin connecting with others, inspiringaction andcontributingto thechange through discourse, service and collaboration. And,of course,Iam deeplypassionate aboutsubmergingmyself ingood music, arts andculture and thescenic beautyand majesty of Africa

Plan to unlock tax benefits of green energy production

CONTINUED FROM PAGE 1 asopposed towithinthe mining companyitself, must be analysed.

Forexample, theITAprovides capitalallowances for companieswhosetradeisthe generation ofelectricity. This may not beavailable where

the plant is housed in the mining company. It is also incumbent on the mining companyto consider each componentof the powerplant inagranular manner. Differentsections in the ITA target different facets of a renewableenergy structure andhave similarbut

slightly varyingrequirements. Theseprovisions are not straightforward.

Forexample, section12B, which allowsdeductions for equipment used in the creationofsolarenergy,requires thattheasset mustbeowned by the taxpayer.But, of course, insome projects

expenditure must be incurred in respect of assets not owned bythe taxpayer, for example,upgrades to Eskom’s substations.

Evidently, the president’s announcement in 2021 is a significant developmentin the mining economy.It will ensure aconsistent power

supply,lower thecarbontax liability andattract new investment. These benefits areaugmentedbytheITA,the provisions ofwhich if considered at the outset and in sufficient detail potentially provide miningcompanies with immensefinancial relief as regards the construction of

new renewable energy generation projectsor the improvement of existing plants.

To thisend, alltaxpayers must ensure thecorrect tax allowances areused, ensuring tax efficiencyand avoiding potentialpenalties for getting it wrong.

With POPIA in full swing, don’t miss out on securing your business keep the data breach at bay

BUSINESS LAW & TAX

Keep alert to Fica changes

• There is a danger that an accountable institution asks for too much when verifying clients

Aslam Moosajee , Era Gunning , Jessica Blumenthal & Shenaaz Munga ENSafrica

The recentcase of NedbankLimitedv Houtbosplaas (Pty) Ltd andAnother raises interesting considerations for accountable institutionsaiming to comply withtheir obligations under theFinancial Intelligence Centre Act, 2001 (Fica).

Fica is aimedat the identification of the proceeds of unlawful activities, combating moneylaundering and combating thefinancing of terroristandrelatedactivities.

Togive effectto theseobjectives,Fica createsalegal framework forthe effective identification and verification of clients.Regulations issued under Ficaset outa number of proceduralelements that financial institutionsought to giveeffectto inorderto implement Fica.

The highcourt inPretoria in Houtbosplaas(Pty) Limited and anotherv Nedbankheld that customers of banks are under nostatutory obligation under Ficato providedocumentstoa bankforverification purposes,upon request from abank. Nedbank appliedforleavetoappealbut this wasdismissed. Nedbank subsequently applied for leaveto appealtothe Supreme Courtof Appeal (SCA), which was granted.

The disputeat theheart of thiscase aroseasa resultof Nedbankrefusingtoclosethe bank accountsof Houtbosplaas and TBS Alpha (the companies) pursuantto their written instructions.HoutbosplaasandTBSAlphahada longstanding relationship with Nedbank.Four trusts each heldone preference share andordinary sharesin the companies.

In 2016, Nedbank requested certaininformation from the companies pursuant to theprovisions of Fica. Some of the information was provided,but thecompanies contendedthat the request constitutedan unjustifiable intrusioninto the trusts’ right to privacy.

Adispute arosebetween Nedbank andthe companies’ representative inrespect of the requestfor information, which ultimatelyled tothe companies giving written notice to Nedbankin January 2017to closetheiraccounts and transfer thecredit balances of thoseaccounts to Absa Bank

Nedbankrefused toclose

the accountson thebasis that the companiesfailed to comply with Nedbank’s request and, consequently, the accountswere restricted based on Fica.

In July 2017 the accounts were closedafter Nedbank received theoutstanding information it requested from Houtbosplaas and TBS Alpha.

The companiesviewed Nedbank’s conductas unjustifiable andunlawful and instituted proceedingsto claim damages inthe amount of R181,103.31,together with interest and costs.

Indetermining thequestionofwhetherNedbankwas

THE COMPANIES VIEWED NEDBANK’S CONDUCT AS UNJUSTIFIABLE AND UNLAWFUL AND INSTITUTED PROCEEDINGS

entitled to therequested documents, specifically the trust deeds, the SCAhad regard to various provisions in Fica.

Section 21(2)of Fica,prior to itsamendment, readas follows: “If an accountable institution had established a business relationship with a clientbefore thisacttook effect, the accountable institutionmay notconcludea transaction inthe courseof that businessrelationship, unless the accountable institution hastaken theprescribed steps –(b) to establishand verify the identity of the client”

TheSCA heldthatsection 21(2) of Ficaapplied to existing clients of an accountable institution who had already established a business relationship before Fica took effect. At the inception of Fica, Nedbank was required to comply with the prescripts and,oncethishadoccurred,it was not necessaryfor Nedbank to verify the companies in respect ofeach and every transaction concluded during the relationship, provided there is anongoing obligation to ensure the verification information is up to date.

Similarly, theSCA found thatregulation 7,which atthe relevant time required financial institutionsto obtainvarious particulars of trusts holding 25% or more of the votingrights atageneral meeting ofa company,only applies when an accountable institution is establishing a business relationship or con-

TOO MUCH INFORMATION?

cluding a single transaction.

The SCA heldthat the preference shareholdershad untrammelled votingrights and consequentlywould haveevery rightto voteat general meetings of the companies. Consequently, each trustthatheld sharesinthe companies held less than 25% of the voting rights.

The SCAdismissed Nedbank’s appealand heldthat therewas nobasis forNedbank concluding that it was justified in refusingto give effect to the companies’ instructions toclose thebank accounts, giventhat inaccordancewith thelaw atthe time, Nedbank was not required toverify theidentity of the trusts as they did not holdmore than25% ofthe voting rights.

The SCAconcluded that therefusal byNedbankto giveeffect totheinstructions to close the bank accounts shortly after receiving the instruction from the companies constitutedNedbank breaching its obligations to

THE SUPREME COURT OF APPEAL HELD THAT THE PREFERENCE SHAREHOLDERS HAD UNTRAMMELLED VOTING RIGHTS

act in accordance with instructions from its customer. Consequently,the SCAheld thatthePretoria high court was correct in also awarding mora interest in favour of the companies from January20 2017(beingthe date ofdemand) toJuly 10 2017(beingthedateonwhich Nedbank closed the accounts ofthe companiesandtransferred thefunds inthe accounts to Absa).

The Pretoriahigh court’s statement that customers of a bank are not obliged under Fica toprovide thebank, upon request, with documents to verifytheir identity is surprising, but must be consideredin lightofregulation 7. Regulation 7 (prior to it being repealed) referredto a 25% threshold for triggering identification and verification.

Onapplication ofthisrule, Nedbank was notobliged to request documents from the trustsand thetrustswere within theirrights torefuse providing the information.

However, in our view, this should notbe readas suggesting that in terms of current legislation an accountable institution would be precludedfrom, interms of itsrisk managementand compliance programme (RMCP), notinga customeras high-risk or noncompliant if that customer refused to provide information which had

been requested bythe bank in accordance withits RMCP, whether that information was requested in establishing arelationship, orpursuantto that institution’s ongoing due diligence obligations.

We do not believe a customer would beentitled to

FINANCIAL SECTOR LAWS ARE RAPIDLY EVOLVING AS REGULATORS SEEK TO ENSURE FAIR OUTCOMES FOR CUSTOMERS

raise as a defence that the information could be obtained froma thirdparty and an accountable institution wouldbe permittedto initiate its high-risk policy if a customer refuses to provide requested information.

This judgment does, however, highlightthe importance of an accountable institution only requesting information that it is entitled to under Ficaand its RMCP.

Bearing inmind theprinciple ofminimality,as setoutin section 10of theProtection of Personal InformationAct (Popia), an accountable institution mayonly request(and subsequently process)informationifit isadequate,rele-

vant andnot excessive.Askingfor toomuchinformation, orinformationnotrequiredin termsof Ficaor theRMCP, creates a riskbecause failure to provide information not strictly required does not founda basisfor refusingto act on theinstruction of a customer.

Failure to actin accordance with theterms and conditions applicable to a particular customer, such as refusing to implement an instruction when not strictly entitled todo so,could expose a financial institution to aclaim forinterest, orpossibly an offence under the Financial Institutions (ProtectionofFunds)Act.Bearingthe provisions ofPopia inmind, a bankmayalsoexposeitselfto proceedings thatarise asa result of a breach of Popia. Financial sectorlaws are rapidly evolving as regulators seek to ensurefair outcomes for customers while ensuring financial stability and the integrity of the SA financial markets.Itcan bedifficultfor financial institutionsto ensure theiroperations remain compliant. Case lawsuch asthis demonstrates this difficulty, and alsoserves asa caution to financial institutions to continuously review and reconsider their procedures and policies withtheir advisers in light of developments.

BUSINESS LAW & TAX

Vaccine firms not keen to share patents

Dr Joanne van Harmelen ENSafrica

Know-how is something that falls squarely within the domain of intellectual property (IP)law because know-how isoften protected by patents.

OnApril292022,theBBC published anarticle headed “Investors losevote toshare Covid vaccine know-how” The subheading fillsin the gaps: “Three oftheworld’s biggest Covidvaccine makers have seenoff attempts to make themshare theknowhow to make their jabs.” Moderna, Pfizer and Johnson & Johnsonare three of the pharmaceuticalgiants that makeCovid-19 vaccines. Investors inthese companies proposed avaccine knowhow share with companies in developing countries to ensure people in the developing world also get vacci-

nated. Ineach case,the proposal was rejected. The argumentadvanced foraknowhowsharewas simple:itwill speed up thevaccine rollout. The argumentagainst a know-how shareseemed to be somethingalong these lines we are making vaccines fasterthan theycan be used,so thereisno needfor us to share our IP. World Health Organisation director-general Tedros Ghebreyesus addressedthe Moderna annualgeneral meeting earlier this year. He made thepoint thatmore than 11.4-billion doses of the Covid-19 vaccinehad been distributed worldwide, yet one-third of the world’s population had not received a singledose.This cameonthe back of apublic statement by Médecins SansFrontières (MSF), in whichit called on Moderna tomake itsCovid19 vaccinetechnology available to manufacturers in the developing world.MSF

reminded Moderna that it received about $10bnin public funding to develop the vaccine.

Yet only 24%of Moderna’s shareholdersbackedtheproposal thatthere shouldbe an IP and technical know-how transfer to manufacturers in low andmiddle-income countries. One small victory wasa concessionbyModernato linkexecutivebonuses with meeting demand for vaccines in poorer countries.

The shareholdersof Pfizer also rejectedthe ideaof a know-how share by a remarkably similar margin, with only 23.7%in favour. Johnson &Johnson didnot provide figures.

Moderna’s reasoningis alongthelinesof“we’redoing what wecan inthe contextof the constraints facing vaccine delivery in developing countries”. In 2021, the company delivered 807-milliondoses ofvaccine, makinga profitof $12.2bn. Of these 807-million

doses, Moderna claims that morethan 25%went tolow or middle-income countries. The company further claims thatshare couldhavebeen higherifit hadn’t been for issues suchas alack of refrigeration capacity,limited availability of health workers and vaccine hesitancy. Moderna says it is looking at increasing its manufacturing capacity in Kenya.

COMPLEX

Pfizer defends its refusal to transferIP onthe basisthat vaccine production is “extraordinarily complex,” involvingasit does “280 ingredients from 86 suppliers in 19 countries”. Given this complexity, theconcern isthat a transferof IPwithoutproper technical implementation may well resultin risks to patients. The company claims it isexpanding productionto

CONSUMER BILLS

4-billion doses this year, with a quarter going to “less welloff” countries, while those with the “lowest incomes” areto getvaccines atcost price.

Johnson&Johnson,which has also received millions of dollars from US taxpayers, has indicated that it has provided 900-million doses at not-for-profit prices, and saysitisworkingonalicencing dealwith anAfrican country.

Oxfam USA has shares in all threecompanies, andin thecase ofeach company,it was Oxfam that submitted the proposal for a know-how share. Oxfam rejects the arguments advanced by the companies for refusing the proposal, claiming vaccine hesitancy has been exaggerated.Itsays that “what the donation-based statusquo has achieved is74% vaccina-

tion rates in rich countries and 12% vaccination rates in poor countries”.It goesonto say that “lower income countries aresaying giveus the toolsthat weneed tomanufactureourowndosesforour owncitizens, andthatlocally based manufacturingwill solve many problems”

There has beena great deal oftalk aboutan IPwaiver,ever sincethe issuewas raised in discussions involving the EU, US, India and SA. But there has been little real progress. OnMay 6,Politico reportedthatthe issueofa waiver had beendiscussed at the World Trade Organisation, and thatfollowing this meeting, the US announced it was still engaged in domestic discussions, while China describedthe latesttextas one that was no more than a basis for further discussions. As hasbeen pointedout before, there may be more pertinent issues stalling access to Covid-19 vaccines in developing countries, such as thecost andavailability of raw materials, the capacity and number of vaccine manufacturing facilities capable of producing the quantities of quality vaccine required for the globalpopulation, andthe logistical complexities of providingvaccines toremoteor rural locations,particularly where the vaccine requires a cold chain to remain viable. Untilall oftheseissues can bedealt with,it seems there will be slow progress for vaccine manufacturing on the African continent, regardless of the willingness of big pharma to share their knowhow.

Bill of rights gives equal protection to everyone

As we come out of Pride Month and Youth Month, it is worth reflecting that when the bill of rights uses the word “ everyone ” in the equality clause it means just that. It gives equal protection and benefits of the law to everyone.

The ink was hardly dry on the constitution in 1995 when the Constitutional Court declared the death penalty unconstitutional and explained the values that have protected all of us ever since. While public opinion may have some value, it is no substitute for upholding the values in the bill of rights, if necessary by recourse to the courts, without fear or favour.

If public opinion were decisive, there would be no reason for the Constitutional Court because parliament has a mandate from the majority of the public. That argument was relied on by the apartheid regime.

The very reason for the establishment of the new

legal order is to protect the rights of minorities and every individual. Someone convicted of murder has the same rights to equal protection as the president. As the recent Constitutional Court judgment shows, even smokers have rights. This has been starkly illustrated recently in relation to the theft of money from the farm of the president. We have heard hundreds of times from the media and the public that “he owes us an explanation”. Any lawyer will advise you that if a charge is laid against you there is a right to remain silent. Like most principles in law, the Romans had a phrase for it: nemo tenetur se ipsum accusare (“no person is

bound to accuse themselves”). That right to silence, which can be exercised by everyone even when accused of a misdemeanour, is one of the many rights that must be respected.

Pride Month reminds us that no-one may unfairly discriminate against others on any of many systemic grounds mentioned in the bill of rights. Gender, sex and sexual orientation are only a few of the prohibited grounds. But this does not mean people with a different gender or sexual orientation from you or me are in any sense different from anyone else in relation to basic human rights.

It is not a question of being fair to people who, say, fall within LBGTQI+ gender or orientation. That label is not necessary because there is a separate LGBTQI+ “community”. Labels become necessary because people unfairly discriminate against others, even against those in the majority, as in the case of

the universal discrimination against women. That differentiates us from, for instance, the US constitution, where politicians can load the courts with judges holding a specific view and override years of entrenched and established basic rights.

In SA the core value of our constitution is human dignity. The courts have recognised many times that the right to employment is an essential part of that obligation. That right begins with every child being entitled to basic nutrition and basic education, accessible through reasonable measures by the state.

These are not rights invented for our constitution. You don’t need international conventions nor bills of rights to recognise how important it is that we embrace these rights practically and not just conceptually. It starts from the recognition that “ everyone ” means everyone.

This brings me back to the point that the bill of rights protects what the

Constitutional Court, in the death penalty case, called the social outcasts and marginalised people of our society. People are not marginalised because of anything they have done. They are marginalised because other people impose self-created values that discriminate unfairly. Take a simple example. Sex work in SA is criminalised. The law assumes that sex workers are deliberately embarking on criminal acts. In a country with the levels of unemployment and poverty SA has, this is inexcusable. If a country such New Zealand can decriminalise sex work, what possible basis can there be for not doing so in our

LABELS BECOME NECESSARY

BECAUSE PEOPLE UNFAIRLY DISCRIMINATE AGAINST OTHERS

constitutional democracy where most of those involved in sex work are involved because of necessity not choice? And even it that were not the case, there is no reason and no constitutional basis for sex workers to be marginalised and criminalised.

Pride Month and Youth Month are just examples of the bigger picture. We recognise the basic rights of people in all kinds of ways. There is some right or other being celebrated on virtually every day of the calendar. These are not rights of separate classes of persons we have to give special attention to. We are all equal individuals. Every case is an example of why “ everyone ” not only has equal rights but that everyone has an obligation not to judge unfairly whether any other individual has equal rights.

BUSINESS LAW & TAX

Keeping tabs on work jabs

• Just because the state of disaster has been lifted doesn’t mean you can relax vaccination policies

Lauren

Salt & Jessie Gertzen ENSafrica

With the end of the national state of disaster, some employers have become complacentabout determining theiremployees’ vaccination statusor keeping this information up to date.

Manyemployers relyon outdated vaccinationstatus surveys oroperate underthe misapprehension that their workforce’s vaccinationstatus is of no consequence to their current operations. This can’tbe furtherfrom the truth. Below, we discuss the importanceof employers taking stepsto determine employees’ vaccination status,andthe impactoffailing

to do so.

First, in termsof the Code of Practiceon managing exposureto Covid-19inthe workplace (NewCode), issued by thedepartment of employment &labour on March 152022, every employer musttake measuresto determinethevaccination statusof itsemployees. With the advent of booster shots,an employee’s vaccination status can be a moving target. The New Code recognises thisand has

EVERY EMPLOYER MUST TAKE MEASURES TO DETERMINE THE VACCINATION STATUS OF ITS EMPLOYEES

expanded thedefinition of vaccinated toinclude booster shots. A consequence of this new obligationunder the New Codemeans that employers who have not collected theiremployees’ vaccinationstatus oughttocollectthisinformation,whichin turn ought to include information regardingemployees’ booster shots.

Thequestion thenarises: is it a “must” to keep these records up to date?

TheProtection ofPersonal Information Act,2013 (Popia) provides thata responsible party (the employer in this instance) musttake reasonably practicablesteps to ensure thepersonal informationof itsemployees iscomplete, accurate,not misleading and updated,where necessary. Thismeans an employer must verify

ON THE RECORD

(through obtaining employees ’ vaccination certificates) that the employees are, in fact, vaccinated andwhat the status is inrespect of booster shots.This isparticularlythe case if employers are relying ontheir employees’ vaccinationstatus whenassessing therisktohealthandsafetyin the workplace.

An employer may have, based ona riskassessment, deemedit unnecessaryto implement mandatoryvaccinationbecause ofa highvaccination rate in its workforce. Similarly,an employermay haveimplemented amanda-

LEGAL SCOOP

toryvaccination policyand thenceased toimpose mandatory vaccinationonce a certain percentageof the workforce becamevaccinated.

But hasthis riskassessment beenupdated? Ifthe riskassessment wasundertakenbefore the introduction of booster doses,an employer’svaccination ratemay havefallenfrom 90%to10% inthe scenariowhere employeeshave failedor refusedto receivetheir booster shot(s) and the efficacyoftheir initialdoseshas waned.

If arisk assessmenthas notbeen updatedsince employeeshave becomeeligiblefor boosters,and employers do notknow the currentvaccination statusof theiremployees, therisk assessmentmay notreflect the true risk in the workplace and theworkplace maynot beashealthy andsafe as the employer believes.

The risk assessment that employersare requiredto conductshould bealiving documentand updatedregularly. It needsto be informed bynot justvaccinationrates butdevelopments inthe Covid-19 landscape.

BOTTOM LINE

The bottomline is thatit is importantforallemployersto knowtheir employees’ vaccination status, especially where there isa vaccination policy in place.

Thepercentageofaworkforce that isvaccinated will directlyinform therisk assessment everyemployer isrequired toconductand thisinformation mustbe updated on a regular basis.

Employers areencouragedto seeklegaladvice wherenecessary toensure theirrisk assessmentsand policies are upto date and legallycompliant, andthat theyobtain, maintainand retaintheir employees’ vaccinationstatus withinthe bounds of the law.

Rights and wrongs of different labour action

Lock-outs, strikes, picketing, work stoppages so many terms, but what do they all mean?

It would be understandable for employers to not always know what remedies they can seek after their employees take part in any of these as they all differ despite seeming so similar.

Consulting with your experienced legal adviser is imperative; however, having an understanding of the terms and what you need advice on can make all the difference to finding your workable solution.

● Are they grasshopping, striking or going slow?

Strikes are basically either a refusal to work or can also be “go-slows” or “grasshopper” strikes. Goslows are literally what they are called in that employees work slowly, thereby putting pressure on their employers to meet their demands. A grasshopper strike is when employees do intermittent strikes by coming to work, then striking, returning to work and so on with the aim being to make the employer meet their demands.

Work stoppages by single employees are excluded

from the definition of “strike” Essentially, when two or more employees down tools, their actions would constitute a strike if they act with common purpose. Usually the difference between a work stoppage and a strike is that in work stoppages, employees simply stop working without placing a demand on their employer whereas in strikes, clear demands are made. This distinction is important because it affects how the employer will and can respond should either occur. Any group of employees can strike; however, for protected strikes, employees need to comply with the requirements of the Labour Relations Act, No 66 of 1995 (LRA). Employees do not have to be trade union members to participate in a protected strike but, importantly, employers must make note of which employees participate as this

can be vital if the employer approaches the court for remedy in regards to an unprotected strike.

In interdict applications, employers will need to submit as much evidence as possible to establish the link between the employees on strike and the unlawful conduct complained of, whether it be by identifying specific employees in instances of isolated unlawful conduct or offering facts that imply it is more probable that the employees have engaged in unlawful conduct. Sweeping allegations that employees are acting unlawfully will not be sufficient in the absence of proper evidence.

It must also be noted the proper identification of culprits of unlawful conduct will not only satisfy the requirement that there must be a link but will assist employers in successfully disciplining employees who have embarked upon such unlawful conduct.

It is also important to note that employers may not dismiss employees for participating in a protected strike unlesstheir conduct during the strike is unlawful.

Secondary strikes can also ensue and this is when

other employees strike in support of a primary strike held by colleagues. However, secondary strikes are not protected unless they are in support of a protected primary strike. Secondary strikers also need to give employees seven days’ notice and the strike must not disproportionally affect the employer to the primary strike.

● What about salaries and wages during a strike?

Simply put, “no work, no pay ” applies during a strike. This principle became highly topical during this Covid-19 lockdown period, with much confusion around the legalities when it comes to employers having to continue to pay, or not pay, their employees. However, employers have to make payments in kind for food, accommodation and other benefits such as pension, medical aid and so on.

● Strike ultimatums: An employer may issue a warning to striking employees that they could be dismissed if they do not return to work. This is to allow the employee to reconsider their participation in the strike and enough time should be given for them to do so.

● Defensive and offensive lock-outs and picketing:

A lock-out enables an employer to prevent certain employees from coming to work in order to encourage them to accept a demand made by the employer. There are two distinguishing types of lock-outs, the first being a defensive lock-out and the second an offensive lock-out.

An offensive lock-out is initiated by an employer without a strike having been called and does not allow employees to be replaced by another workforce during the lock-out. A defensive lock-out is in response to a strike and allows the employer to employ replacement labour for the duration of the strike.

Lock-outs can also be protected subject to certain requirements and it is important to consult with your employment attorney to establish what rights you have as an employer or employee.

WORK STOPPAGES BY SINGLE EMPLOYEES ARE EXCLUDED FROM THE DEFINITION OF ‘STRIKE’

Picketing in support of any protected strike or in opposition to any lock-out endeavours to be nonviolent and must take place subject to established picketing rules. Both the LRA and the Picketing Regulations that came into effect on January 1 2019 must be taken into account. The picket may only be held in a public place outside the employer’s premises or, with the permission of the employer, inside its premises.

Employers may not take disciplinary action against an employee for participating in a lawful picket.

FINDING THE RIGHT SOLUTION

From grasshopping to picketing, there are fundamental rules in place for employers to adhere to, and while these descriptions serve to clarify some of the terms, employers should familiarise themselves with, an experienced labour attorney or legal team is undoubtedly the perfect partner when navigating what can ultimately make or break your business.

● Bronwyn Marques & Lisa-Anne Schäfer-King are Directors at Fluxmans.

BUSINESS LAW & TAX

Sasol wins in case on BEE compliance

•

Judgment reinforces requirement for investigative proceedings to be fair and lawful

ENSafrica

Arecent high ourt judgment has yet again set aside findings madeby the Broad-BasedBlack Economic Empowerment (BBBEE) Commission.

Thehighcourt,inSasolOil Limited versusThe B-BBEE Commission andothers on June 142022, reviewed, declared invalid and set aside a decisionmade bythe commission againstSasol Oil Limited fornot complying with the provisionsof the Broad-Based Black Economic Empowerment Act 2003

In2006, SasolLimited and Sasol Oilentered into an empowerment deal with Tshwarisano LFBInvestment Pty Ltd pursuant to which Tshwarisano acquired25% of the shareholding of Sasol Oil forthe benefitof varioushistorically disadvantaged groups.Oneofthehistorically disadvantaged groups identified to participatein the Tshwarisano transaction was Awevest Investment Ltd.

Awevestheld (andcontinuestohold) aminorityequity stakein Tshwarisanoviaa special purpose vehicle. Notably, Awevestfunded the acquisition of itsequity stake through third-partypreference share funding.

In2015, nearlynineyears after the conclusionof the Tshwarisano transaction, a shareholder ofAwevest complained toSasol Limited

that theterms ofthe preference shareagreement entered intobetween Awevest and the funders unfairly favoured the funders and in the processundermined the purpose ofthe Tshwarisano transaction.

Accordingly,SasolLimited facilitated asettlement negotiation betweenAwevest and thefunders,whichresultedin theconclusionofasettlement agreement.

In2017, SasolOilwas

SASOL OIL WAS UNDER THE … IMPRESSION THAT THE DISPUTE BETWEEN AWEVEST AND THE FUNDERS

WAS RESOLVED

notified thecommission was investigating acomplaint received againstit, the essence ofwhich was that Sasol Oil was responsible for theunfairtermsinthepreference shareagreement and, consequently, Sasol Oil knowingly engagedin and perpetuated afronting practice byclaiming blackownership points,which flowed from Awevest’s participation in theTshwarisano transaction.

Eventhough SasolOil made comprehensive submissions tothe commission, in 2019the commission issued adversefindings

against it, withcertain remedial recommendationsnearly twoyears aftertheinvestigation commenced.Sasol Oil approached the high court to review and set aside the findings andremedial recommendations madeby the commission.

GROUNDS OF REVIEW

Sasol Oilbased itsreview application onthe provisions ofthe PromotionofAdministrative JusticeAct 2000, alternatively onthe principle of legality.The primary grounds of review were:

● SasolOil hadnoknowledge ofthe preferenceshare agreement;

● SasolOil wasunderthe reasonable impressionthat the disputebetween Awevest and the funders was resolved after theresolution facilitated by Sasol Limited;

● Awevest’s B-BBEEcredentials (whetherincluded or excluded)had noimpacton Tshwarisano’s B-BBEE ownershipand,consequently,had no impact on Sasol Oil’s BBBEE ownershipand level ratings;

● SasolOil wasnotafforded a fair hearing;

● Thecommissionabusedits remedial powers; and

● The commission’s findings were time-barred.

PRIMARY ISSUES

Theissues thathad tobe determined bythe highcourt included:

● Whether thedecision by the commissionconstituted

Mentorship helps to close

Lerisha Naidu Baker McKenzie

The legal sector is characterised bygender gapswith regardto leadershippositions,career progressionand remuneration.

Ofcourse, thesechallenges shouldnot beovercomeby tokenisingfemale staffwithout ensuringgenuinelyinclusive culturesthat encourage retention,includingaccess toopportunities, fairmeasurement ofperformanceand internalpolicy

reformthat enablewomento combine family and work.

Realinclusion helpsto overcomeboth themeasurable andthe lesstangible challengeswomenfaceinthe legal sector. Itis also important to take an intersectional approachto theinclusion project,factoringinallimportant aspectsof identity,as wellas socioeconomicfactors,in developinginclusion strategies.

As partof theBaker McKenzie’s Diversity & Inclusioninitiative, thefirm

procedurally unfairand unlawful administrativeactionin termsof thePromotion of Administrative Justice Act;

● Whether thedecision by the commissionwas invalid andunlawful withregardto the principles of legality; and

● Whether the commission should beinterdicted from making unlawfuldemands of Sasol Oil and threatening to invoke itspowers against Sasol Oil if itlater does not comply with its demands.

HIGH COURT JUDGMENT

Thehigh courtfound thatthe commission’s finalfindings and remedialrecommendations werereviewable under the Promotion of Administrative Justice Act, and the findings were declared to be invalid andset aside.In essence, the court held that:

● Thecommission’sdecision to issue its final findings constituted administrativeaction and was to bedealt with in terms ofthe Promotionof Administrative JusticeAct, but the findings were also subject toscrutiny underthe principle oflegality. Notably, this judgmentdeparted from the decision in CRRC E-Loco Supply (Pty) Ltd versus BBBEE Commissionand Others,where thecourt heldthat the commission’s investigativepowersasprovidedforin section 13J of the B-BBEE Act

didnotconstituteadministrativeactionascontemplatedin the Promotion of Administrative Justice Act;

● Thecommission’sdecision was basedon incorrectfacts and not onadmissible evidence. It took irrelevant considerationsinto accountand relevant considerationswere nottaken intoaccount.A similardecision washanded down in Cargo Carriers ProprietaryLimited versusBBBEECommission andOthers,wherethe courtheldthat “notasinglejurisdictionalfact forfronting wasestablished” by the commission;

● The findings weremade arbitrarily or capriciously within the meaning of section 6(2)(e)of thePromotionof Administrative Justice Act andwereirrationalwithinthe meaning of section 6(2)(f)(ii);

● The commission’s findings were unreasonable within themeaning ofsection (6)(2)(h) of the act;

● To ascribe a fronting intent toSasolOilthroughanagree-

THE PROCESS FOLLOWED BY THE COMMISSION WAS UNFAIR IN THAT IT DID NOT COMPLY WITHTHEPROVISIONS OFTHEACT

menttowhich itwasnota party and that was concluded byindependent partieswas irrational;

● Theprocess followedby the commission was unfair in thatitdidnotcomplywiththe provisionsof theact andthe B-BBEEregulations the commissiononlypaidlipservice togiving Sasol Oila fair hearing;

● The commission’s recommendations were reviewable in that itwas not authorised tomake therecommendations (the B-BBEE Act and the B-BBEEregulations setthe parameterswithin whichthe commissionis expectedto operate);

● The reasoning of the commission wasdemonstrably flawedand thecommission exercisedits powersforan ulterior purpose;

● The commissionmisdirecteditself byconcluding that Sasol Oilhad misrepresented its B-BBEE status; and

● Thefinal findingscontravenedregulation 15(4)ofthe B-BBEE regulations which prescribethat thecommission mustissue itsfindings within one yearof the complaint.

The high court’s order includedan interdictagainst thecommissionfrommaking unlawfuldemands ofSasol Oil and threateningto invoke powersagainstSasol Oil,ifit didnotcomplywiththecommission’s unlawful demands. Corporates will be encouragedby thisjudgment whichreinforcestherequirementthat thecommission must conduct its investigative proceedings ina mannerthat is fair andlawful, including givingdue andproperconsideration to all facts and evidence presented. Thejudgmentalso clarifiesthatthe commissiondoes nothave thepowerto issuefinalfindings morethan oneyear after it has received a complaint if itis notan investigationin terms of regulation 15(8). The commission will need to ensurethatitissues final findings within oneyear of receiving acomplaint inthe future.

● ENSafrica acted for Sasol Limited and Sasol Oil in this matter.

gender gaps in the legal sector

hasset aspirational,measurable targetsfor genderthat focuson increasingfemale representationin partnerand leadershiproles. Thefirm announced in 2019 it had set newglobal aspirationaltargetsat 40:40:20gender diversity,to represent40% women, 40% menand 20% flexible(women, menor nonbinary persons). These targetsapply topartners, senior businessprofessionals,firm committeeleadership and candidatepools for recruitment.

Globally,nearly40%ofthe firm’s3,800 lawyersare women. InSA, about61% of the firm’sstaff arefemale. To empowerfemale leaders,the firm also has an intensive mentorship programmeto supportand helpfemalelawyers risethrough theranks, so theycan takeup leadership positions in the future. Turningattention tothe dynamicneeds ofclients, itis alsoimportant tounderstand what theywant fromtheir lawyers inthis currentchallenging environment.

We have toaccept that what our clients need from their legalteams ischanging. Facedwith disruptionand heightened market complexity, businesses are looking for legal teams who can leverage thelaw faster,moreaccurately and withgreater cost certainty.Clients requirea truelegal “partner” who understands their business, debunkingtech mythsand bringingthe bestindesign thinkingand solutionswhere they truly add value.

Clients wantholistic

answersto businessproblems, with insightand foresightonthe legalissuesthat could propel or derail their business. Postpandemic, with theincreased emphasison digitisation,clients expectus to applyan innovativemindset and embedinnovation in our strategyand services.We mustimplement ideasthat addvaluetoourclients’operations, aid them in pushing forwardtheirowninnovation agendas and helpthem to identifynewopportunitiesfor growth in Africa.

VIEWPOINT AFRICA

From LLCs to LLPs in Rwanda

• Tax considerations when private limited liability company becomes a limited liability partnership

Dieudonné Nzafashwanayo ENSafrica

In February 2021, for the first time inits history, Rwandaenacted alaw governing partnerships (lawno. 0082021of 16/02/2021) aimedat providing more structuring options forinvestors that intend touse Rwandaas a holding jurisdictionwithin theambit ofthe largerKigali InternationalFinancialCentre project.

Thelaw governingpartnerships providesfor the possibility ofconverting a private limitedliability company(LLC)into alimitedliability partnership(LLP) and, recently, theregistrar general issued therequirements to effect theseconversations. This meanscompanies can now start converting to LLPs.

This option willbe useful for variousmarket players, including smalland medium companies, professional servicefirms runascompanies, and companiesthat hold investments. LLPsoffer the limited liabilityprotection in thesamewaythatcompanies do but,unlike companies, LLPsmay besubject toless stringent compliance requirements, arefree from the economic double taxation risk because LLPs’ income accrues directlyto theirpartners, at least interms of the changes proposed to the law no 016/2018of 13/04/2018 establishing taxeson income (Income Tax Law) and thereis potentiallynocapital gains tax incaseof thedisposal of interest in the LLP.

Butwhatare thekeytax considerations thatshould be borneinmindwhenconverting an LLC into an LLP?

Tobeginwith, andasa legal consequenceof converting an LLC into an LLP, article110of thelawgoverning partnershipprovides that “[a]llmovableandimmovable propertyvested inan[LLC], all assets,interests, rights, privileges andliabilities and thewhole oftheundertaking areentrusted withthe[LLP], andthe[LLC]isconsideredas dissolved”

Thereading ofthisprovision clearly suggests the conversionof anLLCinto anLLP may be construedeither as liquidation of the LLC and distribution of assets to the shareholdersas theassetsof theLLP arefroma taxstandpoint the assets of the part-

ners,ortransfer oftheLLC business as a going concern to the LLP.

Wherethe conversionis construed asa sale/transfer of theconverted LLCbusinessto theLLPas agoing concern, avaluation would have tobe performedand the deemed proceedsfrom the transfer of the LLC assets would be takeninto considerationin computingtheLLC corporate incometax liability forits lasttaxyear asper article19of theIncomeTax Law, whichprovides that “business profitalso includes proceedsof saleof anybusiness asset …”

Such construction would also haveVAT implications because, unlikemany jurisdictions, thereis noexemption from VAT on slump sale transactions inRwanda, and the conversionwould be potentially taxedas asale of business assetsunder article 4 oflaw no.37/2012 of 09/11/2012 establishingthe value-added taxas amended (VAT Law)which provides that “[t]hesale ofany asset used by a personin the business isconsidered asa taxable action”

Wherethe transactionis treated as a liquidation followed bydistribution of

ANOTHER TAX CONSIDERATION RELEVANT TO THE CONVERSION OF AN LLC INTO AN LLP IS THE RIGHT TO CARRY FORWARD LOSSES

assets to the shareholders (who wouldbecome theLLP partners), deemed proceeds from the transfer would, after deducting the value of the liabilities and the shareholders’ equity, betaxed asa dividend asperarticle55oftheIncome Tax Law. The VAT Law is not prescriptive on thetax implications of the distribution of assets inspecie tothe shareholders atthe timeof liquidation, but this may also potentially have VAT implications bybeingtreated asadeemed sale on the basis of article 4 of the VAT Law.

However, ifthe proposed amendments to the Income Tax Law are enacted into law, the conversionof LLCsinto LLPswillnothaveincometax implications considered

above, becausepart of those amendments is the modification of the definition of taxfree restructurings for it to apply toother entitiesthan companiesasthiscurrentlyis thecase undertheIncome Tax Law.

For instance, interms of the proposed amendments, business restructuring includes the acquisition or transfer of the entire entity’s shares,assets orliabilitiesso that its existenceis replaced by the purchasingor receiving entity, andthis fully depicts the conversion of an LLC into an LLP. Under article 54oftheIncomeTaxLaw,the transferring companyis exempt from taxin respect of capital gains and losses realised on restructuring in case of a qualifying business restructuring.

Another tax consideration that isrelevant tothe conversion of an LLC into an LLP is the right tocarry forward losses. The provision of the

law governingpartnership that “allrights andprivileges are entrusted with the LLP” would suggest that these rights includetax lossesand, therefore, the LLPshould be ableto carryforwardthe losses of the converted LLC.

However,this notbeinga provision in tax legislation, the tax administration should provide guidanceregarding thetaximplication, ifany,of the conversion ofan LLC into an LLPon theright ofthe converted LLC tocarry forward losses.

The Income Tax Law is equally reticent on the cost basis for depreciation of assets transferred once on the LLP’s balancesheet ie whether they should be depreciated at their book value (as if the conversion did not take place) or there should be an adjustment of thecost basisof thetransferredassets totheirfair market value. This would, however, becomeirrelevant

once the proposed amendments to the Income Tax Law are enacted intolaw as the conversion ofan LLCinto an LLP would constitute a qualifying business restructuring.

Underarticle 54ofthe Income Tax Law, the receivingentitywouldhavetovalue the assets and liabilities involved attheir bookvalue in thehands ofthe transferringentity atthe timeof restructuring and depreciate the business assets according to the rules that would have applied to the transferring entity asif therestructuring did not take place. The conversion of an LLC

THE CONVERSION OF AN LLC INTO AN LLP MAY BE ATTRACTIVE, BUT THERE ARE TAX ASPECTS TO CONSIDER

into anLLP maybe attractive, but there are a number of tax aspects to consider, all of which remain unclear. Specialisttax adviceshouldbe obtained before proceeding. The taxadministration should also consider issuing guidance on the aspects discussed above, and particularly consider whether article54of theIncomeTax Law can (pending the enactment of the proposed amendments) potentiallybe extensively applied to conversionsof LLCsintoLLPs given thatthe statusquo is that partnerships are treated in the same way as companies for income tax purposes. Tax policymakers should also consider reviving the exemption of sale of a business asgoing concernfrom VAT, which wasprovided for under the 2001 VAT Law.

● Nzafashwanayo is a partner at ENSafrica Rwanda.

VIEWPOINT AFRICA

Use law to help build Africa

• The continent’s resources must be protected from the gross exploitation that marked its past

Mirelle Vallie & Guy-Fabrice Holo Asafo & Co

During thehistory of theAfrican continent much of its natural resources were removed by exploitation.

African countries have also played a part in mismanaging theprocessing and manufacturing ofnatural resources leadingthe continent to be the poorest, richest continent in the world.

Investors from all over the world recentlydescended on Cape Town forthe Mining Indaba and itis worth cautioning thatAfrican countries, although independentfrom each otherand havingtheir own laws, have not developedany guidelinestoprotect naturalresources inlaw against abusefrom foreign investors.

Natural resources belong to the Africanstates and, in terms of governing law, these countries havethe power neededtostepinanddevelop legislation whichprotects natural resources so that they have therequisite statusto enrich thecontinent. Resources should be extracted with proper compensationto enable thecontinent tocontinue to developaccording to government mandatesand to build proper infrastructure.

Inthepast wehavewitnessed afew errorson the continent with regardto giving upcertain rightswhich would havebenefited the greater mass and vision of an African unitedpool of resources. Although it is correctthat Africarequiresforeign investmentto facilitate the processesinvolved in producing andexporting natural resources, itmust look intonew, innovativewaysto use such investments to build a better Africa.

For this transition to be effective, itis importantthat this undertakingis accompanied bya profoundtransformation oflegislation forprotection of strategic sectors.

President CyrilRamaphosain arecent speechin Ghana echoedthese sentiments. “Ourendowment of raw materialspositions us perfectly, especiallyfor the manufacture ofelectric vehicles,” hesaid. Thisplaces Africa in a strategic position to interrogateprevious laws and implementnew innova-

tive laws toallow African countries to builda fruitful economy.

Afew Africancountries have adoptedgeneral legislation forstrategic sectors. Guinea, for example,has initiated protectionin legislation related to investment promotion. TheInvestment Code establishes a categoryof “ reservedsectors ofactivity” in which foreignindividuals or legal entitiesmay nothold, directly orthrough companies underGuinean law, more than 40%of the shares of companiesengaged in press ormedia activitiesin Guinea.

Similarprovisions existin other investmentlaws. However, asa generalrule the definition ofstrategic or reservedsectors hasonlya limited effecton investment projects.

Thedecisions takenin investment lawdiffer by country. The Investment Code inthe Democratic Republic ofCongo excludes several sectors from the benefits of the code, such as mining andhydrocarbons. Senegal’s InvestmentCode guarantees free access to raw or semiprocessed raw materials produced throughout the national territory.This paradox is only oneof the many pitfalls ofprotecting strategic sectors in Africa: the difficulty of defining themin a harmonised manner.

THE AU’S AGENDA 2063 FORESEES AS ITS FIRST ASPIRATION A PROSPEROUS AFRICA BASED ON INCLUSIVE GROWTH

One couldconsider that the differencein approachis explainedby thedegreeof importance of mining assets inthe economyof thetwo countries.TheMiningCodein the Democratic Republic of Congo allows for the declaration of a “reserved” or “strategic” substance, with regard to the economic or international situation, and subjectsaccess, research, exploitationand marketing of these substances (cobalt, geranium and coltan) to a special regime.

The declared willingness of thepresidents ofthe Democratic Republic of Con-

LAND OF RICHES

goandBurundi toreviewthe contracts concluded with foreign mining companies is only the latest illustration of theidea tochangethe paradigm that makesAfrica a hub of raw materials.

This initiativeshould be supported and extended to other countrieson thecontinent. Indeed,in viewof the upcoming energytransition, African countries must work together to secure their strategic minerals. African countries should begin to create their own processing plants onthe continentas opposedtoprocessingstrategic minerals on other continents, which isnot beneficial for Africa.

The partnership between African countries and investors should be balanced, inthatpart oftheprocessing should beoperated onthe continent or, at least a share of the revenues derived from the processing abroad of the raw materials should be returned to the place of origin.

The multiplicationof articlesandstudiesonthestrategic character ofcobalt or

lithium for the greening of industries,such astheautomotive industry, should accelerate thisawareness and encourage the adoption of adequate regulations.

African countriesshould pay particular attention to sectors of strategic interest, giventheirimportanceforthe development of their economies and for theirusein large-scale industrial projects.

DIVERSITY

However,andthis isoneof the difficulties to overcome, the diversityof sectorsthat couldbe declaredstrategicis matchedbythevarietyofforeign interventions, since they arenot alwaysthe resultof direct investment.

AFRICAN COUNTRIES SHOULD PAY PARTICULAR ATTENTION TO SECTORS OF STRATEGIC INTEREST

The mining sector in Ivory Coast,following theexample of other countries, has providedinlawthepossibilityfor the minister incharge of minesto make an operating permitconditional onthe contributory participation of Ivorianprivate individualsin the share capital of the operating companies.

One solution could be to providethat anyinvestment in the so-calledprotected or reservedsectors shouldprovide foran interestof the state, inthe form ofa royalty ora nondilutableshareholding inthe projectcompany that willcarry outthe investments.Drawing onforeign examples, afund couldbe set upto receiveall theprofits linkedtothe pursuitofactivities in strategic sectors.

The sovereignwealth fund of Djibouti, intended to collect and investthe profits ofall publicestablishments that willgenerate them,is the latest development.

The AU’s Agenda2063 foreseesas itsfirstaspiration a prosperous Africabased on inclusivegrowth andsus-

IN VIEW OF THE UPCOMING ENERGY TRANSITION, COUNTRIES MUST WORK TOGETHER TO SECURE THEIR STRATEGIC MINERALS

tainabledevelopment, andin particular throughAfrica’s abilityto adoptlong-term sustainable management of itsresources. Theunion therefore has everyright to take up this issue.

Theimplementation ofthe African Continental Free Trade Area illustratesthat the ability to move towards a common projectis asimportant as that of free movement. Theprotection ofthecontinent’sresources shouldbe the next project.

● Vallie is a Partner at Asafo & Co South Africa, an international law firm dedicated to Africa. Holo is an Associate at Asafo & Co Paris.

Sneaky rugby match ends in dismissal

• Abusing sick leave even if you’re honest about where you went is not going to end well

Jonathan Goldberg & Grant Wilkinson Global Business Solutions

When employees have exhausted their quota ofannual leave,instead of applyingfor unpaidleave some might betempted to usetheir sickleavequota.

Thiswas thecase inWoolworths (Pty) Ltd V CCMA and 2 Others[2021] PA12/2020 ZALAC.

The employee advised oneofthe managersthathe hadtakenillandwouldnotbe attending workon thatday. When the employee returned to work for hisnext shift, his manager inquiredas to wherehe hadbeen onthe previous day.

The employeeinformed hismanager thatthough he was notwell hehad returned to work,and onthe previous day(June9)hehadattendeda rugby match.

Theemployerinvestigated the circumstancesof the employee’s absence from work and instituted a disciplinary inquiryagainst him on acharge ofgross misconduct. Theemployee was found guilty of the charge and dismissed.

The dismissed employee then referredan unfairdismissal dispute to the Com-

mission for Conciliation, Mediation and Arbitration (CCMA).

The commissionerfound the employee hadnot sought tohide thefact he had attendeda rugbymatch,and therewasnoevidencehehad previously beengiven a written or final warning. Further, the employer had not charged himfor dishonesty, and thus,according tothe commissioner, theemployment relationship hadnot yet broken down.The commissioner foundthe employee did not act dishonestly.

The commissioner considered theemployer’s evidence thatthe employee should havegone towork

THE EMPLOYEE HAD BEEN DISCIPLINED ON PREVIOUS OCCASIONS FOR BEING ABSENT AS WELL AS FOR COMING LATE

whenhefelt betterinsteadof attendinga rugbymatch,but herejectedit onthegrounds that the employer submitted no clear policy or guideline of what anemployee whohad been booked medically unfit toworkwasnotentitledtodo when not at work.

The commissioner concluded the dismissal was unfair and ordered the employer to reinstate the employee with retrospective effect.

The employerapplied to set asidethis awardon review before the labour court (LC).The LCheld that thefinding couldnot beset aside because the employer had not provedthe commissioner’s decision was unreasonable. TheLC did,however,hold thatthecommissioner had erred in finding the dismissalprocedurally unfair and foundthe dismissal wassubstantively unfair.

The employer then approached the Labour Appeal Court (LAC) on appeal against theorder. TheLAC found it wasimportantto emphasise that the charge brought by the employer against the employee was on the basis of gross misconduct inthat hehad “breached company policies and procedures when he abused authorisedleave intheform of sick leave”

The LACfound the employee’s actions were dishonest andthat hisbehaviour couldnotbe regardedassetting agood examplefor his subordinates. The LAC noted that the employee acted dishonestly in absenting himself fromworkon thebasisthat

he wastoo illto performhis duties but then travelled for at least anhour tosupport his local rugby team, knowing full wellhe wouldbe paidfor the day.

The findingof thecommissionerthattherehadbeen noactofdishonestywassubject to review.

TheLAC found the commissioner erredin hisreasoning that itwas “apparent the conduct and behaviour displayed by the employee was notsuch, asto makea continued employment relationship at the employer impossible or untenable”. The LAC stated thatthe lenient approach to dishonesty cannot be permitted.

The LACnoted the employee held a relatively senior position,and hewas clearly dishonest, evenon his own version. Heexpected to get awaywith theenjoyment of attendance ata rugby matchonthe basisofclaimingsickleaveandthenenjoying the benefits(payment for the day)thereof. Thiswas

dishonest conduct of a kind that clearly negatively impairsuponarelationshipof trust between an employer and an employee.

TheLACfurthernotedthat the employee had been disciplined on previous occasions for being absent as well as for cominglate. Thecourtfound that for the employer to adopt

THE LAC FOUND THAT HIS BEHAVIOUR COULD NOT BE REGARDED AS SETTING A GOOD EXAMPLE FOR HIS SUBORDINATES

theapproach thatthe employeewasrequiredtoact with integrity andabide by the employer’s policies,procedures and codes was manifestly justifiable.

TheLAC foundthat itwas clear the relationshipoftrust as aresult of hisinitial unreli-

abilityand nowdishonest conducthad brokendown. Viewed fromthe recordof thisemployee, dismissalwas the appropriate sanction. Thismaybe thekindof caseenvisagedbytheConstitutional Courtin Unionfor PoliceSecurity andCorrectionalOrganisation vSouth African Custodial Management (Pty) Ltdand others 2021 (11)BCLR 1249(CC) wherecosts shouldbe awardedagainst thelosing party asa resultof egregious conduct.However, giventhat theemployee wouldhave lost hisjob and beenan individualapplicant involvedin litigation with a large firm, there was no order as to costs.

The employee’s dismissal was foundto beboth substantively and procedurally fair. Thisis abinding LAC decisionwhich setsthe benchmark foremployees abusingsick leave.Thecost issuehas tobeafocus forthe currentLabour RelationsAct amendments.

Clear distinctions in interest deductibility

Benjamin Mbana Allen & Overy

In Taxpayer H v Commissionerof theSouthAfrican Revenue Service(IT 14213) (February 92022) thecourt highlighted that oneof the most important and sometimes overriding factors in determining whether expenditure is incurredin the productionof incomeisthe purpose forwhich the expenditure was incurred. In this regard, the court was obligedto considerthe closeness ofthe connection between theexpenditure and the income-earning opera-

tions of the taxpayer. The taxpayer submitted thatthe “in production of income” requirements of section 24J(2) hadbeen met on that basis that(i) the mere fact thatinterest earnedon the loans madeto its subsidiaries in2011 didnot exceed theinterest incurred does not mean that the interestwasnot incurredinthe productionof income,and(ii) that the interestit earned from itssubsidiaries constitutedincome asnone ofit was exempt.

Sars, on the other hand, arguedthatthepurposeofthe borrowingwastoprovidethe

taxpayer’s subsidiarieswith advantageous loansto benefit the groupby increasingtheir earning capacity.

The courtfound onthe factsthat itwasapparent from the mannerin which the taxpayerstructured the loansto thesubsidiariesthat the taxpayer’spurpose was not to generate income from theloans, norcould itbe shownthe taxpayerhada profit-making purposein advancing the loans.

Though thematter of interest deductibilityhas been consideredin numerouscases, thisjudgment isa reminder thatclear distinc-

tionscan bemade betweena moneylender andan investor and that these differences lie primarilyin thestructureand terms associatedwith the loans. In particular, in determining whetherinterest incurred bya taxpayeris incurred inthe productionof income andtherefore deductible fortax purposes,a

THIS IS A REMINDER THAT CLEAR DISTINCTIONS CAN BE MADE BETWEEN A MONEYLENDER AND AN INVESTOR

distinction mayhave tobe drawn betweena taxpayer who borrows a specific sum of money and appliesit to an identifiable purpose (asin the instanceofTaxpayer H)anda taxpayer whoborrows money generally andon a largescale toraisefloating capital for use in its business. Inthe former, the purpose of theexpenditure (being interest) and whatit actually effects can readilybe determined andidentified, and where there is a direct link between themoney borrowed by ataxpayer and the money lent toits subsidiaries the taxpayer willbepre-

cluded fromrelying on income receivedfrom other sources to prove that the taxpayer’s intention is one of profit-making (asin the instance of Taxpayer H). Had thetaxpayer, instead, applied theapproach ofplacingall borrowedfunds intoa common poolwhich constitutes ageneral fundused for all purposes,the taxpayer may havebeen ableto argue the generalsense ofits expenditure (being interest) was incurredto providethe taxpayer withfunds toraise floating capital foruse in its business and thus incurred in the production of income.

BUSINESS LAW & TAX

A lean, smart and modern tax machine

• Sars Vision 2024 aims for greater efficiency and simplicity in collections, but questions remain

Joon Chong Webber Wentzel

The SARevenue Service (Sars) announced in February 2020 that itwas taking the firststeps towards becoming afuture revenue authority informedby datadriven insights,self-learning computers, artificialintelligence and interconnectivity between peopleand devices.

The Sars “Vision 2024” is to bea smartandmodern organisation “with unquestionable integrity,trusted by government, thepublic and our internationalpeers”, commissioner Edward Kieswetter saidat the time.

Accordingto arecent Sait/Sage payrolltax update webinar,Vision2024aimsto, among others:

● Enableaccurateandtimely withholding oftaxes from employees andtheir payments to Sars;

● Reduce thepayroll administration foremployers, payroll administrators and Sars; ● Enable employeesto

monitor theirtax obligations during the tax year; ● Simplify theannual returns processfor employers; and ● Relieve,in thelongterm, the necessityfor most salaried employeesto file annual tax returns. In a recentmeeting with tax practitioners,Sars out-

IN A RECENT MEETING, SARS OUTLINED ITS VISION 2024 TO DO AWAY WITH ‘FILING SEASON’ IN THE 2025 YEAR

lined its Vision2024 to do awaywith “filing season” in the 2025 year.(Our sense is that this will be for the 2024/2025 year of assessment.)

Vision 2024anticipates using third-party data from third-party returns to prepopulate an “assessment” for the individual through a Sars

appwhere nearreal-timetax liabilities will be shown. There will be enough information on the “assessment” in the app to constitute a valid assessment in termsof the Tax Administration Act.

Currently, banks, financial institutions (such as longterm insurers,retirement funds and collective investment schemes), medical schemes, attorneys,estate agents,and issuersofbonds, debentures andfinancial products are required to file third-party returns to Sars. These third-party returns are filed with Sars once a year after theend ofthe yearof assessment andcontain information oninterest, dividends orcapital gainson disposals in theyear of assessmentwhichaccruedto a taxpayer in that year. (For example, the third-party data annual submissions for the year of assessment ending February 28 2022 will be open from April 1 2022 to May 31 2022.)

These third-party returns, together with the IRP5 certificates issued to employees

and EMP 501returns filed with Sarsby employers,are currently used to prepopulate the ITR12 annual tax returns for individuals.

Vision 2024envisages a data analyticsenvironment where third-party data will be provided to Sars on a realtime monthly basis, which will then be used to generate an “assessment” on a Sars app. It appears that the thirdpartydatacould beusedby Sars to generate an “effective tax rate” foreach taxpayer. Through a “push directive” or theIRP3edirectivesissuedby Sars to “employers”, Sarscan then require employers to withhold employees’ tax (PAYE) using the higher effective taxrate ratherthan the lower calculated rate based on the actual remuneration paid by the employer.

This process is already in effect for annuitants who receive income from more than one streamof annuities. Annuitantscan electtohave their PAYE withheld at the lower calculated rate rather

LABOUR PAINS

thantherate intheIRP3e directives.

Trust distributionsand section 18A donations are not currently reportedthrough third-party data reporting to Sars. It appears Vision 2024 may also require third-party data on these transactions.

What aboutthe business income of sole proprietors, rental income and capital gainswhicharenotsubjectto third-party data reporting?

How will Sarscollect the tax due on these amounts?

There is no information on this yet. Itappears these taxpayerswill needtoupdate the appwith theseamounts and monitor andpay their monthly tax liabilities on the appas theyarise. Theexample used by Sars in the recent discussion with practitioners was thatif taxis triggeredin March andpaid onlyin January, interest will be payable for the 10-month delaybetween theduedate and payment date.

We anticipate thatthe Tax Administration Actand

variousother taxstatuteswill need tobe amendedto accommodate theimplementation of Vision 2024.

We also note the budget 2022 contains a proposal that the provisional tax system would be reviewed given changing circumstances and international developments andthattherewouldbeadiscussion document published for comment in due course. Itappears the timing of this review would coincide with the implementation of Vision 2024.

Sars willbe circulating information on Vision 2024, especially on the implications for employers and employees, and on all those required to filethird-party datawith Sars. The IRP3e regime to implement theparagraph 2(2B) directive process for annuitantshas facedafew practicalissuesinimplementation. We hopethe solutions developed through this process willpave theway fora smoother implementation process for Vision 2024.

There is a high bar to prove constructive dismissal

Section 186(1)(e) of the Labour Relations Act defines constructive dismissal to be circumstances in which “ an employee terminated employment with or without notice because the employer made continued employment intolerable for the employee”

Put differently, the employee resigns and claims that they were, in effect, unfairly dismissed, as they would not have resigned had it not been for the alleged intolerable employment circumstances created by the employer.

One of the interesting facets of such disputes is that, unlike all other alleged unfair dismissal disputes, the starting point is the rebuttable presumption that the employer did not, in fact, fashion an intolerable

TONY HEALY

employment relationship and for this reason the employee, not the employer, has the burden of proof.

Let’s not forget that in the case of all other species of alleged unfair dismissal disputes, the rebuttable presumption at the outset is that the dismissal was unfair, until the employer proves, if it can, that the dismissal was fair, both procedurally and substantively.

Employees frequently underestimate how exacting the test is in constructive dismissal cases. The CCMA,

bargaining councils and our labour courts are not easily swayed by claims of constructive dismissal, with the statistics on the outcome of such disputes confirming this. Employees more often than not are unsuccessful when it comes to claims of constructive dismissal.

The recent labour court case in Shoprite Checkers (Pty) Ltd v Prince Nkosi & others [Case no. JR625/20] emphasised just how high the bar is when it comes to proving constructive dismissal, when it concluded that “by parity of reasoning, intolerability should not be easily reached in a case of constructive dismissal”

In short, the employee resigned and claimed constructive dismissal in a dispute referred to the CCMA. The commissioner found that the employee had

successfully proved that he was constructively dismissed. The employer reviewed the arbitration award in favour of the employee on grounds that the commissioner had erred as his conclusions were not supported by the evidence on record.

HIGH THRESHOLD

Without going into the nitty gritty of this labour court review case, the judge, quoted, among other things, the labour court judgment in Gold One Limited v Madalani & others [2021] 2 BLLR 198 (LC) which “sanctioned a well-established principle that “intolerability is a high threshold, far more than just a difficult, unpleasant or stressful working environment or employment conditions, or for that matter an obnoxious, rude and

uncompromising superior who may treat employees badly. Put otherwise, intolerability entails an unendurable or agonising circumstance marked by the conduct of the employer that must have brought the employee’s tolerance to breaking point.”

This emphasis on the weight of proof required to prove constructive dismissal as similarly addressed in the Constitutional Court judgment handed down earlier this year in Booi v Amathole District

EMPLOYEES … UNDERESTIMATE HOW EXACTING THE TEST IS IN CONSTRUCTIVE DISMISSAL CASES

Municipality & others (2022) 43 ILJ 91 (CC): “It is accordingly no surprise that the language, context and purpose of section 193(2)(b) dictate that the bar of intolerability is a high one. The term ‘intolerable’ implies a level of inbearability, and must surely require more than the suggestion that the relationship is difficult, fraught or even sour the conclusion of intolerability should not easily be reached.” The labour court judgment in Shoprite summed this up by stating that “by parity of reasoning, intolerability should not be easily reached in a case of constructive dismissal”

● Tony Healy is CEO of employer labour consultancy Tony Healy & Associates www.tonyhealy.co.za

Bones of intragroup loans

• Passing them off as a money-lending exercise and seeking a tax deduction on the interest won’t stick

Benjamin Mbana Allen & Overy

Inmany groupsofcompanies, intragroup loans make sense asa way of fundingthe operationsof the group.

Ifthe fundsaresourced fromoutside thegroup bya borrower entityand thenonlent toother companies within the samegroup as the borrower, thequestion is whether theinterest incurred by the borrowerentity is deductible interms ofsection 24J(2) ofthe IncomeTax Act No 58 of 1962(tax act). This question wasonce again considered inTaxpayer Hv CommissioneroftheSARevenue Service(IT 14213) (February 9 2022).

The taxpayer was a private investmentholding company whoseassets comprised, inthe main,shares in unlisted subsidiary entities, loansadvanced tothosesubsidiaries and cash.

The taxpayercontended that during its 2011 year of assessment, inaddition to being aninvestment holding company, itundertook a tradein moneylendingwith the specific purpose of making a profitfrom on-lending borrowed fundsto itssubsidiaries. Ittherefore sought toclaimadeductionforinterest incurredon borrowed fundsin theamountof R68,133,602.

TheSA Revenue Service (Sars) sawthings differently. Sarswasof theviewthat interestwas notincurredby the taxpayerwhile carrying onatrade, norwasit incurred inthe productionof income, thereforethe requirements of section

24J(2)of thetaxact had not beenmet. Sarsthereforedisallowed thededuction ofthe full interestamount. However, owing toa practice adopted bySars (setout in Practice Note 31 read with section51oftheTaxAdministration Act 28 of 2011), it allowed apartial deductionof the interestexpenditure limited to the amount of interest income ofR34,936,000 received by the taxpayer.

Sarsdisallowed thefull interest deduction for the following reasons:

tured its lending transactions so itcould earnneither income nor profit.

Sarsalso imposeda10% understatements penaltyin accordance with section 223 of theTax AdministrationAct No 28 of 2011.

The taxpayerdisputed Sars’ conclusion onthe basis that(i)it wascarryingon money lending trade and (ii) it incurred the interest expense inthe productionofincome as required under section 24J(2).

THE COURT FIRST CONSIDERED WHETHER THE TAXPAYER WAS CARRYING ON TRADE AS A MONEYLENDER

● The taxpayerborrowed at interestrate of8.29%per annum, yet it extended loans toits subsidiariesatinterest rates rangingbetween 0%, 5.29%, 6.22%and, attimes, 8.29% per annum.

● The interest rates imposed by the taxpayer demonstrated the taxpayer’s intentionas nothingmorethan furthering the group’s interests, by enhancingthe earning capacity of the subsidiaries.

● The transactions related to the funding of unproductive loans, in that the taxpayer’s borrowings were less than its receivables and the taxpayer’s lending transactions extended onlyto itssubsidiaries.

● The taxpayer had struc-

This articleconsiders only the court’s findings in relation to the deductibility of the interest incurred bythe taxpayer in terms of section 24J of the tax act

The courtfirst considered whether the taxpayer was carrying ontrade asa moneylenderin its2011 yearof assessment. In this regard, the court referred to guidelines set outin Solaglass FinanceCo(Pty) LtdvCommissioner for Inland Revenue [1991]257 (A).The courthighlighted the following findings from this case:

● Thelendinghad tobedone pursuant to asystem or plan that discloseda degreeof continuityin layingout,and gettingback thecapitalfor further use and which involved a frequent turnover of the capital.

● The obtaining of security was a usual,though not essential, featureof aloan made in thecourse of a money-lending business.

● The fact that money had on severaloccasionsbeenlentat remunerativeratesofinterest was not enough to show the business of money lending was being carried on. There had tobe acertain degreeof

PUT A STAMP ON IT

continuity about the transactions.

● As to theproportion of the incomefromloanstothetotal income, thesmallness ofthe proportion could not necessarilybe decisiveif theother essential elements of a money-lending business existed.

The court also referred to ITC 177166 SATC205 and ITC 81220 SATC469 in which the following was stated: “A long-term loan without any repayment terms, in myview, lacks the essential characteristicsof floating capital which, if it becomes irrecoverable,constitutes a loss of a capital nature”;and“Themaindifference between an investor anda moneylenderappears to consist in the fact that the latter aims at the frequency of the turnover of his money and forthat purposeusually requires borrowers to make regular payments on account of the principal. This has been described as a system or plan in laying out and getting in his

money…”

The courtnoted that throughout the taxpayer’s correspondence with Sars it argued that the interest expense was deductible in full because it was incurred whilecarrying ona tradein money lending with the purpose ofproducing income, specificallyfrom interest generated from its on-lending activities.

However, when faced with the reality it would fall short inmeeting thetests outlinedin thecase law,the taxpayer discontinued this argument, arguing instead thatits tradeactivitiesconsisted of “interest earning and interest earning activities”

The courtfound thatthe taxpayer could notjustify its claims it wasengaged inthe trade of money lending, which was further apparent fromthe factthat thetaxpayer had declared, in its 2011 tax return,it hadnot concluded any transaction in terms of section 24J.

In consideringwhether a

taxpayer has a profit-making motive, the court stated that:

● Money lenders demonstrate theirprofit-making purpose by charging remunerative interest rates and fixing terms when lending.

● Money lenders use a plan orsystemof layingoutand getting backtheir capitalto demonstrate continuity.For this reason, they usually requiretheborrowertomake periodic repayments.

● Money lendersdo notborrow at highinterest rates and lend at either nil or substantially low interest rates or at the verysame interest they incurred, andlook to the fiscus tofinancethe growth of theborrower and enhanceitsprofitability,inthe comfort theywill reaplofty dividends.

The courtfound thatthe taxpayer’s lending transactions were not concluded withtheintentionofmakinga profit, instead they were about fundingunproductive loans forthe taxpayerto reap exempt income.