BD Business Law & Tax (Nov 2022)

BUSINESS LAW&TAX

A REVIEW OF DEVELOPMENTS IN CORPORATE AND TAX LAW

New world: crypto assets now financial products

• Service providers will have to apply for a licence from 2023 to bring them into the regulatory net

Angela Itzikowitz, Era Gunning, Jessica Blumenthal, Johan Loubser & Talia Cullinan ENSafrica

Crypto assets have beenon the radar of the SA regulators for quite some time. “Ourview haschanged and we now do regard [cryptocurrency] asa financialasset andwe hopeto regulateitasafinancialasset,” said ReserveBank deputy governor KubenNaidoo on July 13 during a webinar.

Threechanges wereproposed, namely:

● An amendmentto the Exchange Control Regulationstoclarify thepositionon crypto assetsas capital within the purview of those regulations;

● The inclusion of cryptos as a financial product for purposesof theFinancialAdvisory and Intermediary Services Act, 2002 (Fais); and

ments wasto Faisand after much deliberationthe Financial SectorConduct Authority (FSCA) hasdeclared crypto assets asa financialproduct, as defined under Fais.

● The inclusion of all crypto asset service providers as “accountable institutions” in terms of Schedule 1 to the Financial Intelligence Centre Act, 2001 (Fica). The firstof theseamend-

Faisgoverns therendering offinancial services (advice and/orintermediary services), as thoseterms are definedinFais, inrespectof financial products in SA.

IT’S WORTH NOTING THAT CRYPTOASSETS ARE THE ONLY FINANCIAL PRODUCT WHERE THERE IS NO CENTRAL ISSUER

“Financial product” is defined to include a share, insurance policy,debenture, note or other security, and a “deposit”, as that term is definedinsection 1(1)ofthe Banks Act,1990. Crypto assets will nowbe included in this definition.

What isconsidered tobe a crypto asset by the FSCA?

“Crypto asset” has been definedas“adigitalrepresentation of value that:

● Is notissued bya central bank but is capable of being traded, transferredor stored electronically bynatural and legal persons for the purpose of payment,investment and other forms of utility;

● Applies cryptographic techniques; and

● Used distributed ledger technology.

UTILITY TOKENS

Itisworth notingthatcrypto assetsare theonlyfinancial productwhere thereisno central issuer.Further, the term is broadlydefined and could includeutility tokens whichwould notin theordinarysense beregardedas financial products.This broad definition mayalso capture

specific typesof crypto assets, such asthose in respectofnonfungibletokens (NFTs) and mining nodes and node operators.

However,the FSCAhas acknowledgedby meansofa separate generalexemption thatatthisstage,theinclusion offinancialservicesrelatedto NFTsand nodeoperationsis not appropriateand should not be subject to the FSCA’s oversight. Nonetheless,the reach of the definition is sure to raise many questions as to whether a certainproduct is included or not.

Whatis theeffect ofthe declaration?

Persons renderingfinancialservices inrespectof crypto assets must:

● Apply for a licence under FaisbetweenJune12023and November 30 2023;

● Immediately comply with certain provisionsof the Determination ofFit and Proper Requirementsfor Financial ServicesProviders, 2017 (relating tohonesty and integrity) andthe General Code ofConduct forAuthorised FinancialServices Providers and Representatives, 2003(relatingto rendering financial services honestly, fairly, with due skill, care anddiligence, andin the interests of clients and the integrity ofthe financial services industry);

● Comply withthe remain-

Crypto assets now financial products

ing provisions ofthe general code of conductby December 1 2023; and

● ProvidetheFSCAwithany information which it requests thatisrelevanttothefinancial services oractivities rendered by such person.

Inaddition, theFSCA published afurther draft exemption aimedat easing transition ofproviders into the regulatedspace. Commentsonthedraftexemption are due on December 1 2022.

The declarationmeans that providersof financial services inrespect ofcrypto assets will haveto consider how to complywith Fais and related legislationthat applies to financialservice providers (FSPs) including Fica.

Whatare therequirements under Fica?

AlthoughSchedule 1to Ficahasnotbeenamendedto include cryptoasset service providers as accountable institutions, FSPsunder Fais are accountableinstitutions for the purpose of the schedule.

Anypersonwhorendersa financial service inrespect of crypto assets(and whois therefore requiredto be licensed as an FSP) will also have to comply with Fica.

Fica placesnumerous obligations onaccountable institutions, whichgo beyond mere “KnowYour Customer” obligations. These include:

● Registration with the Financial Intelligence Centre;

● Conducting customer due diligence;

● Record-keeping of prescribed client information and transaction records;

● Developing, documenting, maintaining and implementing a riskmanagement and compliance programme (RMCP);

● Ongoing trainingof employeeson Ficaandthe institution’s RMCP;

● Appointment ofa compliance officer; and

● Reportingobligations,such as the submissionof cash threshold reports,suspicious transaction reportsand terrorist property reports.

LINGERING

UNCERTAINTY

Itremainstobeseenwhether there willbe aspecific code for cryptoasset providers, and whatqualifications and practice requirementswill be implemented. Willcrypto asset serviceproviders providing financialservices be permitted toamend their licencecategoriesorwillthey have tomake newapplications?

BUSINESS LAW & TAX

LATERAL THINKING

Powers of Sars to act

• Business Day Law

&

Tax

editor Evan Pickworth speaks to Francis Mayebe, candidate attorney, and Virusha

Subban, partner and head of tax, Baker McKenzie Johannesburg, about the power of Sars to search and seize your property without a warrant, and what the law says about this

EP: Virusha, can you tellme more about the case law andlegal framework around theright tosearch a premises not identified in a warrant and its potential to be inconflict withthe constitutional right to privacy in SA?

VS:The caseof Bechanand Another vSars Customs Investigations Unitand Others(19626) [2022] hinges on fundamental aspectsof constitutional democracy.

Section 62 ofthe Tax Administration Act28 of2011 (TAA), whichpermits thesearchof premises not identifiedin a warrant, hasbeen under scrutiny for many years due to itspotential toinfringe the right to privacyas enshrined in the constitution

TheSA RevenueService (Sars)andthe TAAplayan essential rolein ensuring taxes are collected in an efficient andeffective manner. Therefore,inorder todoso and ensurefiscal security, section62oftheTAApermits Sars toconduct warrantless searches andseizures of taxpayers’ property.

Thispower grantedto Sars collideswith thetaxpayer’s constitutionalrights to privacy asentrenched in section14 ofthebill ofrights, contained in chapter two of the constitution.A question remainsas towhethersuch an infringementon one’s constitutional rightsmay be justifiable undera limitation clause covered insection 36 of the constitution.

EP:Francis, couldyougive us a background on this case andwhat actually happened?

FM: In theBechan case, Sars wasissuedwith awarrantin terms of sections 59 and 60 ofthe TAA,whichauthorised themtoseizeinformationand documentation concerning the case at thepremises of a particular taxpayer. On arrival atthe taxpayer’s

THE MAIN ISSUE BEGAN WHEN SARS BEGAN INVESTIGATING THE CARS IN THE PARKING LOT WHEN EXECUTING ITS WARRANT

premises toexecute the warrant, Sarswas delayed access to the office park in which thepremises ofthe taxpayer werelocated. While waiting andattempting to gain access to the office park, Sars noticedseveral people carryingitems fromthetaxpayer’s officeand placing them inthe vehiclesaround the parking lot.

Somehours later,Sars wasgranted accesstothe premises. Besidesfinding the directorsofthetaxpayer,they also encounteredBechan (applicant) onthe premises, whowas atthe premisesto dobusiness withadifferent entity. ‘ The mainissuebegan when Sarsbegan investigatingthe carsinthe parkinglot whenexecutingitswarrant.It noticed thatthe vehicles contained severalitems and documents relatingto the taxpayer. This provedto be a criticalfactorfurtheroninthe case.

The applicant’s carwas among the cars parked in the parkinglot and,accordingto Sars, whenasked toopen his vehicle, he statedhe did not have thekeys. Considering the applicant’s resistance, Sars soughtassistance from theSAPS andthe Hawksto assist, as wellas the services of a locksmith to open the vehicle inquestion. Once opened, Sars took possession of several items belonging to the applicant.

Accordingto theapplicant’sversion, hehandedthe keys overto Sarsand denied being presentwhen Sars took possession of the items in question.

EP: Virusha,what critical issues arose in this matter?

VS: The critical issue in this matter came about upon the institution ofa mandament van spolie application by the applicant, whosought an

order for Sars to return certain items in its possession. For thisapplication tosucceed, two legalquestions had to be answered:

1. Wasthere adisturbed dispossession ofthe applicant’s property?

2. Was the search and seizure ofthe applicant’s vehicleby Sars,whichfell outside of the scope of the granted warrant, unlawful?

In dealingwith thisissue, the court relied on the principles ofthe Constitutional Court inAnale Ngqukumbav

The Minister of Safety and Security201(5)SA112(CC),in which the Constitutional Court held thatthe “ essence of the mandament van spolie is the restorationbefore all else ofunlawfully deprived possession of the possessor.

It finds expressionin the maxim spoliatusante omnia restituendus est (the

CONSIDERING THE APPLICANT’S RESISTANCE, SARS SOUGHT ASSISTANCE FROM THE SAPS AND THE HAWKS TO ASSIST

despoiledperson mustbe restoredto possessionbefore or else)”

Essentially the spoliation orderis meanttoprevent taking possession unless it is in accordance with the law.

EP: Francis, what did the court decideon thefirst issue?

FM: Onthe first issue,it was undisputedthat Sarshad takenpossessionoftheapplicant’s property. However, the two different versions between the parties ought to havetwo differentoutcomes for the second issue.

The court found, on balance,the probabilitythatthe applicantdid notrelinquish possession voluntarily, therefore, therewas adisturbed dispossession.

EP: Virusha, what does the TAAsay aboutsearching premises not identifiedin a warrant andhow didthe court conclude this matter?

VS: Section 62of the TAA empowers aSars officialto enterand searchpremises not identified in a warrant,

subjectto thefollowing requirements:

● The propertyincluded ina warrant is atpremises not identifiedin thewarrantand maybe removedor destroyed.

● Thewarrant cannotbe obtained in time to prevent the removal ordestruction of the relevant material.

● Thedelay inobtaininga warrantwould defeatthe object ofthe searchand seizure.

The courtfound thatSars was entitled, inthe execution of thewarrant, toascertain whether Bechan had in his possessionor underhiscontrolany ofthetaxpayer’s materialsspecified inthe warrant. Thisview bythe court was most likely motivatedbythefactthatSarshad earlier observed materials beingcarried tomotor vehiclesinthe parkinglotof the premises.

With respectto theapplicant’sargumentthatthewarranthad tobe confinedonly to theactual premisesof the taxpayer,which excludedthe parking lot, the court dismissed this view by stating that the warrantreferred to the address ofthe taxpayer’s premises,which wouldalso include the parking, and the interpretationargued bythe taxpayer wouldundermine the warrant’s efficacy.

To concludethe case,the courtdismissed theapplica-

THIS POWER GRANTED TO SARS COLLIDES WITH THE TAXPAYER’S CONSTITUTIONAL RIGHTS TO PRIVACY AS ENTRENCHED IN THE BILL OF RIGHTS

tion andordered theapplicant to pay the costs jointly and severally.

EP: Francis, canyou tell us why this finding is important?

FM:The importanceofthis finding is entrenched in the factthat, althoughawarrantlesssearch maybeexecuted bySars,this searchissubject tomuch morestringent requirements, even though the rightsto privacymight be infringed at times.

Such rightsare subjectto limitations and, in the court’s view, section 62of the TAA would be sufficientto meet

FURTHER, THERE ARE UNANSWERED QUESTIONS WITH RESPECT TO THE TRUE SCOPE OF THE ABILITY OF SARS TO INVESTIGATE AND SEIZE

the scrutinyof thelimitation clause insection 36of the constitution. Further, there are unanswered questionswith respectto thetrue scopeof the ability ofSars to investigateand seize,particularly withoutawarrant,andifsuch collected evidencecould extendbeyond theobjects and purposeof theoriginal warrant.

However, it is important fortaxpayersto notethatitis notalways thecase thatSars officials would needto furnish them with a warrant to search and seize their propertyand,as thecourthighlighted,the circumstancesin which these powers may be exercisedby Sarsarehighly fact dependent.

Length of service counts in disciplinary

• Unpacking dynamics of misconduct and dishonesty in bank employee’s dismissal case

Jonathan Goldberg & Grant Wilkinson Global Business Solutions

Ina disciplinaryprocess, the length of service of theemployee countsa lot,especially whenthe offenceis notclearly dismissible. Thecase of Austin-Day v AbsaBank Ltd and Others(PA02/2020) [2022] ZALAC 6 (8 March 2022) illustrates this fact.

At the timeof her dismissal, theemployee was employed by Absa as a branch manager.She was charged anddismissed for misconduct, which was alleged toinvolve dishonesty andfailuretocomplywiththe bank’s policiesand procedures in the execution of her duties as a branch manager.

Atthe timeof the alleged misconduct, shehad beenin theemployment ofthebank for about 33years with an unblemished record.During her employmentas the branch managerat 6th Avenue, WalmerPark, the employee decidedto deposit R100ofher ownmoneyinto 10 inactiveaccounts, opened by 10different customers, that were under her control at her branch.

An amount of R10 was depositedin eachofthose accounts. Thedeposits were

made withoutthe knowledge and/orconsentoftheholders of those accounts. They were then recordedas activated accounts inthe branch’s books and, as such, constitutedsales interms ofthe branch’s performance.The accounts wereused predominantly bycustomers in the low-income group.

Eachof thebank’s branches hadsales targets that wererecorded whena newly openedaccount is activated. Duringa routine

THE EMPLOYEE’S PERFORMANCE TARGET ALREADY STOOD AT 103% ON A YEAR-TO-DATE BASIS AT THE TIME OF THE INCIDENT

visit to the branch by the area head managerof thebank, the employee voluntarily informed him about the deposits in question.

The bank’s forensics department investigated the matter and confirmed that they could not detect any fraudulent conduct and recommended that remedial action should be taken.

An operations consultant

recommended disciplinary action against the employee. She was charged with two countsofallegedmisconduct. Following a disciplinary inquiry, the employee was found guilty and dismissed Aggrieved bythe decision, the employee referred an unfairdismissaldisputetothe Commission forConciliation, Mediation and Arbitration

The employeechallenged thesubstantivefairnessofher dismissal. The commissioner foundagainst herinrelation to the centralissue of whether ornot theemployee had acted dishonestly.

The commissionerfurther madeafindingthatevenifthe employee had transgressed any such policies, dismissal in these such circumstances had been unfairand that the employee deserved to be reinstated.

Accordingly, the dismissal wasfound tobeprocedurally fair but substantively unfair, and the employer was ordered to reinstate the employeein itsemployon terms and conditions no less favourable to her than those that governed the employment relationship immediately before her dismissal.

The employerfiled a review application in the Labour Court (LC).The LC concludedthatthedecisionof

the commissioner was not a reasonable one. Onappeal to the Labour Appeal Court (LAC), theLAC hadto determinewhether basedonthe materialthat wasbeforethe commissioner the LChad correctly concluded that the commissioner’s conclusion was one that a reasonable decision-maker couldnot reach.

The employer’s contention was that the employee acteddishonestly because shestood togain by heractions,inthatthebranch would then meetthe target. The evidence thatwas led further established that the employee, of herown accord and while the area head manager was doinga routine inspection, informed him that she had opened accounts. Shedidthis inanacknowledgement-seeking manner for her actions.

This evidencewas the basis onwhich thecommissioner found that the dismissal was unfair.

The LAC found that the employer’s submission that the employee wanted to deceive the bank by boosting her branch’ssales, andthat she was introuble with her

performance,was notsubstantiated. The employee’s performance target, or “bucket” for transaction accounts,already stoodat 103% on a year-to-date basis atthetime oftheincident.At best she stoodto boost that figure to 105%. There was nothing on recordthat indicatedthe employee stoodto gainany kind of rewardas she had added10 accounts.There wasno performancebonus or other kind of incentive that was withinreach atthe time thatcould beachieved bythe artificialaddition ofthe10 savings account.

There was undisputed evidenceshewantedtomotivate herstaff. Therewas no evidencethat theemployee acted inbad faith orthat by heractions sheexposedthe bank to any material risk.

On the otherhand, as the commissioner found, the

THE EMPLOYEE’S UNBLEMISHED RECORD OF 33 YEARS OF SERVICE ALSO SPEAKS FOR ITSELF

employer as thecustodian ofits policiesand thelegislationrelied upon should havecontacted thenine clientswho didnotoperate theaccounts,statingthattheir accountshad beenaccessed by aprivate personand activated and for that reason hadtobede-activated,orthat they may open new accounts or something to that effect. If there wasany misconduct, it wasnot serious enoughto warrantdismissal. The employee’s unblemished record of 33years of service alsospeaks foritselfand militates against thesanction of dismissal.

Itis wellknown thatonce itis foundthat thedismissal was substantively unfair, reinstatementis theprimary remedyenvisaged bythe Labour Relations Act. Theappealsucceededand theaward ofthecommissioner was upheld. In this case,the evidence infavour ofthe employeeis her own admissionof what shedid.In addition,shehad nothingto gainfromdepositing minimal amounts into the accounts and shehad 33 yearsof unblemishedservice on her record.

Tricky issues ahead with employment equity law

Employerswill faceconsequencesif theEmployment EquityAmendment Billis implemented,specificallythat hard-coded sector targets willbe enforced,alongwith fines for noncompliance. Thisis particularlyrelevantagainst thebackdrop ofthe moratoriumon hiringor promotingwhite persons allegedly imposed by Dis-Chem.

Theadmirable purposeof the EmploymentEquity AmendmentBill istransformation.However, thecontentsofthe bill,anditsfastapproaching anticipated

implementation date (September 2023),create practical considerationsthat have causedpanicamongemployers and willrequire careful consideration. Ina nutshell, the bill provides:

● That the ministermay set numerical targetsfor identified nationaleconomic sectors, for “ensuringthe equitable representationof suitably qualifiedpeople from designated groupsat all occupational levelsin the workforce”. Examples of national economicsectors for which theminister willset targets aremining, financial services, agricultureand manufacturing.

● That employment equity targets,usuallysetinemploy-

ers ’ employment equity plans, must comply with sector targets set by the minister.

● Consequences of noncompliance include that employers cannot do business with the state and may be liable for hefty fines.

The fines and penalties set out in Schedule 1 of the Employment Equity Act were negotiated at Nedlac within an existing framework of aspirational employment equitytargets. Thesefinesare unchanged in the proposed amendments to the bill, even though thetargets arenow hard-coded and no longer aspirational. Because of this, employers who comply 99% with sector targetswill be treated thesame asemploy-

ers who are 5% compliant. Apart fromthe fines,noncompliancewith sectortargetswillincuradeclarationof non-compliance and an inability to dobusiness with the state. This has severe financial andreputational consequences.The billdoes providethat employersmay, afterhaving beendeclared noncompliant, present justifiable reasons.This iscold comfort,becausebythenthey willalready havebeen declared noncompliant.

There is noclear guidance yet onwhat willbe accepted asjustifiable reasonsfornoncompliance. TheDraft Employment Equity Regulations(which weanticipate willbe publishedtogether

with the bill)provide factors that may contributeto, and possibly justify,noncompliance with sector targets.

Theseincludewhetherthe employer hadinsufficient recruitment and promotion opportunities, a lackof skills orwhether atransferof business ortransactions amounting tomergers and acquisitions impactthe employer’s transformation figures and goals.

Employersmay,inapanic, react byimplementing policies that may give rise to discrimination claims. A measured andconsidered approach is therefore required. Employers that operateinsectorswheresectortargetshave beensetare

encouraged toconsider whether or notsuch targets are achievable and,if not, what theirreasons fornoncompliance will be. Employers may then, through their industrybodies, orontheir own,engagewiththeofficeof the presidentand explainthe practical difficulties they may encounterifthe billisimplemented in its current form.

The president has the power to refer the bill back to the NationalAssembly orto the ConstitutionalCourt ifhe has reservations about its constitutionality. Thecurrent public debate, with representations from employers and industry bodies, may cause the bill to be reconsidered by the president.

BUSINESS LAW & TAX

Interesting case of breach of confidence

Jeremy de Beer ENSafrica

There hasbeen an interesting UK court decision dealing with breach of confidence: ClearcoursePartnership and others v Jethwa (2022).

In thiscase, aparty involved in a business sale heard andused information he was not supposed to hear.

Clearcourse wasinstructedto handlethesale ofa company ofwhich Jethwa was the part-ownerand then CEO. Twodirectors of Clearcourse hada meeting withJethwa athisoffices, ina conference roomthat was monitored by CCTV.

Atone point,Jethwaleft the roomand wentto his ownoffice nextdoor.While hewas outofthe room,the two Clearcoursedirectors had whatis described in thejudgment asan “unguarded and candid” discussion.

They discussed their strategy forthe negotiations and theirviews onJethwa, predicting hewould probably be fired ifthe transaction went ahead.

Jethwaheard itall,and

though he claimed that what he heardcame throughthe wall ratherthan throughthe CCTV footage, hedid take a screenshot of the footage.

Jethwasaid nothingof what he had heard to the Clearcoursedirectors,apparently because he wanted the deal to go ahead.

Thesale wasconcluded but adispute subsequently arose.

Jethwathen sentClearcourse the screenshot, adding thesewords: “You should knowthis doesn’t do you any favours what you both say shouldbe interest for social [sic].”

Clearcourse interpreted this asa threatto disclose whathadbeendiscussedprivatelyon socialmedia,and brought anaction inthe high court seekingan interim nondisclosure order.

Clearcourse alleged breach of confidence.

Thejudge acceptedthat Jethwa’s screenshotand

REPORTS

SUGGEST THAT IF DENEL HAD NOT SOLD THIS IP, IT COULD HAVE EARNED R480M FROM 2013-2018

message was athreat and he found in the company’s favour.

The judge said that to succeed witha breachof confidence claim you need to establish three things:

● The discussion had the necessary quality of confidence.

● The defendant came to know of what was being said in circumstances importing an obligation of confidence.

● There had been unauthoriseduse, ora threatto use, thatinformation tothe detriment of theowner of the information.

The judgefound thatthe requirements had been met, saying “thereis noreason why a person overhearing a private discussion through a windoworawall,andwhois aware ofthe contextand private nature ofthe discussion, shouldnotcomeunderaduty ofconfidence.Thefactthathe makes no specific effort to eavesdrop is not determinative in this regard.”

The judgeaccepted this claim too, saying Clearcourse “would regard their conversation, behind closed doors, asgiving riseto areasonable expectation of privacy”

The judgesaid thatthere was nogeneral interestor

justification for its disclosure. It is worthnoting South Africanlawwouldalsooffera remedy in a case like this, under the generalground of unlawful competition.

THEFT: HERALDRY

Heraldry isa ratherobscure area of the law that is loosely linked to intellectual property.Wedon’tgettowriteabout it much.

When SAbecame a democracy in1994, theold flag was replacedwith the “horizontally oriented Yshapeflag”thatcomprisessix colours: blue, green, black, white, yellow and red.

Ithasalwaysbeenaccepted that theflag was created by HaroldFrederick Brownell,amanwhowasthe state herald at the National Archives from 1982-2002.

There is now a claim that the design for the South African flag was stolen.

Thembani Hastings Mqhayi, a managerat the Eastern Cape department of arts &culture, claimshe submitted five potential designs forthenewflagtothedepartment of sport, arts & culture

in 1994. The suggestionis that Brownell, who waspart of the committee that made the final decision, took Mqhayi’s designs and submitted them as his own.

Mqhayihas filedanaction atthe highcourt inPretoria, citingsports, arts&culture minister Nathi Mthethwa as the first respondent and the state herald asthe second respondent.

Mqhayi alleges Mthethwa failed to disclose pertinent information about the creation ofthe flag,and thata request made underthe Promotion ofAccess toInformation Act, 2000, in July 2021 was ignored.

He isseeking agreat deal of information abouthow the flag was created, including:

● The identities and capacities ofall thosewho madeup

THERE

IS NOW A CLAIM THAT THE DESIGN FOR THE NEW SOUTH AFRICAN FLAG WAS STOLEN

the committee.

● Minutes of meetings about the designs.

● Detailsof allthosewho submitted designs.

● Details regarding the selection process.

● The committee’s final recommendation that was sent to the president for approval Unfortunately, Brownell cannot be consulted because he diedin 2019.It willbe interesting to seehow this matter plays out.

IGNORANCE: DENEL

According to recent news reports, the arms company Denel sold intellectual property relating to the RG35 armoured vehicle’s developed version,the N35,to a companycalledNIMR,asubsidiary of UAE governmentlinked Tawazun.

This sale occurredin 2015 and the purchase price was $16m(R208m atthe time of writing).

Reports suggestthat if Denelhad notsold thisintellectual property, it could have earned some R480m in the period2013-2018.Moreworryingly,the reportsays projections for theN35 vehicle for the period 2015-2021 were R4.1bn.

The newsreports are vague. Butwhat thestory doesis highlightthe needfor proper intellectualproperty valuation, and an understandingofthevalueofIPand the revenue it can generate. This isparticularly importantinthe contextofmergers and acquisitions, where the target company’s intellectual property may besold to the acquireras partof the merger, or soldseparately to athird party(whichcould affect the target’s valuetothe acquirer).

● Reviewed by Gaelyn Scott, head of ENSafrica’s intellectual property department.

Clarity required on VAT for electronic services

Pieter Janse van Rensburg AJM

In 2019 thefinance minister announced updated regulations forelectronic services for theValue-Added TaxAct 89of 1991(VATAct). Theregulations (read with the relevant provisionsof theVAT Act)dealwiththeVATconsequences of electronicor digital content suppliedby electronic means,for example, viathe internetorother telecommunications service. At the same time, the SA Revenue Service(Sars) published afrequently asked questions document as general guidance on how the regulations mustbe interpreted and appliedin practice.

The regulationsare relevant for foreign suppliers of electronic services.In appro-

priate circumstances,those foreign personsare regarded as conducting a VAT enterprisein SAandbe liablefor local registration as a vendor. Sars’ recent interpretation of theregulations hasleft many taxpractitioners confused, mainly sincethe purposeofthe regulationsis “to assist foreignelectronic services suppliers,intermediaries, vendors andthe public atlargetoobtainclarityandto ensure consistencyon certain practicaland technical aspects relating to the updated regulationsand amendments”

Of particularconcern is Sars’ viewthat anyinformation ordocument delivered using emailconstitutes the provision ofan electronic service and that a person whoprovides suchanemail, is regardedas conductingan

enterprise in SA.Why the concern? Thisis twofold. First, Sarsstates specifically in the FAQ document: ● “Ifresearch wasdoneoutsideof therepublicby anonresident business,then the service concerneddoes not become anelectronic service merely becausethe final report was sent to the South African client by email.”

And ● “Q:I amanarchitect inan export country.I designa planfor ahouseand emailit toa personin SA.Am Isupplying electronic services?

A: No, theservice involves substantial human intervention carried out in an export country and theproduct is supplied froman export country. Thesupply is therefore notdependant on information technologyor automated. Theemail is

merelythe meansofcommunication.”

Sars’ current interpretationis acompleteturnaround on theirpreviously published view. This is baffling, given that theirintention withthe document is to provide clarity and consistency.

Admittedly, Sarsis not bound byits publisheddocument. Still,any reasonable person (and, for that matter, presiding officer)would arguethat, withoutthewithdrawal ofpreviously published views,a legitimate expectation iscreated on how Sars will apply the law. Another concernis that Sars’ interpretationis completely unbusinesslikeand irrational. Moreover,such an interpretation isnot directed attheoriginal purposeofthe legislation governing electronic services,which wasto

introduce amechanism to address noncompliance of VAT reversecharge mechanisms dueto somecustomers not complying out of sheerignorance andaperceptionthatthe taxisvoluntary. That lackof compliance leftlocale-commercesuppliers in anuncompetitive position comparedto foreign suppliers. Theywere not required to chargeVAT on their sales toSouth African customers, andcustomers simplydidn’tpaytheVAT.Itis difficult to see how the current interpretationaddresses theperceived mischiefofthe time. What, thenis theremedy? Itappearsas thoughSarshas taken a view (rational or not) that each sender of an inboundemail isanelectronic service provider.It is

unlikely they will be persuaded otherwise.The call must, therefore,be that exclusion isintroduced into the regulationsthat provide for a business-to-business exception. Such exclusionwill leave SA in atax-neutral position. Ratherthan havingtheforeign supplierregister locally, charging VAT andthe local recipientbeing entitledtoa corresponding claim,the providedservice willnotbe regarded asan “imported service” wherethe local entity uses itto make taxable supplies and in that case not havingtoaccount fortax.The business-to-business exclusion willkeep SAfiscally neutral andremove complexities froman already overregulated system. Can common sense please prevail?

BUSINESS LAW & TAX

Fundamentals remain for M&A activity

• Strong local companies and cash-flush global investors will help revive mergers and acquisitions

Chris Green Hogan Lovells

Despite the effects of the pandemic and periodsof civil unrest, SA experienced robust mergersand acquisitions (M&A) activitylast year, with morethan 430transactions totallingabout R750bn in value.

In 2022, we have seen a generaldeclineinM&Aactivityfrom2021levels.Notwithstanding this,the fundamentals whichdrove dealactivity in2021 remainlargelyintact, with localcompanies continuing to produce solid financial performance,valuations remaining generallyattractive(with theupsidepotential for future earnings), the rand being weak and interest rates remaining withinexpected ranges despitethe recent hikes. TheAfrican Continental FreeTrade Areaagreement is also likely to bolster investment in the country.

Thesefactors, whencombined withthe factthat many globalinvestors arestillsitting onsignificant cash reserves followinga protracted periodof inactivity throughout the pandemic, point to sustainedlevels of African M&A activity throughout 2022 and beyond.

SA companies, including those which may be distressed giventhe ongoing impact ofthe pandemic,will continue tohave opportunitiesto lookto globalsources of capitalfor development and growth.

Investment bythese established internationals can, andfrequently does, unlock previouslyuntapped

synergies forSA businesses. Inturn, thisprovidesavenues for businessoptimisation and growth whichwould otherwise notbe available.Global players in developed markets will also besearching for growth andsynergistic opportunities outsideof their established territorieswhich are typicallycharacterised by competitionformarketshare, rather than industry growth. Wealso expectongoing foreign investmentto drive enhanced activity inthe market fromlocal players.Those thatface adepressedlocal economy, andwhich have significant deployablecapital, willcontinue tolook northof thebordertootheraccessible developing marketsas a

WE EXPECT TO SEE SIGNIFICANT ACTIVITY AND INVESTMENT IN RENEWABLE ENERGY ACROSS

THE BOARD

means for growthor to more mature markets inwhich to deploy capital asa means of consolidating theirposition. The same fundamentals that drovedeal activityin2021 andtheneedtogrowthrough acquisition in many sectors will drive healthy competition among local companies.

SECTORS TO WATCH

The technology, media, and telecommunications (TMT) sector has seen sustained levelsof activityduringthe pandemic and sincethe easing of lockdown restrictions. Linkedtothis, weexpectto

see sustained and potentially increased M&A activityin the short to medium term in the financial services, retail and logistics and supply chain sectors, with businesses in these segments continuing to look for growth opportunities to address increased consumer demand for technology solutions to meet daily needs (for example, online shopping and delivery services).

Inthecontextofthisongoing investment in technology, our expectationis thatmajor investments will continue to bemade indata centres(of which there aremore than 50 inSA), withSA uniquely positioned for growth due to its geography, relatively advanced IT andfibre infrastructure and, more recently, significantly enhanced potential for captive renewable energy generation.

Investment inthe energy sector (particularlyinvestment focused onthe energy transition) isalso likelyto continue its upward trajectory, with the SA government under ongoing pressure to addressthe energycrisisand its impacton theeconomy by removing “red tape” which hinders private sector involvement.

Weexpect toseesignificant activity and investment in renewable energy across theboard.This willbedriven by the government’s Renewable EnergyIndependent Power Producer Procurement Programme(REIPPP) and, more importantly, the need for commercial and industrial operations to secure private power supplies.

Recent regulatory changes pursuant to President Cyril Ramaphosa’s 10-

BUILDING BLOCKS

point powercrisis planpermitting private power projectsofupto100MWwithout licensing requirements havingto bemet havespurred activityin thisregard(the recently announcedfinancial closeof SOLAGroup’s two 100MW PV solarprojects to supplypowertoTronoxMineralSandssites inSAbeing an excellent example of this).

We expect thistrend to continue, particularlyconsidering the imminent removal of any licensingcap on private power projects.

More broadly,the transition away fromfossil fuels is having, and will continue to have, significant consequences onM&A activityin

SA. Traditional powers in conventional energy have, in many instances,embarked oncorporate activitytoseparateand evensell downtheir interestsin coalassetsto newer and smaller market participantswho maynotbe subject to the same global investor pressures.These participants are capitalising on thepractical realitythat, despite a move towards renewable energy,conventional energywill continueto

THE TRANSITION AWAY FROM FOSSIL FUELS … WILL CONTINUE TO HAVE SIGNIFICANT CONSEQUENCES ON M&A ACTIVITY IN SA

account forthe majorityof SA’selectricity demandsfor sometimeto come,giventhe constraintson existingelectricity infrastructure.

Similarly,asC&Iandother captive power projects become increasinglycommon,we willcontinue tosee significant investmentacross the sector.This islikely to result in a consolidation of industryparticipants asthis sector matures.

REGULATORY LANDSCAPE

Recentchanges tocompetition/antitrust law will continuetoaffect M&Aactivityin SA.The competitionauthoritiesare increasinglyfocused onpublic interestconsiderationsandhavestartedrequiring agreater spreadof ownershipby historicallydisadvantagedpersons (HDPs)and workersin M&Atransactions. Theyare alsoexamining digital firms and markets more closelyand haveproposedthat smallmergersin thissector benotifiableas, despiteoftenfallingbelowthe notificationthresholds dueto thefirms involvedusually beingstart-ups, thesemergersarelikely tohaveasignificantimpact oncompetition and market dominance.

Another proposed amendmentto theCompetition Actwill lookat determining whethermergers involving foreignacquirers may havean adverseeffect onthenationalsecurityinterests ofSA. In linewith global

trends, environmental, social andgovernance (ESG)considerationshave alsobecome centralto SouthAfrican M&A.

There is increasing stakeholder activism in SA and acquirersand lendersalike areapplying morestringent ESGstandards totargetsand borrowersto mitigatereputationalrisks andinsupport ofglobal imperativesofdriving sustainable business. Intermsofcorporategovernance,there areplansto amend theCompanies Actto give workers the right to appointdirectors tothe boards of companies,and to extend directors’ fiduciary duties to considerthe interestsof employeesandother stakeholders(in additionto shareholders), whichwill undoubtedlyimpactaboard’s considerationof futureM&A transactions.

While SAseems likelyto continueto facesignificant politicaland economicheadwindsfor sometime, several macroeconomic factors remainconducive tosustainedlevels ofcorporate activityacross variousindustry sectors. As a resourcerichnation, impedimentsto SA’s ability to capitalise on theseresourcesremains,first and foremost,structural. Ata politicallevel,industryparticipantsrequire enhancedregulatory certainty. In terms of infrastructure, the country still requires significant developmentand improvements in energy supply andinfrastructure acrossports, roadsandrail. Whilethese structuralissues arecurrently impedimentsto investmentin manycases, theyalso presentopportunities forinvestors andmarket participants alike. Ultimately, it comes down toidentifying theopportunitieswithin challenginglocal conditionsto positionabusinessforgrowth andmakeit anattractive investmenttarget for global role players.

Ofcourse,thereareexternalfactorssuchastheuncertaintyintroduced intoglobal marketsbyongoingeconomic sanctions onRussia and highlevelsofinflationthatare likely to have an impact on M&Aactivity. However,corporate SA has proved that is able to navigatecrises, while still beingable toharness growth opportunities,and thereis noreason tobelieve thistrend willnotcontinue into 2023 and beyond.

Competition Commission issues revised merger wording

Webber Wentzel

Furtherto theprevious releaseissued onSeptember 28 2022 titled “New guidelinesaim tocapturemore notifiablemergers”,theCompetition Commission(commission)has issuedrevised guidelineson smallmerger notification (smallmerger guidelines), correctingthe wording erroneouslyincluded in thecriteria for determiningwhen firmswillneed toinform thecommission about small mergers. The correctedwording nowreads: Thecommission will requirethat itbe in-

formed of all small mergers andshare acquisitionswhere theacquiring firm’s turnover or asset valuealone exceeds thelarge mergercombined asset/turnover threshold (currentlyR6.6bn) andat least one of the following criteriamustbe metforthetarget firm:

● Theconsideration forthe acquisition or investment exceedsthetargetfirmasset/ turnoverthreshold forlarge mergers(currentlyR190m);or

● Theconsideration forthe acquisitionofapartofthetarget firm isless than the R190mthreshold buteffectivelyvaluesthe targetfirmat

R190m or more. Therevised smallmerger guidelinesalso nowclarify theseguidelines areeffective from December 1 2022.

Assuch,smallmergersdo notrequire mandatorynotification,but interms ofsection 13(3) ofthe CompetitionAct, thecommission mayrequire, up to sixmonths after the smallmerger hasbeen implemented, such mergers be notified and approved by the commission if, in the opinionof thecommission, themerger maysubstantially preventor lessencompetitionorcannot bejustifiedon public interest grounds.

BUSINESS LAW & TAX

ESG in the maritime sector

• Samsa has published drafts of two codes of good practice, while an amendment bill is in the works

Andre October, Sheena Dias, Sharmila Naidoo & Lesiba Legodi Webber Wentzel

Environmental, social andgovernance (ESG)principles andreporting are highly relevant tothe maritime sector, whichfaces issues such as emissions of greenhouse gasesand otherair pollutants, recycling,ecological impacts,business ethics, employee healthand safety, aswellas accidentandsafety management.

About90% ofglobaltrade is transported by sea and the shipping industry accounts for nearly3% ofthe world’s carbon dioxide (CO2) emissions. Theindustry isunder immense pressure to become cleaner and greener.

Numerous shippingcompanies andmaritime service providers haveadopted corporate socialresponsibility (CSR) codes. ESG and CSR allowfor: (i)thegrowth ofthe organisation and an improvement inits reputation; and(ii) environmental protection thatwill save marinespeciesandthefuture of humankind.

The InternationalMaritime Organisation(IMO), as the international governing body for shipping,sets out several regulationsto protect the environment,through the International Conventionfor

the Preventionof Pollution from Ships(Marpol), safetyof workersthroughtheSafetyof Life at Sea Convention (Solas) andthe welfareofshipping professionals through the International Labour Conference-Maritime LabourConvention (ILO-MLC).

CSRis notimposedon entities butrather adoptedby them. Makingit mandatory for maritimeorganisations to complywith CSRwouldhelp the shippingindustry to: develop greenships, from building andoperation to scrapping;ensurethewelfare

THE SHIPPING INDUSTRY ACCOUNTS FOR NEARLY 3% OF THE WORLD'S CARBON DIOXIDE EMISSIONS

of ships’ crewsin terms of safety,security, healthand communication;and goa step furtherthan IMOand other international regulations toensure crews’ enjoy basic rights.

Bunkering and ship-to-ship transfers codes of practice

The SA Maritime Safety Authority(Samsa) haspublisheddrafts oftheBunkering Code of Practiceand the Ship-to-ShipCodeofPractice

for Cargo Transfers

In September 2022, Samsa published Marine Information Notice 10-22. Thisexplained thatSamsa,in collaborationwithSA’stransport department and the National Ports Authority, had updated the codes because of several oil spillsalong the SA coastline(specificallyinAlgoa Bay) during bunkering activities between 2016 and 2019.

As aresult, thegovernment reviewed all policies, proceduresandprocessesfor the application, approval and management of these activities.

The stated purpose of the codesis toensurethat bunkering/STS transfer operations are conducted with zeroharm tothe marine environment.

The codedetails the requirements foraccomplishing safebunkering/STS transferoperationstosupport commercial marine activity.

The codesare underpinnedby theprinciplesof consistency, fairness, objectivity and timeliness in each application for bunkering/ STS transfer approval. Samsa will ensure all applications for bunkering licences are dealt within atransparent manner, within three months from the date that a full and complete submissionis made, and that the applicant isadvised ofthe outcomeof the application within the stated period.

MAKING WAVES

The roleplayerswill cooperate to ensure bunkering/ STS transfer operations are conducted in an environmentally safe and efficient manner. Entities involved in bunkering operations are encouraged to advise Samsa about challenges and make suggestions to promote safe operations, considering new technologies availableand their benefit.

While Samsahas invited the public to comment further, it aims to release both codes as soon as possible.

Marine Pollution (Prevention ofPollution fromShips)

Amendment Bill

A further development in the maritime sector isthe Marine Pollution (Prevention of Pollution fromShips)

CONSUMER BILLS

Amendment Bill (B5-2022) (MPPPSA Bill).

The MPPPSA Billaims to: amend the Marine Pollution (Prevention of Pollution from Ships)Act, 1986,to giveeffect toAnnex IVof Marpol;to incorporate the 1997 Protocol to give effect to Annex VI of Marpol; and to provide for related matters.

Annexing Marpol to the billmeans itwill beincorporated intoSA lawand will have legal force.

In addition, the MPPPSA Bill empowers Samsa to issue technical standards for dealing with marine pollution from shipson suchmatters asmay beprescribed byregulation, whichwill havethe force of law.

The bill expandson the minister’s powers to make

regulations to include the following:

“(e) To make regulations relating to theprevention of air pollution from ships; (f) relating to the prevention of pollutionby sewage from ships;

(g) relatingto theremoval of endocrinedisrupting substances fromsewage streams before itis treated and released;

(h)relating tothepermitted types of emission abatement equipment;

(i)relating totherequirementsfor thedisposalof wastegenerated bythemitigation equipment;

(j) relating to accredited laboratorieseligibletotestthe fuel samples and the costs;

(k)relating tothedesignation of emission control areas;

(l) relatingto theenforcement of protective measures in particularly sensitive sea areas and other special areas; and (m) on generally any other ancillaryorincidentaladministrative or procedural mattersthatarenecessaryforthe proper implementation or administration of this act.”

OPPORTUNITIES FOR THE FUTURE

ESGisgainingtractioninvarious sectors, including the maritime sector. But there is stillalotofworktodotoraise standards. Engagements such as COP27 inSharmelSheikh, Egypt (which began on November 6 andends on November 18)are a starting point for figuring out a sustainable way forward.

The right to return of cultural heritage: a solution

There is an intriguing ongoing debate about the obligation of conquering and colonial powers to return tangible objects representing the culture, traditions, art and achievements of communities or countries to their source.

The public debate constantly gains momentum because of everyone’s access to, and power of, the media.

The principal arguments by the possessors of the appropriated heritage in favour of holding on to them are the “universal museums” claim and the, usually unstated, argument that the objects will not be properly looked after if returned to their places of origin.

The “universal museums” claim has various dimensions, including the contention that the works

have become part of the culture of the country in which the museums are found and that, if dispersed, fewer people will view the objects. An example given is that of the Rosetta Stone, which has more than twice as many visitors in their millions seeing it at the British Museum than it would have if returned to the Cairo Museum.

This is a variation on the naturalist Gerald Durrell’s justification for zoos. He said that if no-one outside Africa saw a real rhinoceros or

giraffe there would be little interest in the conservation of their environment. That may hold true for animals but, thanks to modern science, it need not hold true for tangible cultural objects. There is a solution that satisfies the arguments from both sides. I leave aside the issues of proving who is entitled to a particular object and whether it was obtained by looting, conquest, theft, purchase or permitted archeological endeavour.

It is possible with modern technology, in most cases, to recreate virtually exact copies of the object in question, at least to the inexpert eye of the average museum visitor. Even experts have been fooled by good fakes in the past. Most of the fascinating objects you can see in the Louvre Museum in Paris, the

Metropolitan Museum in New York, or the British Museum in London can be replicated, often using the same or similar material to that used to create the original.

Most of us would be surprised how many times we have seen something purporting to be the original that is the product of the latest laser and 3D facsimile fabrication. There is no reason why cultural objects as famous or infamous as the Parthenon Marbles could not be replicated in this way.

It needs agreement between the current lawful or unlawful possessor and the lawful owner of the object to make the replica in the first place, based on an actual or cultural copyrights. After that it becomes a matter for negotiation and compensation.

The possessing museum can keep the original and give the claimant the replica, or the other way around. The museum will then pay an amount or, preferably, a periodic rental for keeping and displaying the original (for a higher rent) or keep the replica. If there is any concern about the preservation of the original once returned, money can be put up to ensure that it is kept in the most suitable surroundings.

Some museum visitors will be unhappy at the

IT IS POSSIBLE WITH MODERN TECHNOLOGY TO RECREATE VIRTUALLY EXACT COPIES

thought of looking at a replica rather than an original. There will be little cause for that complaint, however, if it is to all intents and purposes an exact copy. The experience will be the same when looking at an object behind the glass of any museum. Any museum that wants to show the original can get it back temporarily in the same way that museums have always exchanged objects and artworks for exhibitions.

Of course this all comes at a cost. Restoring imbalances always does. In this case, the cost will be well spent in the cause of international comity and recognising the value and importance of indigenous cultural heritage.

BUSINESS LAW & TAX

Packing for Perth can be a taxing matter

People who want to emigrate often make the mistake of putting Sars on the back burner

Mohammed Mayet Tax Partner at PKF Octagon

The challengesofa looming economic recession inthe UK, raging wildfires inPortugal, a freezingCanadianwinterand a politicallydivided USmay be reason enoughto press pause onemigration decisions for some.

ManySA taxpayersalso tend to return.

However, manySouth Africans contemplating the big stepdespite theseglobal risks aresimply becoming fedup withthelocal perilsof load-shedding, increasing water outages,violence, political instabilityand adwindling rand. For others,it is the allure of ahigher salary or more excitingjob opportunities and career growth.

But when you are planningor decidingtomove abroad forwhatever reason, itis criticalto considerthe hidden complicationsof emigrating that are not always spoken about.

Recent tax legislative changes inSA havemade it more complex onthe one hand toget thestamp of approval fromthe SARevenue Service(Sars) andthe Reserve Bank while, on the

other hand,also offering guidance on whatsteps must to be taken toenjoy a seamless journey onwards. It is often forgotten that SA itself hosts thelargest numberof immigrantsonthe African continent.According to officialestimates, the countryishometoabout2.9million immigrants, mainly fromAfrica andAsia. Thatis one side of thestory, but new job opportunitiesand those simply lookingfor greener pastures are still leading to high rates of departures. Estimatesare that611,500white South Africans haveleft the countryover thepast35 years, thoughrecent numbersshowfewer leftin2021 than expected,with Covid-19 a likely reason.

Whenthe decisionis made to go, however, pro-

spective emigrants often prioritise thesale orrenting of theirhomes, saleofassets suchas carsand findinggood schools, jobs or business opportunities abroad while leavingtheirtax affairsonthe backburner. Thiscouldlead tounpleasantsurprisesdown theline, suchas beingliable for taxesyou werenot even aware of orhaving difficulty with conducting your everyday financial and business affairs offshore.

Whatisclear isthatemigration needs tobe managed to avoid pitfalls of entering new and unknown territory. Prospective emigrants should investin gettingtheir taxaffairsstraightenedoutfor thisreason. Inthe earlyplanningstages ofleavinghome soil, consider the following:

● Ifyouremainataxresident ofSA,you willneedto declare your income to Sars and make sureyou get the benefitof SA’s double taxa-

NOT EVERYONE HAS A GRIP OF THEIR TAX MATTERS, WITH WORK, FAMILY AND OTHER INTERESTS COMPETING FOR THEIR TIME

tion treaties with certain countries;

● If circumstances demand that you change your tax residencyto yournewhome, you willhave toapply fortax clearance from Sarsand pay an exittax chargeon leaving home soil;

● SA introduced anexit tax in 2021 which implies emigrantscannolongerleavethe country to establish themselves abroad without paying a potentially handsome sum of capital gains tax on their worldwide immovable assets.

Think about the fact that recent changes tothe local tax laws mean emigrants won’t be able to immediately access their retirement funds to set up abusiness or buy a property abroad.

Unknown tosome, itis not alwaysideal tomove your taxresidency whenyou emigrate or work abroad. Whensomeone ceasestobe anSA taxresident, itcomes with risks due to the fact that SA has a residency-based tax system. This hasspecific tax consequences for the assets ofthe taxpayerin SAand potentially also overseas.

The residence-based tax

system means residents are, subject to certain exclusions, taxed on their worldwide income, irrespective of where their income was earned. By contrast, nonresidentsare taxedontheir incomefrom anSAsource. Since tax systemsdiffer from countrytocountry, thereisa chance that a particular amount could betaxed twice. Thispossibility ofdoubletaxation is, however, often alleviated by tax relief contained in various double taxation agreements (DTAs).

Standard financialemigration(nownolongerpossible afterrecent taxchanges on March 12021) would include ceasingto bea tax resident inSA andtaking up tax residency in a new jurisdiction.It wasessentiallythe way in which someone ensured they moved and then aligned their funds with the tax jurisdiction.

Remember Sarswill also conduct residency tests, such as the societiesyou intend belonging to, and consider true intentions. Youwill need an emigration tax clearance certificate after proving your nonresidency status.You thenhavethe newexittaxes

mentioned above and retirement fundaccess willbe restrictedforaperiodofthree years. Thiswould meanyou can only getyour hands on yourmoneyafterthreeyears. It isenvisaged thatthe implementationdate willbepostponedfromMarch 12023to March 1 2024.

Insome casesit wouldbe preferable to retaintax residency inSA whilestill achieving all your offshore goals, for instance through dual citizenship or investment,orintracompanytransfers. The key is to ensure that a clearplan is in placeso that your goalsare achieved.This is still possible as long as a clearunderstandingofthetax consequences isachieved and all optionsto achieve the best outcomes explored.

Itis criticalto alsoknow the relevant provisions of any doubletax treatywhichmay apply.

Not everyone constantly has a firm grip of their tax matters, with work, family and other interests competingfortheir time.Forsome, tax isfurthest fromthe mind whenthey aregoingthrough big lifechanges. Butif youfall intothis category,youmay have tochange yourhabits as not having tax clearance or an updatedtax statuscould limit your activities in your new land.

It is importantto distinguish between tax residency and financialemigration. While tax residency determineswhereyouareliableto pay tax, financial emigration implies that youmove all your money and investments overseas to effectively hedge your finances against the volatile rand.

Financial emigrationis a challenging exercise and it requires agood amountof administration as well as technical and legal knowhow to achieve. Prospective emigrants oftencontact cross-border taxspecialists tohelpmake thisasmooth journey.

Ins and outs of two-pot retirement savings

Mohammed Mayet

PKF Octagon

The recentmedium-term budget policystatement provided some important updates onthe taxtreatment of retirement funds.

National Treasuryand the SA RevenueService (Sars) have introduceda two-pot system as far as accessing retirement fundsis concerned.Thiswillbeenhanced by a third pot. All registered retirementfunds inSAwill haveto amendand gettheir fund rulesapproved by March 1 2024.

In summarythe three-pot system entails:

● Savings pot;

● Withdrawal fromthe savings pot;

● Retirement savingsand money in thevested pot, whichwill remain off limits until retirement.

Taking publiccomments into account,Treasury proposes toclarify andamend the draft bill on broader policy issues as follows:

● Members must contribute one-thirdto thesavingspot and do not havethe ability to contribute less.

● The 12-monthperiod in

which onewithdrawal will be allowed will bea rolling 12 months.

● The minimumwithdrawal amount of R2,000per rolling 12-monthperiod isagross amount.

PUBLIC SECTOR

Members exitinga fundwith less thanR2,000 inthe savingspotwill beallowedto withdrawthatsumorrequest for it to be transferred into their retirement pot.

The R165,000de minimis rule will apply on a cumulative basis to amounts that are subject to annuitisation,ie full

withdrawal ispossible ifthe totalof(i) two-thirdsofthe vested pot value; and (ii) value in theretirement pot is less than R165,000.

Therewill bemoreconsultation withthe public sector defined-benefitfunds stakeholders toexplore how thenew regimewillaffect these fundsand theirmembers, giventhat members’ benefits arebased ona defined formulawithout reference tocontributions and investment performance.

Section37DofthePension Funds Act(relating todeductions forpension-backed

housing loans,divorce settlements, etc) willhave to be amended to cater for the two-pot system and to provide thatsuch deductions must be madefrom the vested and retirement pots. The two-potsystem will be mandatory forall retirement funds,though Treasury is still consideringa request to exemptcertain legacy retirement annuity funds. Thescope andnatureof charges leviedon transfers from anotherfund andfund values willbe clarified,as the draftbillprovided forcoststo be deductedfrom contributions, and fundvalues arising from transfersfrom another fundhavenocontributionsby members.

THE 12-MONTH PERIOD IN WHICH ONE WITHDRAWAL WILL BE ALLOWED WILL BE A ROLLING 12 MONTHS

Intheeventofamember’s retrenchment, thegovernment willallow limited income-based withdrawals, subject toconditions, from the retirement pot.

BUSINESS LAW & TAX

Nuts and bolts of union membership

• Recent clarification on when unions can act for employees and when their right may be constrained

Bradley Workman-Davies Werksmans Attorneys

Unions worldwide playan essential rolein protecting the rights and interests ofemployees, particularly atlower-income levels whereindividuals may not have recourse to legal services and representation.

Correcting thepower imbalance betweenemployer and employeeis often a critical function performed by unions.

Assuch, therightof unionstoexist andtorepresent their members is a critical andconstitutionally protected right, andthe way in whichunionsorganisethemselvesinternally andintheir relationswith employersisa highly regulatedsector of labour law.

However,aswithallregulated areas, the devilis in the detail andemployers who wish to ensure that unions comply withthe roles mappedoutfortheminlegislation, as wellas adopted by their own constitutions, should beaware ofrecent cases whichhave clarified when unions can act for employees andwhen their right torepresent employees may be constrained.

A starting pointfor consideringtherightofaunionto representits membersisthe

scope of the industry in whichtheunionoperates.For example, the scopefor the National Unionof Mineworkers is self-explanatory, and employershave often assumed that if a union carves a place foritself in a particular industry that it is constrained tooperating in that industry alone.

Theextent ofthe scopeof the union is usually selfimposed,andistobefoundin the constitution of the union.

CORRECTING THE POWER IMBALANCE BETWEEN EMPLOYER AND EMPLOYEE IS OFTEN A FUNCTION PERFORMED BY UNIONS

Sincethegeneralprinciple inrelation totheestablishmentof tradeunions isthat theunionisboundbyitsconstitution, it followsthat if the constitution of theunion sets outa limitedscope, theunion cannot exceedthe powersit has given itselfby representingemployees whoare employedin industriesoutside of that scope.

Although a union may allowsuch membership,the courtsand employerswould beexpected tobe entitledto disregard such members

whenconsidering therights of the union when engaging in collective bargaining.

For example, in the 2019 case ofLufil Packagingv Commission forConciliation, Mediation andArbitration andothers, theNational Unionof MetalworkersofSA (Numsa)attemptedtocompel Lufil to grant it organisational rights. Numsaadmitted atthe outset of theproceedings that Lufil, which manufactures printed andplain paperbags andassociated paperpackagingproducts andproducts basedon paperderivatives, wasnot anemployer inthe scopeof theunion,which, eventhough quitebroad, generallyrelates onlytothe iron,steel, engineeringand metallurgical industry,the electrical engineering industry, the plastics industry, the automobile manufacturing industryand themotor industry.

Incounting thenumberof employeeswho couldbe taken intoaccount fordetermining if Numsawas sufficiently representativewithin Lufil’sworkplace, theLabour Court found that the correct legal positionis thatNumsa had toshow that itwas sufficiently representative.

The employees on which itreliedin allegingitwassufficiently representativecould notbeand thuswerenotin law membersof Numsa,as they did notfall within the

RIGHT TO REPRESENTATION

scopeoftheunionintermsof Numsa’s constitution. Numsa wasnot sufficientlyrepresentativeof theemployeesat theworkplace andtherefore wasnotentitledtoanyorganisational rights.

Sincetheemployeeswere employedby anemployer whichdid notoperate inany industry thatfell withinthe union’sscope, theywerenot lawfulmembers forthe headcountwhich theunion relied on.They couldbe members ofthe union,but the union could not treat them asmembers forthe purposesof assertingaclaim toorganisational rights,and the employer wasentitled to disregard these members.

The scope of the industry fortheunion isthereforeof criticalimportance, andthe unionwillbe heldtothelimitsofsuch scopewhichithas taken upon itself.

However, in the October 2022case ofNationalUnion ofMetalworkers ofSAand others v Afgri Animal Feeds, theLabour AppealCourthad alreadyheldthat itisnotthe businessof anemployerto concernitself withtherelationship betweenindividual employees andtheir unionin matterswhich donotinvolve

collective bargaining.

In this case, Afgri dismissedabout 100workers, andwhen theunionattempted torepresent theseworkers on the basis that they wereits members,Afgri objected.This objectionwas onthe basisthat theseworkerswereemployed inasector which felloutside of the scope of theindustries in which the union was entitled torepresent itsmembers, underits ownconstitution.

On thebasis of theLufil case, this point seemed likely to succeed.

However, theLabour AppealCourt hasheld thata trade union isa voluntary association andthat ifa union accepts a personas a memberoutside oftheprescribed scopeofitsconstitution,itcan dosoin ordertorepresent that person in the particular dispute and toensure ade-

A TRADE UNION, ACCORDING TO THE LABOUR APPEAL COURT, CAN REPRESENT WHOMEVER IT CHOOSES

quateaccesstojusticeforthat person.The LabourAppeal Courtconsequently heldthat theunion couldrepresent these workers, even if they were employedin anindustry which fell outside the scope of theunion’s constitution.

As such, when an employerassesses theright ofa unionto representits members, the issuemust be distinguished: organisational rights disputes, such as disputes over wages,changes to termsand conditionsof employment, theestablishmentof therequired levelsof representivityrequired ina workplaceor bargainingunit inorder todetermine whether aunion issufficientlyrepresentative, amajority union, or otherwise,must be distinguished from disciplinary issues.

A trade union, according to theLabour AppealCourt and AfgriAnimal Feeds,can represent whomeverit choosesin disciplinarymatters;itis onlywhenitseeks rightsagainst anemployer, basedon itsmembership, thatadherencetothescopeof itsconstitution whenassessing membershipnumbers will be enforced.

Stick to privacy policies and avoid data breaches

Ahmore Burger-Smidt Werksmans Attorneys

Employeesare expectedto rememberand complywith manypolicies, includingon privacy. Postercampaigns are rolled outto reinforce positivebehaviour andstill whenwe considerdata breachesit isoftenunbelievable how themistake that resultedin thebreachcould have possibly occurred. The reality isthat many databreaches occurwhen employeesbelieve theyare doing theright thing.Below are the topfive employee

privacy riskpotholes that should be avoided.

DO NOT BE TOO HELPFUL

Employeeswant todothe rightthingtokeepcustomers, suppliers, internaland external clients happy. But beingtoo helpfulmay resultinanemployeeproviding unnecessaryinformation to complete a task, which increases the riskof a data breach.For example,awellintended employeemay provide morepersonal informationthan required.Ifthat information isprovided to

unauthorised individuals,it would result in a data breach which wouldbe requiredto be notified to the information regulator.

SECURITY RULES ARE NOT FOLLOWED

Whenemployees areina rush andunder workpressure,ithappensthatinformation, personal information and confidential information could besent outwithout applying password protection orusing properencryption. Thisproblem occurs when thesecurity processes and technology is too difficult

andtime consumingtouse, or alternativelythe employee hasnotbeentrainedandcannot use the technology solutions properly.

SENDING FILES TO THE INCORRECT RECIPIENT

Thisis infactthe mostcommon and difficultissue to tackleat acompany.Many email applicationsautomatically storepast email addresses. However,this can increase the chances of a mistake asemployees may use theincorrect auto-filled emailaddressandfailtodouble-check the recipient’s

name.Itisonlyaftertheemail is sent or when the recipient notifies thesender ofthe incorrect transmission that the error is discovered.

THE RISK OF MULTITASKING

Weare allbusy withmore than onecomputer monitor and have a number of computer applications openat a time. Whenpersonal information isentered intothe wrong systemand disclosed this results in a data breach!

THEY COLLECT WHAT THEY DO NOT NEED

Onlyaskingforthebareminimum relevant information required is keyand employeesmust considerthiscarefully. The less personal information a companyhas and employees haveaccess to, the less the riskof a data breach. Logicallythe converse applies. Alack ofrobustbusiness processes and employee Popia trainingcannot be underestimated. Thinking beforeyou do, must bethe rulewhen it comes toemployees and privacy. Let thehouse stand firm.

BUSINESS LAW & TAX

Eskom and medico-legal cases

• What does the possible impact of load-shedding mean for determining medical negligence?

Mtho Maphumulo & Seipati Mohaladi Adams & Adams

Eskom, thecoun-

try’s only public power utility,is battlingtomeetthe electricity power demands ofthe population, andthis islikely tohave catastrophic consequences for the healthcare system.

Inrecent weeks,several government officialshave been calling on Eskom to exempt hospitalsand health institutions from loadshedding.

Health institutions rely heavily onelectricity andany untimely powercut canhave undesirable consequences. These consequencescan possibly lead tolitigation as death orserious healthcomplications may occur.

This, inturn, evokespertinent questionsincluding whether, insuch instances, victims shouldsue the energy supplier orthe health institution itself/department of health;how negligence wouldbe determinedinsuch cases; whichmedical proce-

dures/interventions arelikelytobe affectedbypower cuts; andpossible measures that canbe implementedby health institutionsto mitigate possible harm.This piece intends to delve into these aspects.

LEGALITIES

Health institutionsideally require uninterruptedpower supply to carefor critically unstable patients,who often require assistance from multiple electricdevices and

IT IS CRUCIAL TO DRAW A DISTINCTION BETWEEN PUBLIC AND PRIVATE HEALTH INSTITUTIONS

systems. When load-sheddingoccurs, thesedevices andsystems become completelydysfunctional orless effective.

This isbound tocause serious health complications for the patients. In extreme

cases, death may result.

To determine negligence in sucha case,the following test would apply:

● What wouldreasonable healthcaregivers inthe positionof thealleged wrongdoers do?

● Didthe allegedwrongdoers adopt reasonable steps?

Iftheanswerisinthenegative,then negligenceis proven.Ifit isinthepositive, thenthere isnonegligence and thus no legal case.

In determiningreasonable steps in such cases, various factorsneedtobescrutinised.

Factors such as the availabilityof alternativepower supplies;the conditionand stateofreadiness foruseof those alternatives;whether thestaff memberswere advised of the power cut in questionand, iftheywere, what could theyhave done to prevent harm or mitigate it; were necessaryprecautions implemented orinstalled timely; installingefficient uninterrupted power supply technology; storing and maintaining fully charged back-upbatteries foressen-

tial devices; having a loadsheddingroster toactivate additional clinical and administrative staffwhen required; and/or connecting sensitive, life-sustaining medicaldevices thatare capable of automatically switchingbetweenmunicipal and emergency generator power circuits

These factorsand thecircumstancesof eachincident willdetermine whetherthe healthdepartment islegally blameworthy.

In addition,it iscrucial to drawa distinctionbetween publicand privatehealth institutions.In thecase ofa publicinstitution, avictim wouldsue thehealthdepart-

LEGAL SCOOP

ment, whereas inthe case of privateinstitution, theprivate institutionitself wouldbe sued.

CLAIMS

Itwould probablytakegross negligencefor avictimto successfully claim against Eskom for harm (death or health complications)associated with powercuts. This is because Eskom’s dutyto supply poweris notabsolute, andit islegally permittedto implement load-shedding where grounds to do so exist.

Thus, the prospects of successfully claiming from Eskom are slim.

Another possibilityis when a healthinstitution has

adirect contractwitha power supplier. Inthat case, the starting point would be to scrutinise the provisions, terms andconditions ofthe contract.

One further instance is where there is a possibility of shared blameworthiness betweenthehealthinstitution anda powersupplier,in which case thevictim will needtolaunchlegalproceedings against both institutions.

Theongoingrollingblackouts arelikely to addto the woesof thehealthcaresystem;it willbe interestingto see whetherload-sheddinglinked medicalnegligence/malpractice cases make their way to our courts.

Code opens way to tackle harassment at work

The Code of Good Practice on the prevention and elimination of harassment in the workplace (code) was published on March 18 2022, and applies to all employers and employees, as provided for in the Employment Equity Act (EE Act). This code includes physical, verbal, psychological and sexual harassment as opposed to the original code which focused only on sexual harassment. It is clear in its requirement of employers to understand their obligation to take appropriate steps to prevent any and all forms of harassment in the workplace.

In June 2021, the Constitutional Court stated that the legislative regime adopted to deal with SA’s sexual harassment plague has been largely ineffective. Sexual harassment is an abuse of power that often mostly affects vulnerable employees who rarely become whistle-blowers. Many do not report harassment of any kind for fear of being fired which is even more daunting, given

LEGAL SCOOP

the high levels of unemployment in SA and their risk of not working again. In addition to the fear of job loss, some victims feel concerned that they will be perceived as troublemakers which will inevitably risk their progress within the company they work in. This adds to the reasons for the requirement of confidentiality that must be adhered to in all internal and external communications relating to any reported incident of harassment within a workplace. It is vital that employers create an environment where those who feel harassed can report this securely without their grievances being trivialised or not believed.

EMPLOYER POLICIES

On September 13 2022 at the department of employment

& labour’s 22nd Annual Employment Equity (EE) Roadshow in collaboration with the Commission for Conciliation, Mediation, and Arbitration (CCMA), the department’s deputy director: employment equity policy and compliance, Niresh Singh, called on employers and trade unions to be active participants in the implementation of policies that seek to eliminate harassmentinthe workplace.

It is important to acknowledge and deal with harassment in any form. Employers need to have a harassment policy in place within which the range of disciplinary penalties must be set out and must be in proportion to the seriousness of each harassment type. In addition, counselling, treatment and support programs for employees should be outlined in the policy.

HARASSMENT IS DISCRIMINATION

Employee harassment is considered a form of unfair discrimination in the EE Act. The code defines harassment

to include “the use of physical force or power, threatened or actual, against another person or against a group or community, which either results in or has a high likelihood of resulting in social injustice, economic harm, injury, death, physical and psychological harm, maldevelopment or deprivation”

The department of employment & labour has warned that employers who fail to act on harassment issues within the workplace could face being held liable for the perpetrator’s conduct.

CCMA JURISDICTION

The CCMA has jurisdiction to conciliate all workplacerelated harassment disputes. Employees have the right to let any perpetrator know that their conduct or form of harassment is not welcome. This is, however, often difficult, given that many victims are in more junior positions and feel unable to confront the perpetrator. So the employers’ policy needs to state exactly what steps are possible so that the harassment can be reported and acknowledged. Steps

should then be taken to address the harassment.

This needs to happen before the CCMA is involved. It does not mean all internal procedures need to have taken place before contacting the CCMA but rather that the employer has been alerted. The onus is then on the employer to protect the employee.

MANDATORY PROTECTION

Protection for an employee includes public and private physical spaces within their place of work as well as related communications in all forms.

If an employer provides or controls transport to and from the place of employment, this falls under the protection employees need to enjoy. Employers may certainly be held

EMPLOYEES HAVE A DUTY TO ENSURE THEY CONTRIBUTE TO A SAFE PLACE OF WORK BY BEHAVING APPROPRIATELY

vicariously liable for their employees’ transgressions and it is clear the burden of protection lies extensively on all employers to ensure the work environment is conducive to a place of safety and protects and respects the dignity of all employees at all times.

That being said, employees also have a duty to ensure they contribute to a safe place of work by behaving appropriately.

EMPLOYER’S RESPONSIBILITIES

The code states that employers may be held liable for an employee’s actions in terms of the EE act. That confirms again that employers need to educate themselves as well as their employees on the guidelines of the code and ensure that their policies are up to date, acknowledged and, most importantly, adhered to. Hopefully the result of this will see a decline in the high rate of harassment cases seen in our courts and at the CCMA.

● Lisa Schäfer-King is a Director at Fluxmans.

BUSINESS LAW & TAX

International remote work: taxing issues

• Complex tax consequences may arise for for both employers and employees

Jenny Klein & Megan Stuart-Steer ENSafrica

Dueto theimpact of theCovid-19 pandemic, many employers have seen an increased demandfor international remote working arrangements.

Different tax consequences ofinternational remote workingmay arise for bothemployers and employees, dependingon the facts, suchas employees working in SAfor a foreign employer andemployees working abroad for a South African employer. However, thereare certainkeyissues that arecommon tothese scenarios.Wedealwithsome of these below.

● Corporate incometax considerations forthe employer company

Where anemployee works abroad, akey consideration from a corporateincome tax

THERE ARE VARIOUS IMMIGRATION, EMPLOYMENT LAW, EXCHANGE CONTROL AND REGULATORY ISSUES WHICH MAY ARISE

perspective iswhether the activities of thatemployee in the foreigncountry could create a taxable presence for the employer.This would most likely be the case if: i) the employer is regarded as carrying ona trade or business inthe foreigncountry througha permanent establishment situatedin that country(in whichcase,the profitsoftheemployerwhich are attributableto thatpermanent establishment may be taxed there); or ii) theemployer maybe regarded as a tax resident in thatcountry,usuallyduetoits

placeof effectivemanagementshifting tothatjurisdiction (inwhich case itmay be fully taxable there).

Determining whether such ataxable presencemay arise for theemployer would typicallydepend ontherole and activities ofthe employee, thedomestic lawof the country concerned aswell as theprovisions ofanydouble taxtreatyconcludedbetween therelevant countries,if applicable.Anadditionalconsiderationis theMultilateral ConventiontoImplementTax TreatyRelated Measuresto PreventBase Erosionand ProfitShifting (MLI),which will enterinto force inSA on January 1 2023.

● Employees’ withholding tax and tax compliance Animportant practicalissue forboththeemployerandthe employee iswhether, andin which jurisdiction/s, employees’ tax withholding andtax complianceobligations may arise.

This often dependson the

location and the duration for whichservices arerendered bytheemployee, aswellas theprovisions ofanydouble taxtreatyconcludedbetween SAand theforeign country,if applicable.In addition,a change in theemployee’s tax residence status as a consequence of theremote workingarrangement mayimpact onthe employer’s tax withholding obligations Where more than one jurisdiction requires withholdingof employees’ tax (usuallyaccompanied bya local filingobligation forboth theemployer andemployee), this would resultin a dual withholdingobligation forthe employerand acashflow issuefor theemployee (whichmay betemporary, dependingon therelevant locallegislation andpotential refunds, exemptionsand/or foreign tax credits).

Other relevantconsidera-

tionsinclude thesituation whereremuneration ispaid to an employee by different employersin differentjurisdictions, andremuneration (such asa bonusor share incentive payment)payable to the employee relates to servicesrendered indifferent jurisdictions.

● Tax residencefor employees In respectof employeesrelocating,it willbe necessaryto determinewhether theywill ceasetobe taxresidentsofa particularjurisdiction asa resultof theirrelocationand, ifso, whenthis willoccur. This is usually a factual enquirybased onvarious factorsand willdependon the individual’s personalcircumstances. Ifit isdetermined thatthe employee will cease to be tax resident,there areoften various deemeddisposal andtiming ruleswhichapply

and which will need to be considered.

Theabove aresome ofthe keytax issueswhich mustbe carefully thoughtthrough when consideringremote working arrangements. In addition tothese and other tax considerations, thereare variousimmigration, employment law, exchangecontrol andregulatoryissues whichmayarise, both locally and in the relevant offshore jurisdiction. Mostoftheseissuesarecasespecificand requirebespoke legal analysis. As the frequencyof international remoteworking increases, employers will needto bearthesecomplexities in mind when assessing and implementingthese arrangements.

● Reviewed by Peter Dachs, head of ENSafrica’s tax department.

Dispute avoidance able to evade litigation

Siphokazi Kayana, Nomfundo Mkatshwa-Jackson & Lesego Modise CMS South Africa

With the likelihood of a global recession in 2023 and the concerning fallin thevalue of the rand against the major currencies, it isclear SA will continueto facetougheconomic times.

For businesses, this meansoperatinginacautious manner andcutting costs where possible. Businesses must becautious about incurring costs,and this includestheirapproachtothe use of legalremedies in conflicts with other businesses.

Andso,it isimportantto highlightthe riskofexcessive costs when solving businessrelated conflicts through court litigation.Going this route caninvolve timeconsuming processeswhich are costlyand stressful. Lengthy litigationproceedings can alsonegatively affect the reputation of parties.

It istherefore notalways prudent to resolve a dispute through courtproceedings as this maylead toexorbitant costs, hoursof management timewasted andtheorder granted may notalways yield the bestpossible outcome. However,if adisputeis assessed andmanaged well, litigation couldbe avoided altogether, andthe parties may then worktogether to achieve the best result.

Simply put,litigious court proceedings need notbe the fate ofevery organisation. There arepractical waysto neatly curb this,such as through dispute avoidance. Dispute avoidanceis an emerging legal concept in SA. It is a processin which parties to a contract can take note at an earlystage of the potential risks of disputes; it aimstodispose ofthoserisks amicablyand beforethematter becomes litigious. This is theproactive management ofrisk avoidance, anditis essentialinbusiness

today more than ever.

HOW DOES THE DISPUTE AVOIDANCE CONCEPT WORK?

In instances suchas when contractual disputesarise, a dispute resolution practitioner whounderstands dispute avoidance willseek tomanagethedisputetoavoidlitigation. This isthe primary goal of the concept of dispute avoidance.

This canbe achieved whenalegalprofessionalfully understandsthe disputerelated risks and,as a result, isable toformulatesound advice onmechanisms that can be employedto ensure dispute resolutionand litigating through courts are used asalastresortindealingwith a dispute.

After consultation with clients, apractitioner knowledgeable aboutdispute avoidancewillassessthedispute throughproject management touncover thecrux or merits ofthe matter and

theythen evaluatetherisks present andoptions available to the client to avoid litigation. This includesallowing for negotiation toachieve an early resolution.

With effective project management ofdisputes, a businesscan alsoexpecta legal practitionerto identify the position of the counterparty whichallows them to immediatelysee the strengths andweaknesses of the case.

Therefore, forthe practitioner, communicationwith the business client and discussions withthe counterparty are key for dispute avoidance asparties are

THE PROCESS OF DISPUTE AVOIDANCE ALLOWS FOR LEGAL PRACTITIONERS TO ASSIST CLIENTS EFFECTIVELY AND EFFICIENTLY

encouraged toraise anyconcerns regardingthe dispute, thus preventingan escalation to litigation.

Another elementis keeping trackof dispute-related documents suchas contracts and relatedcorrespondence thatcanbe usedtopersuade or negotiatewith thecounterparty toreduce the chances of potential litigation.

Other key considerations for managingdisputes and which becomevitally importantif thedispute cannotbe avoided include:

● Identifying groundsfor the claim which allows the practitionertohaveasetstructure and approachin dealingwith the issuesand tostreamline the informationand documentation to focus on the key elements of the dispute;

● Determining the appropriate forum to resolve the dispute; and

● Adequate preparationof evidence ifthe matter becomes litigious.

The advantagesof dispute

avoidance, especiallyin the SA context, include:

● The promotionof active participation byallowing the participants toengage and explain theirviewpoints and experiences;

● Opening up the parties to otherways ofresolvingtheir disputethatmaynotbeavailable via litigation;

● The reduction ofthe stress of havingto followcompulsory court processes; and

● Confidentiality forboth parties.

The processof dispute avoidance allowsfor legal practitioners toassist clients effectivelyandefficientlywith theirdisputes andto finda waythroughaneffectiveproject managementstrategy to avoidlitigation or tosufficiently prepare forlitigation if avoidance effortswere not successful.

Itis anessential legalprocessthatoffersSAbusinesses and industrythe opportunity to avoid lengthy, onerous and costly litigation proceedings.

BUSINESS LAW & TAX

Transfer pricing audit alert

• It is just a matter of time before SA follows the rest of the world with scrutiny of profit shifting

Robyn Kantor ENSafrica

Alleged base erosion and profit shifting activities of multinational enterpriseshave beenahot issue globallyand therefore thechancesofamultinational enterprise being confronted with a transfer pricing audit have increased substantially over the past few years.

Owingto theintense focus on transferpricing by almost alltax authorities around theworld, together withagrowing focusonthe international exchange of information,it seemsonlya matterof timebeforeany multinational enterprisewill be subject to transfer pricing audit scrutiny.

Steps to be taken in preparation of an SA audit Taxpayers needto proactively adoptstrategies thatwill enable them tomanage the risks associatedwith the transfer pricing audit:

● Performing a self-assessment. Aregular assessment of yourintercompany transactions, another of the functions, assetsand risksas well asoneofthepricingstructure arekey. Checkthat yourpolicyis uptodate, ensurethe validity andrelevance of benchmarking studiesand ensure your resultsfall within theinterquartile range identified. If a possible risk is detected, avoluntary selfadjustment isalways preferable to an adjustment being made by the SA Revenue Service (Sars).

● Reporting requirements SA followsthe three-tiered

approach asimplemented by theOrganisationofEconomic Cooperation andDevelopment (OECD), tatis countryby-country reporting(CbCR), including themaster fileand the localfile. SA-parented multinationals whohave an aggregate ofpotentially affected transactionsof more than R100m annually need to prepareand submitamaster file and localfile. Such documentation shouldnot be viewedas asimplecompliance exercise,as suchdocumentation providesSars (and other taxauthorities with which it shares this information)with thebasis forconducting thorough transfer pricingrisk assessments.Itis

IT IS EVIDENT THAT WELL-PREPARED AND ROBUST DOCUMENTATION ENABLES YOU TO DEFEND YOUR POLICIES

therefore imperativethat such documentationis simultaneously prepared and filed.

● Preparation ofrobust documentation. Without substantiation of transfer prices, you open the door to a thorough investigation, which allows tax authorities to formulate their own views ofthesituation. Thiscanbe extremely harmfuland immediately puts youon the back foot.

In onetransfer pricing case,aDanish courtruledin favour ofthe taxauthority, entitling it tomake a discre-

tionary assessment of the taxable income. This permitted thetax authorityto benchmark the manufacturer (taxpayer)as opposedto the related partysales companies,arguing thatthetaxpayerhad failedto furnishit with robust information concerning the sales companies andtherefore couldnotperformareliablebenchmarking study.

In contrast,in another transferpricingcasetheDanish courtjudged infavour of the taxpayer. Thecourt ruled that the transferpricing documentation providedadequate justification for the benchmarking applied,thus preventing therevenue authority from applying the transactional net margin method (TNMM) to assess the incomeof acompany making losses.

It is evidentthat wellprepared and robust documentation enables you to defendyourpoliciesandprovides context for how each party fulfils its obligations.

● Alignment of facts and evidence. Check that the transfer pricinganalysis aligns with thelegal agreementsand theactualconduct of the parties. It is critical to provide a consistent picture and allowthe readerto fully understandthe natureofthe transactions. If thereare inconsistencies, chancesare that Sars will disregard the analysisand drawitsown conclusions. And so always ensure you provide consistent informationand acohesive storyacross CbCR,master file, local file, legal agreements and supporting evidence.

● Respond systematically

PROACTIVE PLANNING

to Sars’ requests. Section 46 of theTax AdministrationAct 2011 gives widepowers to Sars to request information considers tobe relevant.We advise you to provide comprehensive and timely responses to Sars’ requests as this will create a cordial workingrelationshipwiththe agency, whichwill goa long way when it comes to granting extensions or penalty mitigation.

● Interview readiness. Ensuretheindividuals(keystrategic decision-makers) are fully briefed in advance. Whenitcomes tothefield audit interviewsit isimperative to ensure the individuals respond appropriately and understand thecontext ofthe questions raised by Sars. Interviewees shouldonly respondwhentheyknowthe answer and avoid speculating. A good idea is for the potential intervieweesto refresh their memories by

reviewingall relevantmaterialin advance.It isalso worthhaving someonepresent at the interview to moderatethe discussion,if required, and to record the interview so there is a clear record of what was said.

COMMON RISK

One of the most common reasons for disagreements betweentaxpayers andSars relates to whetherthe entity underinvestigation isdoing what itclaims to do.This is the limited risk versus full riskpredicament. Thiswould generallybe causedby adis-

IF THERE ARE INCONSISTENCIES, CHANCES ARE SARS WILL DISREGARD THE ANALYSIS AND DRAW ITS OWN CONCLUSIONS

agreementover thefunctional profile ofthe parties, that is marketing agent versusservice provider.Insuch cases,thebest lineofdefence istoensure youhaveas muchfactual evidenceto supportthe functionalprofile of the entity under audit.

The selection of comparables also plays a significant role asSars willquestion the taxpayer’s comparable data put forward and provide its own comparabilityanalysis. Donotjust acceptthatSars’ analysisiscorrect.ItisessentialtothoroughlydissectSars’ analysis, requestadditional informationwherenecessary and keep asking questions.

Theincreasingsophistication oftransfer pricingaudits incentivisestaxpayers totake thematter seriously. Being proactive and co-operative after implementingstrategic measures,ensures amore favourableoutcome inthe long run.