Business Day Business Law & Tax, April 2021

BUSINESS LAW&TAX

REVIEW OF DEVELOPMENTS IN CORPORATE AND TAX LAW

Bar wars: Tony’s tripped up

• Campaign aimed at highlighting human rights abuses has backfired

Gaelyn Scott ENSafrica

The well-known Dutch chocolate maker Tony’s Chocolonely has certainly managed to create a stir.

Underthe nameSweet Solution, thecompany has launched a rangeof chocolatesthatis interesting,tosay theleast.There arefourdifferent chocolates.Though eachone isbrandedTony’s and Tony’sChocolonely, one chocolate looksvery much likea KitKat,one verymuch like aToblerone, onevery much like aTwix and one very much likea Ferrero Rocher. Thesebrands are owned by the major competitors ofTony’s Chocolonely Nestle, Mondelez, Mars and Ferrero Rocher.

The shapesof thenew products arewhat Tony’s Chocolonely describesas “playful”, butwe suspect the other companiesmight have a different expression for this. So,for example,the KitKat lookalike comprises a mix of the unequal-shapedblocks used by Tony’sand the wafer shapes of Kit Kat.

But whyis Tony’s doing this? Well,it’s apparently intended todraw attentionto

the problem ofslavery and child labour in the chocolate supply chain.Buyers are askedtosign apetitionthat supports the need for human rightslegislationandseeksan end to the useof slavery and child labour

Tony’s Chocolonely’s plan was to launch this new range of chocolates in the UK, Netherlands, Belgium, Germany and theUS. But, claims the company,its competitors putserious pressureonthe UK supermarketsnot to stock these limited-edition bars.Wedon’thaveanyinformation onhow thelaunch hasgonein theothercountries. Onereport suggests these bars arenow only available onTony’s Chocolonely’s website.

So,what arewe tomake ofthis?Seeking toendchild labour, slaveryand other abuses inthe supplychain is, of course, totally laudable, but is it justifiable to use the

ITS COMPETITORS PUT SERIOUS PRESSURE ON THE UK SUPERMARKETS NOT TO STOCK THESE LIMITEDEDITION BARS

branding ofcompetitors in the process?Cynics might see this as littlemore than a ruse to increase revenue.

Itis, inour view,highly unlikely thatany ofthe chocolate maker’s competitors will takethe legal route. The simple fact is any legal action would look bad given the antislavery/childlabour dimension. Butassuming we’re wrong,what remedy would the law provide?

If thiswere to playout in SA, Tony’s Chocolonely’s competitors mightwell have a case, assumingthey had SA trademark registrations for their labels,registrations that incorporate the colours.

Trademark infringement is dealt with inSection 34 of theSA TradeMarks Act.Section 34(1)(a)prohibits the “unauthorised usein the courseof tradein relationto goods or services in respect of which thetrademark is registered, ofan identical markor ofamark sonearly resembling it as to be likely to deceive or cause confusion”

INFRINGEMENT

Even in caseswhere consumer confusionis unlikely to happen, theremight still be a claimfor infringement under section34(1)(c), especiallyasthevariouschocolate getups aremost certainly

well known.This section deals withinfringement through the use of a similar mark wherethe registered mark is well known and the useislikely to “take unfair advantage of, or be detrimentalto,thedistinctivecharacter or the repute of the registered trademark, notwithstanding theabsence ofconfusionor deception”

Trademarklaws inmost countries havesimilar provisions to these.

Wesuppose thatonelessonto learnfromthis storyis the importanceof separately registering theproduct label, includingin colour,asa trademark, in additionto the

word trademark.

We’llend bymentioning that Tony’s Chocolonely recently discoveredthat taking themoral highground is onething, stayingon itis another.

Thecompany hasbeen dropped fromthe Slave-Free Chocolate’s listof ethical chocolate companies. Tony’s

THE SIMPLE FACT IS ANY LEGAL ACTION WOULD LOOK BAD GIVEN THE ANTISLAVERY/ CHILD LABOUR DIMENSION

Chocolonely’s website says this:“Wehaveneverfoundan instanceofmodernslaveryin oursupply chain,however, we donot guaranteeour chocolate is 100% slave free.”

It goeson tosay that “ we are doingeverything wecan to preventslavery andchild labour [but]we cannot be there to monitor the cocoa plantations 24/7”

But it isthinking big: “Our ambitionextends beyondour own bar, we want to change thewhole industrywhich involvesbeing wherethe problems are sothat we can solve them only then can we say we have achieved our mission to make all chocolate 100% slave free.”

BUSINESS LAW & TAX

LATERAL THINKING

Expect fourth-quarter uptick

• Business Day Law & Tax Editor, Evan Pickworth, interviews Isaac Fenyane and Cheván Daniels, executives in the corporate commercial department at ENSafrica about the prospects for deal-making and commercial law in the year ahead

EP:I’veseensomeconcerning numbersof M&Aactivity taking asmuch as a 60% hitduring theworst days of theCovid-19 crisis. But thatwas last year are you seeing anysigns of blue sky or green shoots now?

ENS: The percentage hit of 60% sounds aboutright if we considerthe downturnin M&A activity in our own practices.During theworst days of the Covid-19 crisis, some M&A activitycame to a grinding halt andthe focus of clientswas onmanaging/ protecting theirexisting businesses.

That being said, towards the thirdquarter of2020, we alreadybegantoseethesigns of green shoots. Of course, some of the green shoots are fuelledby distresseddisposalsflowing fromthe impactof theCovid-19pandemic, which left many companies cash-strappedand undervalued.

Clients in industries that took the biggest hit during lockdown were already brainstorming aboutdiversifyingtheir offerings,which includedacquisitions ofbusinessor companiesoffering complementary goods or services, lockdownsustainable businessoperations, technology add-ons etc. Private equityfunds, investment holdingcompanies,and familyoffices/ HNWIshave alsobeen scouringthemarketfordeals. However,actual dealflow (executed andimplemented deals) remainedlow throughout 2020.

EP: Of course,our GDP fell 7% last year but that wasn’t asbad asit could have beenwere itnot for mining exports,among others. Was the better performance lastyear aportend forbetter tidingsfrom a deal-makingperspective in 2021?

ENS: Itis too earlyto make boldpredictions aboutbetter tidings for 2021.

Ex-Africa, internationally, particularly in theUS and Europe,M&A activityhas started topick up.We think SA is likely to follow suit, particularlytowards thefourth quarterofthis year,butthisis dependent upon a variety of factors,including ourability toroll outCovid-19vaccines (it already appears that vaccinating40-million peopleby the endof this yearmay not be possible).

In addition, while the Covid-19pandemic wasa seismic shock tothe South African(andglobal)economy, evenpre-Covid, theSouth African economicfundamentals were notgreat downgradingto junkstatus by the credit rating agencies, high unemployment,low growth, restrictivelabour laws,too muchregulation (aggravatedby policyuncertainty), poorly performing/inefficient parastatals which putmore burdenon thestrained nationalfiscus etc. Unless these issues are addressed,creating amore conducive M&A environment will remain a challenge.

EP: And the future pipeline canwe expect tosee a strong recovery this year?

ENS: We think future pipeline and astrong recoveryare two different things this year. We are seeinga strong pipeline of deals across a

WE THINK THERE WILL BE A LOT OF ACTIVITY IN THE TECHNOLOGY SECTOR, AND IN THE FOOD/AGRI SECTORS

range of sectors, from those sectors that were hit hardest byCovid-19 (and,consequently, where value is to be potentiallyfound) tothose sectors thatwill continueon anupward trajectoryfrom last year,in particular,in the technology sector. Whetherthatwilltranslate into an actualrecovery in M&A deals thisyear will dependon, amongother things,whether partiescan come to terms on pricing mismatcheswhich arelikely toarise(both onthelowend forthose businesseshit

hardestby Covid-19andon the high end for those businesses thatshot thelights out duringthe Covid-19pandemic)and whetherthereis greater certaintyaround Covid-19,in particular,the roll outof Covid-19vaccines in SA.

EP:Your expectationsfor corporateactivity overthe next three years

ENS:Slow tomoderateactivityfor mostof 2021,an uptickinactivity inthefourth quarterof2021, moreofthe sameforthefirsthalfof2022, and thena strongincrease in M&A activityfor thesecond half of 2022 and into 2023.

Wethinktherewillbealot of activityin thetechnology sectorgenerally, andinthe food/agrisectors. Powerand infrastructuredeals willbe prominent throughoutAfrica, butthis wasthe casepreCovid-19 as well.

Withminingon abullrun, there maywell beactivity in this sector, ascompanies seek togrow/consolidate. Private equity firmsare likely tobe activein themarket over the next three years.

Andthen withinAfrica,a countrylike Ugandastirs quite a bit of interest, while Rwanda is leading the charge on vaccinations.

EP: Which are the areas whichseem mostexciting right now?

ENS: Technology, particularly any form ofpayment platform,is likelyto beexciting on the African continent.

Perhaps counter-intuitively,we thinkhospitality might be an interesting and exciting space.As moreand moreAmerican andEuropeansare vaccinated,they may wantto ventureinto wildernessareas, awayfrom crowded areasin otherparts of the world. There is also valuetobe hadinthesector, ifyoutake amediumtolongterm view.

EP: Whenwe lookat sectors, which arethe most popularat themoment and why?

ENS:Technology, forobvious reasons.However, thisdoes not only applyto your traditional technologycompanies. Theinterest intechnology willfuelcreativityandactivity in other sectors.

For example, data-processingcentres requirereal estateto housethe datecentres,onlineshoppingrequires warehousingspace (bothfor the despatchof productsand

thereceipt ofreturned goods),so thiswill alsostimulate thereal estatesectors, too.Across industries,companies are looking to find solutionsto thechallenges broughton bytheCovid-19 pandemic byintroducing technologyinto theirbusinesses.

We also think private equityfunds aregoing toplay aprominentrole inSAand Africa generally.

EP:What arethefuture trendsin thecommercial space to watch?

ENS:The commercialspace (whetherin aprofessional spaceor businessspace)has been dramatically changed with the advent of Covid-19.

The trends thatwill continueeven beyondCovid-19 era include how people work andengage witheachother so we expectfurther technological developments to enhancethe currentplatforms and make it even more conducive towork andcollaborate remotely andin a cost-efficient manner.

With this, we expect companies in the technology and communications spaceto benefit from the trends while companies in thereal estate andtravelling spacewould needto readjustandremodel theirbusinessofferingstosuit

the new business environment post Covid-19.

EP: Is commercial law keeping pace with all the change,like themoveto digital platforms?

ENS: Traditionally, law has been slowto keeppace with change. However, what we have seen is the Covid-19

WITH MINING ON A BULL RUN, THERE MAY WELL BE ACTIVITY IN THIS SECTOR AS COMPANIES SEEK TO GROW/ CONSOLIDATE

pandemic created such a fundamental shift in working in sucha shortperiod oftime that we wereforced to adapt quickly.Wehavesuccessfully moved to digital platforms, workedfrom homeandcontributed to the environment by reducing the amount of paperwe aslawyerstraditionally use.

EP: What are the biggest changes to the commercial law landscape and legislation we can expect this year?

ENS:Wedo notforeseesig-

nificantchanges tothecommercial law landscape this year. However, wemay see furtherprogress ontheproposed amendments to the CompaniesAct. Inaddition,if SAfollowstheleadofsomeof the European countries such as the UK, France, Italy and Belgium,there maybelegislative measures (temporary and/or permanent) to our corporate insolvencyand restructuring landscapeto mitigatetheeconomicimpact of Covid-19 on struggling companies.

That being said,one of the most significant changes has already taken place the relaxation by theSA Reserve Bank of the exchange control rules regarding loop structures with effectfrom January 2021. Loop structures are now a thing of the past.

EP: Yourtop lineadvice toa C-suite executive thinking about cross-borderexpansion this year

ENS: There are certainly argumentsinfavourofcrossborder expansion,whether inthe formofscaled-up pan-African multicountry operations or possible expansion intodeveloped market economies. Ultimately, theremust be a soundbusiness casefor expansion and avoid growth forgrowth’ssake.Bebold,but also tread cautiously.

EP: Andfinally, youradvice to thatyoung lawstudent considering a career in commercial law. What is the best way to lay the foundation from an educational perspective?

ENS: Ifyou canafford todo so,do notplough straightinto an LLB degree.Any undergraduatedegree,whetherliberal arts (BA), commerce (BCom) or even science or engineering will provide you with a broader foundation from whichto moveinto an LLB degree andmake you a more rounded law student and commercial law practitioner. Read widelyabout SA and thebroader Africanand global economies, andtry to getsomepracticallegalexperience while at law school. Furthermore, becausethe law graduatespool islarge and highly competitive, make sure your profile/resume stands outby scoringexcellent grades, participating in extracurricular andcommunity activities to exhibit all-roundness and leadership qualities.

BUSINESS LAW & TAX

Tricky labour law proposals

• Timing of suggestions from labour constituencies problematic in Covid and recovery environment

Jonathan Goldberg & Grant Wilkinson Global Business Solutions

Labour constituencies recently proposed amendments tolabour legislation. Inthis article, we lookat the proposalsanddiscussthepracticalimplications oftheseas well as alternatives.

The timingof theselabour proposals areproblematic in a Covidand Covidrecovery environment.

The first proposalis to moveby meansoflegislation from a45-hour workweek toa40-hour workweek.Of importance hereis the request for a reduction in hours comeswithout any reduction inwages. Mathematically, ifthat wasthe case in an organisationworking a 45-hour workingweek, that would be an 11% increase.

A further proposal is the increase ofseverance pay from the oneweek for every completed yearof serviceto one month peryear of service. Theseverance amount has been inplace since the Basic Conditionsof Employment ActNo 75of 1997 (BCEA). Acomparative analysis was done with a number of other countriesand figures vary in termsof the severance provided.

In somecountries suchas Germany, Ghana,Italy, Japan and India noseverance is paidirrespective oflengthof service.Thisis instarkcontrast tocountries suchas Zambiawhich, afteraperiod of a year,start having sever-

ance start attwo weeks. Indonesiaalso startsattwo weeks after oneyear’s serviceand thengraduatingfurther.

Contextis importantin thisregardand SAhas,for manyayear,beeninfinancial dire straits.This negative financial situationhas been exacerbated bythe Covid-19 pandemic.At themoment,a number oforganisations have been unable to pay even theone weekpercompleted year of service and this has led to anumber of liquidations inSA. Toincrease this will likely leadto a significant increase in the number of liquidations in the country.

A CHALLENGE FOR ORGANISATIONS IS THE SUGGESTED PROHIBITION OF THE USE OF REPLACEMENT LABOUR

It is ourview this would not bewell placedas alegislated minimum. We support operational and central bargaining and mostof these have severance pay negotiated. At plant level, then, parties could negotiate basedon the meritsand contextofthe organisation on a severance above the minimum.

A proposalwhich may lead tofurther liquidationsis the amendments of sections 189 and 197 of the Labour Relations Act(LRA), andparticularlywith189,thetighten-

ingof theregulationson retrenchments. Itis ourview the current status quo should remain.As analternative,for a periodof 24months, consideration shouldpotentially be givento arelaxation of s189A and process all retrenchments under section 189oftheLRA. Itisourexperience that employersdo not readily embark on s189s withoutvalid reasonandthat tomakethisevenmoreonerouswould bechallengingto businesses going forward.

Other changesproposed include theexpansion ofthe definition of workers to include independentcontractors, actors, Uber drivers, self-employed andother atypical workers andfor paid elderly care leaveto be given to workers who need to take careoftheir sickparents.In respectof theannualadjustments of theincome threshold,it istobenoted thisisa function ofthe NationalWage Commission.

In addition isa proposal to adjust annual adjustments of the incomethreshold toprotect the erosion due to inflation. It is our view the definition ofemployees iswide enoughasisevidencedbythe South African Uber case. The definition of workers has also been adjusted.

One ofthe issuesis the time period for retrenchment insection 189(A)of theLRA. The trade union proposing amendments in terms of retrenchments are the increase ofthe noticeperiod from 60days to120 daysas well as the right to strike after 60daysifthereisnoconsen-

TERMS AND CONDITIONS

sus on thecommercial rationale of the retrenchment.

A challengefor organisations is thesuggested prohibition of theuse of replacementlabour. Maybeasproposed above for enterprises to recover theseshould be a relaxation of these provisions foraperiodof,say,24months to facilitate recovery.

In addition to the amendments mentionedin thearticle thereare proposalsfor Coida, National Minimum Wageaswell astheUnemployment Insurance Act.

When oneconsiders the proposalstabled bythetrade union movement might lead tofurtherjoblossesaswellas more liquidations in our country. The Covid-19 pandemic has made it clear businesses need toput structures in placewhich areflexible to ensuretheycanreacttothese changes with a minimal

impact to boththe majority of employees aswell asbusiness itself.

Further amendments that could be considered besides thosementionedinthearticle are as follows:

● Inthe first12 monthsof employment dismissals should be allowed for employees below the threshold with nosubstantive reason or withoutfollowing a procedure.

IN SOME COUNTRIES SUCH AS GERMANY, GHANA, ITALY, JAPAN AND INDIA NO SEVERANCE IS PAID

● The dismissal of senior employee(forexampleabove R1.5m total remuneration a year) be relaxed to allow for termination on three months’ notice.

● The relaxation of section 189A for 24 months.

● Thethree monthsinthe entire section 189 (fixed-term contract, temporary employment services, part-time and equal treatment) to move to 12 monthsbefore theextra restrictions become effective.

● An expedited process to the minister for exemption from the minimum retrenchmentpay inthe BCEAto avoid liquidation. Covid-19has placedasignificant challenge on business in SA and the net result has been anumber of business closures aswell as job losses. We need to move to a timewhere lawsallowthe successfuloperationoflawful businesses and ensure their success and, in that, the growth of employment in SA.

Will tax reprieve save ferrochrome sector?

Prenisha Govender & Angelo Tzarevski Baker McKenzie Johannesburg

The government recently approveda taxonSA’s exported chrome,though the tax percentageand further details are stillto be announced. The ferrochrome ore industry hasbeen severely threatened inrecent years, mostly dueto increasesin electricity tariffsfor heavyuse industriesthat, combined with theunreliable power supply in SA,have crippled the industry to such an extent thatreportedly 40%ofthe country’s ferrochromemines have been unableto continue production. Some industrystakehold-

ershave suggestedaspecial electricity tariff wouldbe a better way tosupport the ailing industry, statingthat the export tax willnot provide much benefitif electricity supplyandcoststotheindustry are not addressed. Some in the industry feel that thechallenges chrome ore producersface mean they would notbe able to sustain themselves,even after tax relief. This would not only negatively affect exports, but thedownstream industry as well.

SA isone ofthe world’s largest producersof ferrochrome andthe industry couldhave avitalrole toplay in thecountry’s pandemic recovery,if itschallengescan be successfully addressed.

The countryexports 84% offerrochrometoChina,with Turkey andZimbabwe, for example, producing smaller amounts. Therehas been concernthat anexporttax would meanother countries wouldbe ableto offerferrochrome atcheaper prices thanSA,withthecountrylosing significantmarket share in the process.

While China sources most of its chromeore from SA, thiscould changeif theproduct wasavailable cheaper from othercountries. However, it hasalso been noted that it wouldbe difficult for China to move away from the type offerrochrome it imports from SA.

Others inthe industry, however, welcome the

reprieve anexport taxwould provide. Indiahas implemented asuccessful export tax forchrome ore,which has resulted inan increased taxbase,higherinvestmentin theindustry, benefitstothe local communitiesand skills development.

Key industrystakeholders have expressedinterest in collectively undertaking research to explorea more

THE FERROCHROME INDUSTRY COULD HAVE A VITAL ROLE TO PLAY IN THE COUNTRY’S PANDEMIC RECOVERY

viable andconsolidated approach tosupport theferrochrome industry.This process may involve the sharing of competitivelysensitive information, which presents difficulties froma competition lawperspective, and engagement onthese issues has not been forthcoming.

According toSA competition law,joint industry engagement ofthis nature may give riseto anticompetitive conductby facilitating collusion oradversely affecting competitionin the market.

Accordingly, inDecember 2020 keyindustry players applied tothe Competition Commission foran exemption fromcertain provisions oftheCompetitionAct.Ifsuc-

cessful, theexemption would permit stakeholdersto jointly explore neededsolutions in the industry for a period of two years. While thereis no further information onwhether the government will eventually imposeexportlimitationsand restrictions, theSA Revenue Service isexpected to become aggressivein monitoring complianceand the collection ofthese export taxeswhen theydotake effect.

SA chromeore producers who intendon exporting chrome should begin preparing,so theycanbe taxcompliant and in possession of therelevantcustomslicences if newexport taxeseventually become effective.

Extra duties for directors

• The traditional belief that company boards only have to answer to shareholders, is being challenged

Cohen Grootboom Adams and Adams

Thereis aninterdependency between companies and SA society that mirrors the Africanconcept ofBotho, otherwiseknown asUbuntu: “I am becauseyou are; you are because we are.”

A company is dependent on the broaderSA society to provide it witha conducive operating environment, a sustainable customer base and the skills it needs to operate, among many others. Should directors of a companythen berequiredto run itsolely in theinterests of itsshareholders, or should theytake intoconsideration those of other stakeholders in broader SA society?

Prior to the promulgation of the CompaniesAct 71 of 2008, theduties ofcompany directorswere governedby the common lawand codes ofbest practicesuch asthe variouspermutations ofthe KingReport onCorporate Governance for SA.

In terms of the common law,directors arerequiredto act in theutmost good faith andinthebestinterestsofthe company, whichincludes

exercising care,skill anddiligencewithaviewtopromote companysuccess by applying independent judgment.

These requirements have beenapplied injudgments such as SAFabrics vs Millmann,inwhichthecourtheld thata company’s “interests” are only those of the company itself asa corporate entity andthose ofits members.Directors arerequired to manage company affairs in the interest ofthe body of shareholders as a whole and to maximise profits for the benefit of those shareholders.

Although the common lawremains applicable,the provisionsof section76(3)(b) of the CompaniesAct has largelycodified thecommon lawposition. Section76(3)(b) provides that, “A directorof a company, when acting in that capacity,must exercisethe powersand performthe functions of director (a) in good faithand fora proper purpose;(b) inthe bestinterests of the company [ ]” It is clearthe requirement to actin the bestinterests of the company ispresent both in thecommon law,as well as theact. However,the “best interests ofthe company” is not defined inthe act. Efforts togivemeaningtothisphrase

continue. Meanwhile, three theories may shedlight on how to interpret the phrase:

● Shareholder value or shareholder-centric approach

This approach is premised on the idea that directors have anobligation toensure wealth maximisationfor shareholders and that a company is solely owned by its shareholders. Itis inline with the positionthat thesole purposeofmakingaprofitforthe companyentails thatdirectors ought toexercise their duties solely for the benefit of

IN TERMS OF THE LAW, DIRECTORS ARE REQUIRED TO ACT IN THE UTMOST GOOD FAITH AND IN THE BEST INTERESTS OF THE COMPANY

shareholders.Under thistheory, theidea that itmay exist for socioeconomicpurposes too is unsustainable.

● Stakeholder/pluralist approach

Shareholdersare viewedas merely anotherstakeholder in theregard ofdirectors

ROUND TABLE DISCUSSION

alongwith variousothers Directorsmay berequired,if necessary,to foregoshareholder profitsto advancethe interestof otherstakeholders in the company.

● Enlightened shareholder value approach

Aswiththeshareholder-centricapproach, thisapproach requiresdirectors tomaximise profits forthe benefit of shareholderswiththequalificationthat directorsarealso permittedto takestakeholders ’ interests into account, as long asthese remain subordinateto profitmaximisation and shareholder interests. This theoryaims tostrike a balance betweenprotecting thevarious competinginterestsof shareholdersand stakeholdersbyrecognisinga companyis aneconomic institution asmuch as itis a political and social institution.

Within the SA context, various statutes such as the LabourRelations Act66of 1995,the Promotionof AccesstoInformationAct2of 2000and theBroad-Based Black EconomicEmpowermentAct53 of2003 place increasingpressure onthe traditionalview thatdirectors are expected to manage a company onlyin thebest interestsof theshareholders

CONSUMER BILLS

collectively. Theyshould rather takeinto accountthe interests ofall stakeholders employees, creditors, consumers etc. Itcan be viewed as an indirectrejection by the legislatureof apurelyshareholder-centric approach.

The duties directors owe to the company fall within the parameters of corporate governance. Although it does not possess the forceof law, the King 4 Reporton Corporate Governancefor SA2016 (King 4) is instructive on corporate governance best practice inSA and setsa minimumstandard fordirectors’ conduct. King 4refers tothe “triple context” of the economy,society andenvironment in which a company operates as a singular, intertwinedcontext, whichdirectorsmusthave regardtoin their decision-making.

Further, ina policypaper publishedby thedepartment of trade & industry in 2004 entitled SA CompanyLaw for the21st Century:Guidelines for Corporate LawReform, it specifically states: “SA cannot afford to be left behind. There isa growingrecognitionby companies and governments thatthereis aneedforhigher standardsof corporategovernanceand ethicsand

greater interdependence betweenenterprises andthe societiesin whichtheyoperate sociopolitical andeconomicchange inSAhas underscoredthe needfor social responsiveness,transparencyand accountabilityof enterprises”

In thelight ofthis clear state objective, thequestion remainswhether thephrase “thebestinterest ofthecompany ” should beread through the lens ofthe stakeholder/ pluralist or theenlightened shareholder approach.

My view is the enlightened shareholder approach shouldbe takenin whichthe directors’ main objective remainsto maximiseprofits forthe benefitofshareholders, but alsotaking into account stakeholders’ interests,which remainsubordinateto profitmaximisation and shareholder interest.

The act does not prescribe a mandatory orlegal duty to directors to takestakeholder interestintoaccount.However,ifone hasregardtothe spirit,objects, andpurposes of the act, the imperatives of the constitution and the principles of the codes of practice such as the King4, it will be unavoidable forcompanies not tohave regardto the interests of stakeholders. Therefore, on the question of whether it is necessary to broadenthe traditionalconceptthatdirectorsoweaduty to thecompany only,there canbelittle doubtit has, at leastindirectly, alreadybeen putforward. However,it wouldbeuseful forthelegislatureto incorporatethese considerations into the act to avoidany doubt.This isnot inconceivable: ithas already partiallydone sobymandating publicentities toappoint social and ethics committees.

Speed required in deciding public interest cases

The bill of rights gives everyone the right to have a legal dispute decided in a fair public hearing before a court or other tribunal. It’s a pity section 34 does not add the words “as soon as possible where the public interest is involved”

What brought this to mind was the recent court decision prohibiting the Independent Communications Authority of SA (Icasa) from proceeding with the radio frequency spectrum auction planned for March 2021.

Even the spokesperson for Telkom, who successfully applied for the order, said they do not celebrate halting the process nor do they take any joy in delaying the much-needed licensing of high-demand spectrum.

Telkom said that Icasa has a choice to dig in its heels and spend “an inordinate

amount of time in court” or try to find a solution. Seeing they have been trying to find a solution for years without success, let’s hope it is not the other alternative. In the meantime

consumers are being denied better, faster, much-needed spectrum for mobile operators. It does not take an expert to know that better, faster spectrum for data is a golden key for the economy and for education and we all know what inordinate delays in legal proceedings mean.

Important public issues fought out between litigants

can take five to 10 years to go through the high court, the Supreme Court of Appeal and the Constitutional Court before getting to a final decision.

Public projects get delayed for years while tender irregularities are being challenged. Or irregularly awarded projects are completed by the people who were awarded the irregular tender because that is the only way to get anything done.

Billions are spent on suspended public officials while their dismissal inquiries are delayed over years, sometimes deliberately by those pocketing the money. All this costs we consumers a great deal of our hard-earned tax payments.

Recent litigation in England and SA regarding Covid-19 insurance claims

illustrate what can be done. In England, the Financial Conduct Authority decided that policyholders as consumers needed an early decision in regard to the liability of insurers under their business interruption policies.

The legal process began with a test case in the UK High Court in June 2020 and the whole process through two courts was completed by a judgment on appeal of the UK Supreme Court on January 15. Eight parties to the proceedings had to get on with it and there was no question of asking for a postponement for more time to deal with any issue.

In SA a similar matter, which commenced after the March 2020 lockdown, went through the high court and the Supreme Court of Appeal where the final decision was made by mid-December

because of the public need for an urgent final decision.

We all understand resources are not infinite and this cannot happen in every case. But we as consumers should have rights to hasten the process.

There is a process called “friends of the court” (amicus curiae) for interested parties to make submissions regarding the legal issues in any public interest matter. That is not the point. There needs to be a process whereby the public and NGOs which protect our interests can make submissions in regard to the

PUBLIC PROJECTS GET DELAYED FOR YEARS WHILE TENDER

IRREGULARITIES ARE BEING CHALLENGED

process. The speed of the process should not be only in the hands of the litigants. Important public issues should not be subject to lengthy delays or postponements because the litigants are not willing or geared up to proceed to a quick outcome. Resources should be applied to ensuring there are courts and tribunals available for quick solutions to major problems that cost us all money and deprive us of the benefits of essential things like quicker and better data. We don’t want court process, we want justice. Where the general interest is being deprived of justice, the old saying that justice delayed is justice denied is a sad truth to be overcome.

● Patrick Bracher (@PBracher1) is a director at Norton Rose Fulbright.

BUSINESS LAW & TAX

Energy plan lights the way

• SA’s recovery depends on a reliable power supply and the government is finally making progress

Kieran Whyte Baker McKenzie

Eight winningprojectsoftheSAgovernment’s risk mitigation power procurement programme wereannounced by energyministerGwedeMantashe on March 18 2021. The programme was launched in 2020to address continuing power supply challenges in SA.

The fifth round of the renewable energyindependent powerproducer programme (REIPPP)was referenced by Mantashe on the same day. He said the request forproposals (RFP)forthe procurement of 2,600MW underthe fifthroundwill close in August 2021, in the same month asixth round of theREIPPP isexpected tobe announced.

Therehas beenbroad acknowledgment thatSA has to move towards an energy transition andthe increased use of renewableenergy,and that the country has been in dire need of a reliable andsecure energysupplyto helpit outof itsnegative growth spiral.

Thechallenges atEskom

have ledmany toconclude that the countrycould not achieve stableeconomic growth withouta reliable electricity supply. The announcement ofeight successful bids and the opening of bids for thefifth round of theREIPPP isalong-awaited step in the right direction.

Thewinning bidswill deliver 2,000MWof power tothe gridby August2022 and mustreach financial close bya non-negotiable date of July 31 2021.

Thepower willbeproduced froma rangeof renewable energy sources including solarPV, liquefied natural gas(using power ships), wind andbattery storage solutions,which will partly assistin addressing SA’s powersupply challenges, aid in diversifying its power supply andhelp to tackle climate change.

THE LACK OF ACCESS TO POWER HAS HAD A SIGNIFICANT IMPACT ON THE PRIVATE SECTOR IN SA FOR SOME TIME

SA’s powersupply challenges aresignificant andwill impede much-neededeconomicgrowth forthecountry. Multiple actions, includinginteraliapossibleindustry restructuring, theimplementation of the restructuring of Eskom,the facilitationofselfgeneration opportunitiesand the amendmentof policyand regulation to keep abreast of technological advancements need to be urgently assessed toaddress ourpowersupply challenges.

Consumers needto have the abilityto considera broader range of supply options to ensure stability of supply, address environmental, social, and governance considerations and ensure greatercertaintyandvisibility around tariff trajectories.

Mantashe furtherstated the cap for self-generation powerprojectlicenceswould be lifted to10MW of power. Power plants that produce above 10MW willstill require alicence.The increaseinthe cap to10MW iswelcomed butfallswellshortofindustry requirements.

President CyrilRamaphosa announced in October 2020 that,as partof hiseconomic recovery planfor the

GETTING OFF THE GRID

country, 11,800MW of energy would be added to the grid by 2022, with morethan half coming from renewable energy. He saidthe implementation of the country’s Integrated Resource Plan would be accelerated with increases in thegeneration of energyviarenewableenergy, batterystorage andgastechnology.

He notedthat agreements would also befinalised with independent power producers toproduce morethan 2,000MWof energybyJune 2021. Further,he saidthe current regulatoryframework would be reworked to facilitate new generation projectsas wellas tofast-track

LABOUR PAINS

applications forown-use generation projects.

The issues were addressed by Mantashe on March18, withjust theselfgeneration cap of 10MW providing some disappointment forthosewhowantedthecap to be higher.

The SA National Energy Association recently noted in the SA EnergyRisk Report 2020 thatclean energycould aid in SA’seconomic recovery post pandemic. However, it said for the energy transition to takeplace, primary and associated infrastructure gaps should be addressed, and policy and legal frameworks mustchange, tofacilitate the necessary invest-

ment in the sector.

Announcing the winning bids, Mantashe said they would lead toprivate sector investmentofR45bn,andthat localcontent duringtheconstruction period would average 50%. Eachof the projects has50% SA entity participation, with 41%black ownership.

Thelack ofaccessto power has had a significant impact on theprivate sector in SA for some time, and the developments announced by Mantashe, which are aligned with the global energy transition towardsa cleanand decentralised energy system, areto bewelcomed.The work has just begun.

When decisions on unfair dismissal are wrong

The Commission for Conciliation, Mediation and Arbitration (CCMA) comes in for quite a bit of flak. Let’s face it, half of the parties in arbitration cases lose, and the CCMA and its commissioners are the easiest targets.

In our experience, however, you normally pretty much get the arbitration award you deserve. But not always. There are indeed occasions when arbitration awards are wrong. That’s not unique to CCMA commissioners though. It is precisely for this reason that our legal system has a series of review and appeal processes, across all fields of law, not just employment dispute resolution channels.

To be fair to CCMA and bargaining council commissioners, employer cases are often lost due to defects in how a disciplinary hearing was conducted by an employer. Training can go some way to reducing poorly applied internal disciplinary processes.

TONY HEALY

That said, the CCMA can err in its judgments and be found to have committed irregularities in its arbitration awards. Such was the case in San Michele Home NPC v Mahlangu D & others (Case number JR1692/19), in a recently published labour court judgment.

The background to this case was that on January 9 2019, “singing and dancing” union members had confronted an employer administrator “in his office and handed him a letter of grievances, and demanded that he should leave the premises. He was subsequently escorted out of the premises.”

An unprotected strike then ensued, during which “employees who were not

party to the strike were equally subjected to intimidation by the striking employees”

The employer obtained a labour court interdict on an urgent basis on January 17 2019 in light of the strikers’ conduct. As is so often the case, “the unprotected strike and unlawful conduct had persisted”

“The employees were subsequently charged with and dismissed for intimidation, participating in an illegal removal of two employees (administrator and social worker) from the premises and insubordination. Thirty other employees who were members of the National Union of Public Service and Allied Workers (Nupsaw) were also dismissed for similar misconduct.”

At arbitration, the commissioner held that the dismissal of the two employees for intimidation and the illegal removal of two employees was substantively and procedurally unfair on

grounds that (1) there was no evidence of intimidation, (2) the two employees allegedly evicted by the strikers had testified that they had “played along with the strikers in order to save themselves from potential if not actual harm”, (3) the alleged offenders had shown no intention of participating in the unprotected strike, and (4) that the two dismissed employees had long service and, in essence, acted out of fear of union member retribution if they did not act as they did.

The employer took the arbitration award on review to the labour court.

The judgment was scathing of the arbitration award. For example, the judgment notes that “the glaring evidence before the commissioner was that indeed the employees had not only participated in the unprotected strike action but were also positively identified as part of the employees who had also committed acts of misconduct”, continuing that

“further to these factors is that the employees were part of a mob that had unlawfully and in an intimidating and unconscionable manner removed officials of the applicant (a home for the mentally handicapped) who were going about their primary duties”

The judgment also noted that neither of the two dismissed employees had shown any form of contrition for their actions, or taken stock of the consequences thereof”

Turning to the arbitration award’s remedy of the reinstatement of the two dismissed employees, the labour court judge noted that “I fail to appreciate how the commissioner could possibly have concluded that a reinstatement with no

IT IS PRECISELY FOR THIS REASON THAT OUR LEGAL SYSTEM HAS A SERIES

OF REVIEW AND APPEAL PROCESSES

consequence s was appropriate”

The judge was not finished. He continued that “having regard to the above and the overall approach of the commissioner, it is apparent that he clearly made contradictory findings, and other than that, he had relied on speculation rather than the discernible facts that were before him the commissioner had misconceived the nature of the inquiry he was called upon to undertake, had completely ignored relevant evidence, had failed to properly apply his mind to material issues at hand and had committed various other irregularities in the conduct of proceedings”

The court substituted the arbitration award of the commissioner in holding that the dismissal of the two employees was substantively fair.

● Tony Healy is CEO at Tony Healy & Associates Labour Law Consultants, www.tonyhealy.co.za.

BUSINESS LAW & TAX

Milestone for party funding transparency

• New act took a decade to get on the books but will boost democracy and the power of voters

Dario Milo, Tamryn Gorman & Gomolemo Tau Webber Wentzel

On April 1 2021, the Political Party Funding Act cameinto force.

Itmarks asignificant milestone inSA’s democracy, after adecade ofurging by nongovernment organisations forthe regulationof private donations.

In 2005,the Institutefor Democracy inAfrica (Idasa) took thefive majorpolitical parties to court to reveal their sourcesoffundingintermsof the Promotion of Access to Information Act2000 (Paia). TheWesternCapeHighCourt found there wasno need for political partiesto disclose theirsources offundingas they are private bodies.

In 2017, MyVote Counts challenged theconstitutional validity of Paiaon the basis thatitdid notmakeproper provisionfor citizenstogain access to particularsof the private fundingof political parties. The Constitutional Courtupheld itschallenge.It declared Paiawas unconstitutional in failing to provide for access tothe information concerned, and it gave the National Assemblyan oppor-

tunitytocurethedefectwithin 18 months.

Asaresult ofthelitigation, the NationalAssembly enacted thePolitical Party Funding Act, andit was signed intolaw bythe president on January 22 2019. The objectivesof theact are to:

● Provide for,and regulate, thepublicandprivatefunding ofpolitical partiesinparticular;

● Establish andmanage funds tofinance represented political parties sufficiently;

WE BELIEVE THE ACT WILL GO A LONG WAY TOWARDS TRYING TO LEVEL THE PLAYING FIELD BETWEEN POLITICAL PARTIES

● Prohibit certain donations from being made directly to political parties;

● Regulate the disclosure of donations accepted;

● Determine the duties of political parties inrespect of funding;

● Provide for powers and duties of the commission;

● Provide foradministrative

fines; and

● Create offences and penalties.

The actregulates direct donations made to political parties anddoes notallow them toaccept directdonationsofmorethanR15mfrom an individual or entity.

Indirect donationsmade to the Electoral Commission of SA (IEC) are also permitted under theact. Moneyappropriated by anact of parliament or recovered by the IEC in termsof theact andinterest from investments in terms ofthe actmust beallocated by the Represented Political Parties Fund. Private donationsreceivedbytheIEC must be allocatedby the Multi-Party Democracy Fund. These allocations are made by the respective funds to political partiesin national and provinciallegislatures basedon aproportionaland equitable formula.

The IEC istasked with monitoring compliancewith the act,assisted byvarious provisions in the Political Party FundingAct. Forexample, political parties must disclose the relevant information, includingbooks, records, reports and other documentation neededfor any investigation theIEC is conducting under the act. The

IECmayapplytotheelectoral court for anorder to direct partiesto complyandfor administrative fines to be imposed.

The IEC is developing an online disclosure system which will allow political parties and donorsto make disclosures electronically.

The IEC’spowers to enforce compliance include:

● Withholding thedistribution of fundsfrom the Represented Political Party Fund and Multi-PartyDemocracy Fund;

● The recovery of money irregularly accepted or spent; and

● Imposing administrative fines (via the electoral court).

We believe the act will go a long waytowards trying to level the playing field between political parties, providing greatertransparency tothe publicon the inner workings of political parties, forcing political partiestobemoreaccountableto the public, and hopefully

instilling voters with more confidence. Ultimately, it will meanvoters willknowwho is making large donations to which political party and they can thenfactor thatinto their decision to vote.

However,the acthascertain limitations: ● Companies that donate to the Multi-PartyDemocracy Fund may request that they andtheamountoftheirdonation remain anonymous; and

THE IEC IS TASKED WITH MONITORING COMPLIANCE WITH THE ACT, ASSISTED BY PROVISIONS IN THE POLITICAL PARTY FUNDING ACT

● Small, private donations remain unregulated, because a juristicperson andpolitical party are only obligated to disclosedonations ofmore

than R100,000 from a single source.

Only juristic persons have the duty to disclose a donationof morethanR100,000 tothe IEC,not naturalpersons. That means a rich businessmanwhomakesadonation does not have to disclose it buta company willhave to. Althoughthe politicalparty would still haveto disclose the businessman’s donation, it wouldbe better ifthe disclosurewas madebyboth parties.

The definition of “donation in kind” includesthe provisionofservices fortheuseor benefit of apolitical party otherthan oncommercial terms. “Commercial terms” is not defined and could give rise to potential loopholes.

We believe the Political PartyFunding Actis alarge step in theright direction. Inevitably, some loopholes are presentbut, inthe main, this is legislationthat is critical forour democracyand should be welcomed.

Clarification of merger control thresholds

Shawn van der Meulen & Elisha Bhugwandeen Webber Wentzel

The Comesa Competition Commission haspublished a new practicenote clarifying important aspectsof its merger control thresholds. Practice Note 1 of 2021 clarifies the applicationof the term “operate” under the ComesaCompetition Regulations, 2004and the Comesa Competition Rules, 2004, as well as its approach to the application ofRule 4 of the Rules on the Determination ofMerger Notification Thresholds and Method of Calculation.

The Comesa Competition Commission hasadvised that

mergerpartiesshouldonlybe referringto Rule4 ofthe Merger ThresholdRules set out below:

“Any mergerwhere both the acquiring firmand target firm,or eithertheacquiring orthe targetfirm, operatein two or more member states, shall be notifiable if:

a) Thecombined annual turnover orcombined value of assets,whichever ishigher inthe commonmarket ofall parties to a merger equals to or exceeds $50m; and b) Theannual turnoveror valueof assets,whicheveris higher, in the common market ofeach ofat leasttwo of the parties to a merger equals orexceeds$10m,unlesseach of the partiesto a merger

achieves atleast two-thirds of its aggregate turnover or assetsinthecommonmarket within one andthe same member state.”

The PracticeNote clarifies thatRule4 shouldbeapplied cumulatively andthat all the criteriabelow shouldbe satisfied:

● The regional dimension test the mergingparties mustoperatein atleasttwo Comesa member states. There arethree alternative scenarios underwhich merger partiescan operatein member states namely:

i) Both theacquiring firm andtargetfirm canoperatein at least two member states.

ii) The acquiring firm can operate in atleast two mem-

berstates, whilethetarget firm can operateonly in one member state.

iii) The target firm can operate in atleast two memberstates,whiletheacquiring firm can operateonly in one member state.

● The combinedturnover or asset valuetest either the combined annualturnover or

THE ISSUING OF THE PRACTICE NOTE ADDRESSES MANY OF THE QUERIES RAISED BY MERGER PARTIES AND THEIR LEGAL REPRESENTATIVES

combined annualassets in the common market of all the parties to the merger equals to at least $50m. The option to usecombined annual turnover orcombined annual asset shall dependon the higher amount of the two total values.

● The individualturnover or asset value test the annual turnover orannual asset, whichever is higher, of each of at least two of the parties in the common market is at least $10m.Whether touse annual turnoveror annual assetsdepends onthehigher of the two. It should also depend onthe measure (turnoverorasset)usedinthe combined turnoveror asset value test.

● The two-thirds exemption rule thetwo-thirdsexemption rule must be read in conjunction withthe preceding tests. For both the combined and individual thresholds requirements, it isthe higher valueof theturnoverderived or assetvalue heldwhich must beconsidered. The two-thirdsrule ismeantto applyonce thehighervalue has been established. The issuing ofthe Practice Note iswelcomed and addresses manyof the queries frequentlyraised by merger partiesand theirlegal representatives. ThePractice Note willassist mergerpartiesapply themergercontrol rules pragmaticallyand with increased certainty.

Work injuries: who is liable?

• An employer has protection, but it is not a blanket indemnity

Pareen Rogers & Naa ilah Abader ENSafrica

The Compensation for Occupational Injuries and Diseases Act,1993 (Coida) provides for compensation for disablement causedby occupational injuries ordiseases sustained or contractedby employees inthecourseoftheiremployment, or for death resulting from such injuries.

Section 22(1) of Coida providesthat ifan employeehas an accident resulting in their disablement ordeath, the employee ortheir dependants will,subject totheprovisions of Coida, be entitled to thebenefits providedforand prescribed in Coida.

An “accident” for the purposes of Coidais defined as “an accidentarising outof andin thecourse ofan

employee’s employment and resulting ina personalinjury, illnessor thedeath ofthe employee”

Section35(1) ofCoida protects anemployer against liability fordamages in respect ofoccupational injuries anddiseases to which Coida applies.

TheSupreme Courtof Appeal (SCA) in Churchill v Premier, Mpumalanga recently hadto determine whether thepremier of Mpumalanga’s liability was excluded by section 35(1) of Coida.In thiscase,Catherine Churchill suedthe premier and thedirector-general in the office ofthe premier, allegingthataninjuryshehad sustained wasoccasioned by their negligence. Churchill claimed aboutR7.5m forpast and future medical treatment, general damagesand past and future loss of income.

Thepremier andthe

director-general raised a special pleacontending that Churchill’s claim constituted an occupationalinjury for whichshe wasentitledto compensation interms of Coida section35(1), which protectedthepremierandthe director-general against any liability in the circumstances.

Churchill’s claim arose from the following facts: She wasemployed bythe premier as its chief director: policy andresearch. During themorning ofApril5 2017a protest overlabour issues organised bythe National Education, Healthand Allied Workers’ Union,occurred at the premises andin the building whereChurchill worked. Thedemonstration wasmeant totake placeoutside the premises, but certain employees usedtheir access cards to enter the premises.

While Churchill was in a colleague’s office, three

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demonstrators enteredthe office, asked whowas there and leftwithout ananswer. Churchill followedthem to returnto heroffice anddiscovered that it was locked.

Infrustration sheswore and a man in the passage askedher whatshe hadsaid. She apologised andtried to explain, butthis individual regarded theexpletive as being directed atthe demonstrators andshouted ather demandingto knowwhyshe had sworn atthem. Churchill was shoutedat repeatedly and the man followed and shouted ather: “We’re coming for you!”

About20 protestorsthen marched towardsthe office. Churchill tried to hide behind the doorand phoned her husband askinghim tocome andfetch her.Theprotestors foundher behindthedoor and one of themtried to take her cellphone. He also tried to pick her up. Churchill’s colleague attemptedto phone the director-general’s office and thesecurity officefor help,but noassistancewas forthcoming.

Churchillwas carriedout oftheofficeanduptwoflights of stairs by the protestors and shewas called “a pieceof white s**t”.Once Churchill had been carried to the foyer shewasput downinthe middle of the crowd of protestors andher shoes removed. Peoplein the crowd pushed,shoved and punched her,while jeering and shouting “voetsek” and “get out”.Then she was chasedoutofthebuildingand left to make herway to the entrance whereher husband had arrived to collect her.

Churchill’s husbandhad heard everything because she had kept her cellphone on throughoutthe incident. The entire ordeallasted 45 minutes.

Churchill suffered physical injuries inthe form of bruises, scratchesand a swollenfoot.As aresultof being shockedand

humiliated, shealso suffered psychiatric injury that has left her withpost-traumatic stress disorder.

Churchillalleged thatshe foundthesituationintolerable andwas compelledtoresign at the end of June 2017.

In determiningwhether the premierand directorgeneral wereprotected from liability inthe circumstances, the SCA considered the following key issues:

“Did thisincident ariseout of Churchill’semployment so that herinjuries, bothphysical andpsychiatric, were sustained in an accident for the purposesof Coida?It was accepted thatbecause it happened ather placeof employment andwhile she was goingabout herduties it arose in the course of her employment.

“Did it arise out of her employment? Inother words, wasit sufficiently closely connectedto her employment tohave arisen from it? The fact that it occurred inher workplace whenshe wasgoingabout her duties is undoubtedly a factorthatconnected ittoher employment. Inthat sense her employmentbrought her within the zone of risk, but that is merelywhere the inquiry commences.

“Wasthe riskalsoincidental to her employment?”

The SCA found that the purposeof Coidaisto compensate foroccupational injuries anddisease. While longstanding authority dictates that sociallegislation of this type is given a generous construction, it is not directed at providing compensation and exempting employers from liability forinjuries and diseasesthat areonlytenuously andtangentially connected tothe dutiesof the employee.

Had this beenthe case, Coida couldsimply provide for compensationfor alland any injuries or illnesses sustainedwhenatworkorwhen working.

The SCA confirmed that in cases of thisnature there is no bright-line test and the inquiry is always whether the statutory requirement that the accidentarose outof the person’s employment, as wellas inthecourse ofthat employment, issatisfied. A court mustaccordingly analyse thefacts ofa matter closely todetermine whether an accidentarose outof a person’s employment.

TheSCA ultimatelyconcluded withreference to these facts thatthe only connection betweenthe incident and Churchill’s employment wasthat shewasat workat the time. Theincident did not relate to herduties and she was not assaulted because of the position she held or because of anything she had donein carryingouther duties,or foranyreason related to the protest. Herinjuries thereforedid not arise outof her employment, section 35(1) of Coida did not apply and the premier was accordinglyliable to compensate her for damages. The matter was remitted to the high court to determine the quantum of the damages.

LESSON TO BE LEARNT

This caseillustrates that employers willnot alwaysbe shielded fromliability in terms of section35(1) of Coida, particularlywithin the context ofworkplace demonstrations and industrial action,and steps should be takento protect employees insuch circumstances.

A blanketreliance onsection35(1)ofCoidabyemployers is notan approach that our courts willeasily accept. In this case, the SCA found that anassault inthe workplace isnot somethingthat ordinarily arisesand/or is incidental toan individual’s employmentand, tousethe words ofthe SCA(and judge Wallisin particular), “in simple language, they are not things that ‘go with the job’”

BUSINESS LAW & TAX

Rwanda gets a new code to lift investment

•

Changes are geared to attracting businesses and making Kigali a regional financial hub

Dieudonné Nzafashwanayo

ENSafrica Rwanda

Effective from February 8 2021, Rwanda hasa new law bringingabout a setof new investment incentives, mainly gearedat enhancing Rwanda’s competitiveness and attracting cross-border investments, newbusinesses and financialinstitutions to operate acrossthe African continent andbeyond through thenewly setup Kigali InternationalFinancial Centre. The newlaw isnumber 006/2021 of05/02/2021 on investment promotion and facilitation (New Investment Code) and itrepeals 06/2015 of 28/03/2015,which had been in force since 2015.

Thefirst strikingchange under thenew investment code relates to new priority economic sectorssuch as mining activitiesrelating to mineral exploration;construction or operationof specialised innovationparks or specialised industrial parks; transport, logisticsand electric mobility;horticulture and cultivation ofother highvalue plants includedon the list approvedby theRwanda Development Board;creative artsinthe film industry; and skills developmentin areas where the country has limitedskills andcapacityas

determined bythe Rwanda Development Board.

Another important change relates tovaried taxincentives that have been introduced. These include:

● A preferential corporate income tax rateof 3% applicable topure holdingcompanies, investmentspecial purpose vehicles, collective investment schemes, on foreign-sourcedincomeofan investoroperating asaglobal trading or paper trading, and on foreign-sourcedroyalties of intellectualproperty companies meetingthe conditions set out under the code;

HOWEVER, THE COUNTRY EQUALLY ALSO NEEDS TO KEEP ITS FOCUS ON OTHER INVESTMENT LOCATION DETERMINANTS

● Tax incentives for entities established by philanthropic investors which include nonrecognition as revenue of grants and funds transferred tothe philanthropicentityfor the purposes of financing its social impact activities; 0% VATrateon thegoodsand services procured locally by the entity and exemption from employment income tax of the expatriates

employed bythe entityprovidedtheydonotexceed30% oftheemployees oftheentity as wellas arefund ofsocial security contributions paid to the Rwanda Social Security Board on permanent departureof theexpatriatesfrom Rwanda.

● A preferential withholding tax rate of5% on dividends and interest paid on securities listed on the Rwanda Stock Exchange. A similar incentive alreadyexists under the IncomeTax Law, but itis onlylimited todividends and interest whose beneficiaries areRwandan and/or East African Community residents.

● A preferential withholding taxrate of10% oninterest paid onforeign loans,dividends, royalties and service fees, includingmanagement and technical servicefees by specialised innovationpark developers or specialised industrial park developers.

● Exemption forangel investors investing a maximum $500,000in astart-up from capitalgains taxupon the sale of shares, provided the shareswere initiallypurchased as aprimary equity issuance by thestart-up, and from withholding tax applicable todividends upto five distributions by the start-up.

● Tax incentives to investors in the film industry meeting the requirements under the new investment code. Those

COLOURS OF KIGALI

incentives include a0% VAT rateon thegoods andservices procured locallyand a preferential withholding tax rateof0%onpaymentsmade forspecialised servicesprocured by the investor. A list of thequalifying foreignspecialisedservices isjointly approvedby theRwanda FilmOffice andtheRwanda Revenue Authority

Another interesting feature of thenew investment code(whichwasprovidedfor underthe 2005investment code) isthat in additionto the incentives set outin the law, specialincentivescanbeprovidedto strategicinvestment projects(ie investmentprojectsof nationalimportance, whichhaveastrategicimpact on thedevelopment ofthe countryand meetother requirementsset outunder the code).

Strategic investment projects thatmeet qualifyingcriteria andcorresponding additional investment incentivesare approvedbythe cabinet upon proposalby the Private Investment Commit-

tee(a committeeestablished by the newcode), whereafter an agreementto thateffect is negotiatedand enteredinto between theregistered investor and the government. The change revivedby the new law allowing the cabinet togrant additionalincentives is quite timely given that ad hoc incentivespreviously granted by the government in absence of aspecific legal statutehave sparkedcon-

ONE WOULD EXPECT TO SEE MULTINATIONALS CHOOSE RWANDA AS THEIR HOLDING JURISDICTION FOR EXPANSION

tention, with the Rwanda Revenue Authority refusing to recognise such incentives onthe groundthat theyare not provided for by the law as required by the constitution.

The newinvestment code

provides for severaltax and nontax incentives, and one would have notrouble concludingthatitcontainswhatit takestoattract thelocationof internationally mobileproduction factors in Rwanda, and one would expect to see a number of multinationals choosing Rwanda as their holding jurisdiction for expansion in other African countries.

However, thecountry equallyalso needsto keepits focus on other investment location determinantssuch as infrastructure, the macroeconomic environment,a predictable tax system, goods market efficiency,labour market efficiency,technological readiness and innovation. In that way, the country of a thousandhillscouldexpectto see deployedinvestments andsacrifices madeinterms revenues collection generate commensurate development benefits.

Reviewed by Fred Byabagabo, a partner at ENSafrica Rwanda.

Judgment clarifies fair labour practice issue

Sandile July & Nyiko Mathebula Werksmans

The LabourCourt judgment in Botes vCity of Joburg Property CompanySOC Ltd andAnother [2021]2BLLR 181(LC)put itbeyonddoubt that issues which fall under section 23 of the Constitution, the rightto fairlabour practices,are governedbythe principles ofprocedural and substantive fairness. Furthermore, the court indicated thatsuch issuesare primarily dealtwith through the Labour RelationsAct 66

of 1995(LRA). Therefore, when dealingwith adismissal disputeor unfair labour practicethe question should bewhether the alleged conductsought to be impugnedwas procedurally andsubstantively fair, not lawful.

In the Botesmatter, the issuewas whetherthedecisionoftheboardoftheCityof Joburg Property Company (CJPC)to placeBotes onprecautionary suspensionpending adisciplinary process was unlawfuland stoodto be setaside. Botesallegedthat the CJPC did not have the

powersto placeher onsuspension and even ifit did, the necessary jurisdictionalfacts to exercisesuch powers were absent.

Thisraised aquestionof the jurisdiction ofthe Labour Court. MoshoanaJ remarked thattheLabour Courtisa creature ofstatute which derivesits powersfromthe LRAandany otherlawthat gives it jurisdiction.

MoshoanaJ statedthatif the legislaturewished to clotheany ofthe labourdisputeresolvingbodies,includingthe LabourCourt,with powers toentertain thelaw-

fulnessof asuspensionit couldhave saidso.This isa viewinformedbySteenkamp and othersv Edcon(Numsa intervening) (2016) 37 ILJ 564 (CC). Theprinciple drawn from Steenkampis that where anemployee alleges

WHERE AN EMPLOYEE ALLEGES UNLAWFULNESS AND NOT UNFAIRNESS, THE LABOUR COURT LACKS JURISDICTION

unlawfulness andnot unfairness, theLabour Court lacks jurisdiction.

The othernoteworthy point from Botes is that a breach ofan employment contract shouldnot beconfused withunlawfulness. Should an applicant wish to claim breachthen same should be broughtin terms of section 77(3) ofthe Basic Conditions of Employment Act 75 of 1997.

The court madeit clear that breachcannot be equated to unlawfulness.

The courtfurther stated that it wouldhave been

inappropriate forit toassume jurisdiction wherethe LRA provides thatunfair suspension disputesare justiciable under section 191by the CCMA orbargaining council. This isrelevant because Botes’casewasinessencean unfair suspensiondispute as contemplated by section 186(2)(b) of the LRA. Therefore, shecould have pursued herclaim atthe CCMAin termsofsection 191(1)(a)(i) and (ii)read with section 191(5)(a)(iv). However, shedisavowed those remediesand suffered the consequences.

Keeping workat-home staff off the couch

• As

Covid-19 spurs new working trends, companies turn to invasive technologies to monitor employees

Keketso Kgomosotho Baker McKenzie, Johannesburg

The Covid-19 pandemichasaccelerated (and for some, cemented) the work from home (WFH) trend whichwas limitedtoa handfulofforwardthinking companies before.

According to research from Slack, 72% of employees whowork fromhome wishto continuewithsome form of hybridmodel, even after thepandemic. Even with avaccine rollout,many businesses are still far from going backto theanalogue workplace in away resemblingthe oldnormal,and many businesseshave abandonedtheconcept of a physical workplace altogether.

In a world that often rewards presenteeism,however,this trendintroducesa new threatto employers’ and managers’ senseof control over employee productivity.

As a result, many employersacross theglobe are turning toemployee monitoring technology toreplace the physical employeeoversight once applied in theoffice.No employer wantsto pay someone to watch TV, or scroll throughtheir social media whilelying onthe couch during work hours.

Our IT friendstell us employers havebeen monitoring employeesin the workplace for along time

through CCTV, biometric clock-in systemsand internetand telephoneuse,for example. Recent developments haveproduced technology tomonitor employees in the home setting too. The growingsuite ofsurveillance technologyavailable toemployers offers everything from allowing employers toview login times, measurekeystrokes, track livelocations, monitor andtrackinternet,e-mailand video, andtake screenshots of desktops throughthe day.

OUR IT FRIENDS

TELL US EMPLOYERS HAVE BEEN MONITORING EMPLOYEES IN THE WORKPLACE FOR A LONG TIME

Employers havemany legitimate reasons for monitoring employee activity, including managingproductivity, securing information in modern networkedenterprises, enforcingcompany policies, controllingquality, protecting employees’ safety and securing business assets. However, the decision to monitor employees in such waysis notwithoutethical and legal complexities.

In SA, themonitoringand interception of communica-

tions is governedby the Regulation of Interception of Communications andProvision ofCommunication Related InformationAct, 2002 (Rica). The default position in terms of the act is that allworkplacemonitoringand interception is prohibited, unless it fallswithin one of the exceptions leftopen in chapter 2 of the act.

Thus, employeemonitoring is permitted:

● Where the employee consentsor wheretheirconsent can be reasonably implied;

● Where theinterception occursinconnectionwiththe carryingon ofbusiness(the business exception); or

● Where interception is carried out by aperson who is a partyto thesamecommunication.

Often thedecision an employermustmakeiswhethertobasetheirapproachon prior written consent in terms of section5, or the business exception at section 6where writtenconsentis not required, ora combination of both.Most employers ensurethey havetheprior written consent, which may be obtained in employment contracts. Those agreements may alsoinclude referenceto the processing of personal information andinterception of communication.

Forthosesituationswhere something falls through the cracks where theemployerhas writtenconsentfor

IN THE HOUSE, ON THE CLOCK

some, butnot all,reasons for intercepting andmonitoring, or where the employee has not secured consentfrom all staff members the employer mayhave recourseto the business exception in section 6.This provisionacts asa catch-all exceptionfor employee monitoring that occursinconnectionwiththe carrying on of a business. It does not require written consent,andissufficienttojustify the monitoring and interception of communication in connection with business operations.

Once employeecommunication has been intercepted,employerscanexpectthat thedata theyobtainedwill invariablybe subjecttothe protection of both the Protection of Personal Information Act (Popia)and theconstitution,both ofwhich mustbe fully considered when planning to monitoremployees in a home setting.

The implementationof the substantive data protection and privacy provisions of Popia during 2020 ensured thatdata subjectsin SAnow have an array of additional data privacy rights.It brought with itthe creationof new civil remedies, empowering data subjectsto bringclaims against employers for their personal information on a strict liabilitybasis. Withonly afew monthsleft ofthe Popia’sgrace period,it isin the employer’s interest to ensure full compliance.

Thus, from aPopi compliance perspective,employers must be prepared to:

● Implement a monitoring policy for employees, with the aim ofinforming them of the types of monitoring (for example, covert, continued, one-off or occasional);

● Implement the use of appropriately worded consent forms, which the employer would sign whenever consent is required. Specific reasons for the processing must be provided (for example, whereemployee monitoring will take place as a resultof anew workfrom home policy);

● Inform employees of the methods of monitoring and the circumstancesunder which itwill beconducted (typically to investigate allegations of misconduct);

● Implement measures to ensure the confidentiality of the data, and that processing complies with the Popia;

● Implement employer’s communication andawarenesstrainingprogrammesfor existing and new employees; and at the induction of new employees.

The boundariesbetween ourprofessionalandpersonal spaces were already rather blurred before work from home became trended, and those lineshave onlybecome lessvisible. Thenewnormal has alreadyresulted ina shift in employee-employerrelations, with staff having to work aroundadditional

child-care obligations, athome distractions, grief and otherstraining factors each requiring a more empathetic approach from employers. Thus, it isbest to tread prudently; if the employer’s aim is toassure productivity within the workplace,then it mightbe enoughtosimply use software that analyses the amount of time spent on a given website or programme to ensure staffare working instead of playing. To the extent that the monitoring technology does not capture personal data such as passwords or banking details, and only tracks the employee during working hours, there should beno infringementon data privacy rights.

Data gatheredfrom employee monitoring programmescould beusefulin managing employee underperformance, and identifying and remedying employee misconduct, especiallywhen physicaloversightandsupervision are not possible. To ensurea sound employee relations environment, itis criticalto havea clear plan for managing employee concernsabout unwarranted infringements of privacy, abuse of personal data and consequences.

Thisarticle wasoverseenby Johan Botes, Partner and Head ofthe Employment& Compensation Practiceat Baker McKenzie, Johannesburg.

Watch out when choosing trademark words

Janine

Hollesen Werksmans

In thecase ofSwatch AG (Swatch SA) vApple Inc, in the Supreme Court of Appeal, Swatch, the owner of the SWATCH trademark, had opposedthe registrationof theIWATCH trademarkfiled by Apple.

Thehigh courtdismissed Swatch’sopposition whichit then appealedto theappeal court.Swatch arguedits SWATCHmark andthe IWATCHmark areconfusingly similarthat therewould

be a likelihoodof deception orconfusion. Theenquiry was concerned with whether IWATCH wasconfusingly similar to SWATCH. Applearguedthatthelikelihood of confusionwas substantiallydiminished byits longstanding established brandwith afamily ofi-prefixedtrademarks andthat theseproducts andservices gainedpopularity aroundthe world and in SA. A consumer whowould encounteran Apple product with the i-prefixwouldrecognisetheproductas partof theApple

i-prefix family of products. Todetermine whetherthe twomarks weredeceptively orconfusingly similar,the appealcourt consideredthe visual,aural andconceptual similaritiesofthemarks;how the markswould beperceived by theaverage consumer; andthe degreeof similarityofthegoodsinrelationtothedegreeofsimilarity of the marks.

Swatchargued thatboth marks consist onlyof words, having no logos or other distinguishingmatter, bothcontainthe commonelement

“WATCH” preceded byasingle letter prefix which presented the only visual difference and the marks sounded the same.

Theappeal courtconfirmedthatasbothmarksuse

CONSUMERS WOULD BE MORE CONCERNED WITH THE BRAND OF WATCH THEY WANTED TO PURCHASE

the commonelement “WATCH” a visualsimilarity was created,. but stated that wheremarks containa descriptive word,emphasis must beplaced onthe prefix. Thecourtheld thattheprefixes ofeach of themarks are thevisual differentiatorsand which differentiated the marks from one another.

It wasfurther statedthat it isnot thepurpose oftrademarks or copyrightto secure monopolies over descriptive wordswhich haveobvious relevanceto thegoodsfor which they areto be regis-

tered.A furtherfactortaken into account was that consumers wouldbe moreaffluent and would be more concerned withthe brandof watchthey wantedtopurchase and would be less likely tobe deceivedor confused bythe limitedsimilarities between the marks. Thiscase illustratesthe difficultiesin enforcingrights indescriptive wordswhich areincorporated intrademarks andthat careshould betaken whenchoosing trademarks whichinclude such words.

BUSINESS LAW & TAX

Ad blokes not woke no joke

• Toxic masculinity in lager advert criticised by advertising regulator

Liézal Mostert ENSafrica

In a TV advert two blokes are on avideo call (yes theyshould bein abar, but these are not normal times). They’re having one of those deep male conversations.

BlokeOne: “Hey where are you?”

BlokeTwo: “Just grabbing a beer, man.”

Bloke One: “Better be a real one.Remember when you asked for this?”

As hesays this,Bloke One holdshis thumbandforefingersome5cmapart.Thenwe seeavisual ofthatearlier time whenBloke Two ordereda beerwhiledoing the thumb-and-forefinger5cm-apart thing,during which he alsouttered the apparently controversial words“CanIhavealimewith this?” To which an agitated Gerard Butlerresponded, saying “Hey, that’sa Windhoek, that’s 100% pure beeryou don’t need any lime.”

Ashe saidthis asuitably chastened BlokeTwo tooka

sipofhis beerandclearly enjoyed it.To whichnowsatisfied Gerald Butler respondedwith a “Keep it real, Joe.”

So, in short,we’re talking about a TVadvert for Windhoek beer that tells you not to add limeto yourbeer. An advert thatfeatures famous actor GerardButler (who’s seenasquite macho)and,as Bloke Two, a person who’s neither famousnor macho, but therewill besome more detail on himlater. An advert thathas thatsparklingdialogueyouread earlier – all that’smissingthere isaload of “boets”, butitmight bethat the scriptwritersthought that Butler (who’sfrom Scotland) might havestruggled with that little South Africanism.

THE OBJECTION

An individual,Aadila Agjee, filed a complaintwith the South African Advertising Regulatory Board(ARB). She claimed theadvert was offensive andbelittled people (particularly women) for their personal preferences.She cited variousprovisions of

FIT-IN CULTURE

theCode ofAdvertisingPractice, including clause 3.5 of section II(unacceptable advertising – gender).

WHAT HEINEKEN HAD TO SAY

Heineken argued that the point ofthe advertwas toget the message across that Windhoek is 100% pure. Thereis,saidHeineken,nothing wrong with suggesting you shouldn’t addlime to your Windhoek because the product does notneed any flavouring.

There’s nooffence or shame inthe advertbecause BlokeTwoin factrealiseshe likes Windhoek without lime. AndGerardButler isnotdiscriminating against women.

THE RULING

The directorate saw things differently. It foundthe advert breachedclause3.5ofsection II. Whatfollows issome ofits reasoning:

● A depiction of a macho world. “The directorate understands thebasis ofthe complainant’s discomfort. While it is never spelt out there is an undertone of real mendrink realbeer.” This comes from the “masculine interactions and the all-male cast; it is almost impossible to

imagine a woman teasing her friendfor orderingalime slicewiththe beer,orinsisting that herfriend order real beer”. There is “unspoken dialogue”, which is further emphasised by the use of Butler, an actor associated with macho movieroles, and by the use of the words Keep it real, Joe.”

This is in contrast with Bloke Two, a “gentle-looking red-headedman – two characteristicsthatmighttypically make hima targetfor teasing in a toxic environment”

● A lack of humour. “It is a completely seriouscommunication,theunavoidableouttake of which is that real men drink real beer.”

● Adepiction ofa fit-inculture. The directorate was “disturbed bythe ‘fit-in’ culture communicated by the commercial; not only is the character publicly shamed and belittled about his

IT IS EXACTLY THE UNSPOKEN NATURE OF THE COMMUNICATION THAT MAKES IT PARTICULARLY DANGEROUS

request for a lemon or lime in his beer,but heis alsostill being teasedabout itafter the fact”

● The implicit natureof the message. The advert never says “realmen drinkreal beer”,it simplyimpliesit: “The reality is that it is exactly the unspoken nature of the communication that makes it particularly dangerous – the gender stereotype portrayed as sonormal thatit doesnot even require explanation.”

● Toxic masculinity. “It is the entrenchment of the role of men as having to behave in a certain waywith whichthe Directorate takes issue.It is also the entrenchment of male behaviourthat isbullying, and what has come to be labelled as ‘toxic masculinity’”Theadvertisement,rather than drawingattention tothe purity of the taste of their product, paints a clear picture ofanaspectofthetargetmarket: stereotyped macho male “who buckles tothe pressure of his peers to fit in” PC(wokeeven) orajudgmentthat reflectsthevalues of 21st centurySA? You decide.

Reviewed by Gaelyn Scott, Head of ENSafrica’s IP department.

VAT facts for foreign firms with SA activity

Riette Lombard AJM Tax

Uncertainty oftenexists whether aforeign business with supplies toSA customers is required to register as avalue-added tax(VAT) vendor in SA.

The implicationof theSA Revenue Service’s (Sars’s) literal interpretation of the relevant provisions anda recent high court decisionon the matter willlikely negatively impact foreigninvestment into SA,and disincentivise foreign businesses from doing business withSA customers by virtue of their potential VAT risk.

A VATregistration obligation exists for any person who conducts an “enterprise” and exceeds the VAT registration threshold.

Section 1(1) ofthe ValueAddedTax Act,No.89 of1991 (VAT Act)defines “enterprise” tomean anyenterpriseor activity conducted continuouslyorregularly inorpartly in SA and inthe course or furtherance ofwhich goods or servicesare suppliedto any otherperson forconsideration.

Proviso(ii)tothedefinition of “enterprise” provides that any mainbusiness orbranch

ofa foreignbusiness thatis permanently situated outside SA, that is separately identifiable andmaintains anindependent accountingsystem, is deemed to becarried on by a separate person. Anysupply ofgoodsor services bythe localbranch to the foreign main business isdeemed tobe asupply madeby thelocal branchin thecourseof itsenterprisein terms of section8(9) of the VAT Act.

SARS INTERPRETATION

For a number ofyears, it has been generallyaccepted that a separateidentifiable local branch withan independent accountingis deemedtobe carried onseparately from the foreignmain business, evenwhen thelocalbranch only performscertain functions for its foreign main business. Inthese circumstances, thelocal branch wouldregister asavendor (asopposed totheforeign main branch)and accountfor VAT on its suppliesto the foreign main branch. Recently, Sars indicated that wherethe localbranch only makes suppliesto its foreign mainbusiness, the localbranch isnotconductingan enterpriseandmay

thus not register as a vendor.

The Gautenghigh court recently considered the application ofthese provisions and foundin favour of Sars inthe unreportedjudgment ofWenco International Mining SystemsLtd and AnothervTheCommissioner for the South African Revenue Services(case no 59922/2019).

Both the firstand second applicant areincorporated in Canada, withthe second applicant beingregistered as a branch of the first applicant in SA. Thefirst applicant supplies management systems software, maintenance, safety andmachine guidance to themining industryacross the world.

The secondapplicant renders services such as training,systemsupport,sitevisits andinstallation toSA and other African clientsof the first applicant, forand on

behalf ofthe firstapplicant. The first applicant pays the second applicanta managementfeefortheservicessupplied to the first applicant.

Thefirstandsecondapplicant submitted aruling application requestingSars to confirm thatthe second applicant (local branch) should registerfor VATas opposed to the first applicant (foreign mainbusiness) and accountfor VATat thezero rate on the services rendered to the first applicant.

Sarsissued arulingprovidingthat thefirstapplicant is conductingan enterprise andmustregister asaVAT vendor inSA andcharge VAT onthesupplies toitscustomers(at eitherthestandard or the zero rate).

Sars provided that for the local branchto satisfythe general definitionof “enterprise” asa separateperson from its foreignmain business, theservices are requiredtobesuppliedtoany other personfor consideration.

purely forsupplies it makes to itsbusiness permanently situated outside SA.

Upon reviewof Sars’s decision, thecourt considered thebusiness structure and geographicalarrangement betweenthe applicants and found that the second applicant’s alleged enterprise consistedsolely oftheservicessupplied tothefirst applicant, whichare supplied fortheoperation ofthefirst applicant’sbusiness.Thesecond applicant cannotbe separately identifiedfrom the first applicant and is not is not engaged inan enterprisein which itmakes suppliesto the end-clients.

The courtconcluded that proviso (ii) to the definition of enterprise is notapplicable to the secondapplicant and confirmed thatsection 8(9) presupposes theexistence of an “enterprise”

IMPLICATIONS

such relief.Similar reliefmay and haspreviously been achieved byforeign businesses byapplying proviso (ii)to thedefinition of “enterprise” andsection 8(9)of the VAT Act.

Itappears the court’s conclusionsare premisedonthe fact that the second applicant was not conducting an enterprise inSA. Thequestion is posed whetherSars andthe court wouldhave concluded differently thatis, that proviso(ii) tothe definitionof “enterprise” andsection 8(9) was applicable, if the local branch wasalready conductingan enterprisein SAby virtue of itmaking other supplies to local customers for which itreceived consideration.If thisisthe case,the current interpretation issue may becircumvented to ensure theforeign business does notobtain aVAT registration obligation. A foreignmain business that conductsbusiness inSA throughalocalbranchshould be aware of Sars’s interpretation ofthe provisions. It appears thelocal branch’s activities andsupplies should be distinguishablefrom the foreign main branchto rely onproviso(ii)tothedefinition of “enterprise” MOST FOREIGN JURISDICTIONS HAVE

Sars furtherprovided that thesecondprovisotothedefinition of “enterprise” in section 1(1)never intendedto create a situationwhere a branch isregistered or required to register in SA

Most foreign jurisdictions have incorporated a form of VATreliefintotheirlegislation to ensurenonresident businesses mayrecover theVAT incurred for purposes of their business activitiesin theforeign jurisdiction.

TheVAT Actdoesnot explicitly makeprovision for

BUSINESS LAW & TAX

Treasury aims to broaden exit-tax ambit

• Proposal in budget for inclusion of SA retirement funds of emigrants in the net of taxable assets

Joon Chong & Wesley Grimm Webber Wentzel

The 2021 budget includes aproposal fora deemed retirement withdrawal tax on retirement assetsof emigrantsas anexittax. Theproposal is unclear and involves many issues.

Datafromvarioussources suggests thatabout 23,000 SA taxresidents emigrate eachyear insearch ofgreener pastures.Individuals who ceaseto betax residentscurrentlypay anexittax ontheir worldwide assets,with certain exclusions.At present, immovable properties and retirement fundsthat remain invested in SA are excluded from the exit tax net.

TheTreasury proposesin the budget toinclude SA retirement fundsof anemigrant in the netof assets that are subject to exit tax.

Emigrantswill bedeemed to have withdrawn from their retirementfundsinfullonthe daybeforethey ceasetobe SAtax residentswhichwill resultinadeemedretirement withdrawal tax (RWT).

There isno effectivedate mentioned in the budget.

The purpose ofthe proposal is to addressthe loss to

the fiscus whenan individual hasemigrated tobecometax resident inanother country, such as the UK.

Thedouble taxagreement (DTA)between SAandthe UKprovidesfor theUKto have sole taxingrights on the SA pensions andannuities of the emigrant. Thismeans the SA pensionsand annuities received bythe emigrant who has become UK tax res-

THE EMIGRANT IS NOW TAX RESIDENT IN A COUNTRY WHICH HAS SOLE TAXING RIGHTS ON THE SA PENSION AND ANNUITIES

ident would not be subject to tax in SA, only in the UK.

Other countrieswith similarsole taxingrights intheir DTAs with SA include Australia, New Zealand, People’s Republic of China, Hong Kong, Denmark, Germany, Italy, Portugal and Spain. Treasury proposesthat paymentof theRWTplus interest “will be deferred until payments are received from the retirement fundor as a result of retirement” This proposalis unclear

butappears tosuggestthat the RWT plusinterest will be withheld against actual payments received by the emigrantin thefuture fromthe retirement fund. (An actual payment could be received due toan allowedpre-retirementorretirementelection,a divorce settlement or on death.)

The proposalthen continues to state that “[A] tax credit will be provided for the deemed retirementwithdrawal tax as calculated whentheindividualceasedto beaSouth Africantaxresident.” Thisproposal isalso unclear.

The emigrant is now tax resident ina countrywhich has sole taxing rights on the SA pensionand annuities.SA hasnorighttotaxthepension and annuities. Thereis no SA tax to credit against.

Some DTAsprovide for SA and thenew country of residence both tohave taxing rightsonthe SApensionand annuities. Thesecountries include Canada, the US, Netherlands, Singapore, Qatar, Mauritius, Kuwait, United Arab Emirates, Saudi Arabia, Sweden and Switzerland. This usually means that theSA pensionsandannuitieswillbesubjecttotaxhere as normal, and any SA tax paid is a credit against any tax

due in the new country of residence.

If SA has notlost the right totaxthepensionsandannuities inthe DTA,then thereis no need for the RWT in the first place. Ifthe retirement assets growat aconsistent rate, therewould behigher amountsoftaxtobecollected by the South African Revenue Service on retirement or when paid on death or divorce afteremigration. There is no loss to the fiscus.

Capital gains,interest and dividends on retirement funds are not subject to South Africantaxinthehandsofthe retirement funds. This is based on thepolicy that the funds shouldbe allowedto grow their asset base as much aspossible toprovide maximum value on retirement when such amounts are taxed.

The proposalwill erode the assetbase witha deemed interest onthe RWT.This could be interest accruing over long periods until retirement. A significant portion of the retirement funds of the emigrant wouldnot beused forretirement butto paythe RWT and interest. This runs

counter against the policy to encourage retirement savings in SA generally.

What happens if the RWT plus interest exceeds the value of the retirement assets on retirement?This couldbe due tothe “associated interest” onthe RWTorasignificantdeclinein valueofthe retirementfunds afteremigration.On retirement,the emigrant wouldhave topay the shortfallin RWTand interest andwould havenil valueremaining aspension or annuities.

The mutual agreement procedure (MAP) isa remedy in aDTA forthe revenue authoritiesof bothcountries (egSarsand HMRC)tointeract with each other to resolve international tax disputes. Where there isforeign tax imposedon foreignincome, anSA taxresident canclaim the foreigntax asa credit againstSA incometax ifthe foreign tax is validly imposed. Aforeign subsidiarymay deduct withholding taxes againstfeespaid toanSA parententity interms oftheir tax rules.We haveseen Sars disallowingthe foreigntax creditclaimedby theSApar-

ent entity ongrounds that the withholdingtaxes werenot validly imposed interms of the DTA.

In our exampleabove, if theHMRCholdstheviewthat the RWT plusinterest cannot bevalidly imposedinterms of theUK/SA DTA,there could be double tax on the SA pensions andannuities received by the emigrant. The HMRCwouldnotgiveacredit for the RWT plus interest against anyUK incometax due.

A possibleremedy forthe emigrant would beto refer theissueto MAPandforthe HMRC andSars todiscuss the validity of the RWT plus interest. This could take years to resolve.In theinterim, the UKretiree wouldbewithout anypension orasignificantly reduced pension dueto the RWTand interest,plusany UK tax.

Recent amendments effective March1 2021affectingpreservation andretirementannuity fundsprovide that anemigrant canonly access these funds after three years ofceasing to bean SA tax resident.

The proposal means the emigrant will nowalso be liable forthe RWTplus interest overthis three-yearwait, which will furtherreduce the value of the retirement balance.

We hope many aspects of theproposal whichare unclear will be clarified in the drafttax billcirculated around mid-2021.

Theproposalmayresultin emigrantselecting towithdrawtheir SAretirement fundsin fullwherepossible andtopayany SAtaxdueas the risks ofleaving these fundsto growin SAuntil retirementare toouncertain. Thefiscus willreceivesome tax immediately. However, the withdrawal isanoveralllossfortheeconomyasthe poolofretirement fundsin SAwill reduceand the taxbase on anygrowth of the funds hadthey not been withdrawn will be gone.