Business Day Business Law & Tax, February 2021

BUSINESS LAW&TAX

A REVIEW OF DEVELOPMENTS IN CORPORATE AND TAX LAW

Wealth tax to plug the gaps not the right answer

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Taxpayer is already stretched

and overburdened and will be too little to close the gap, say experts

Evan Pickworth

BD Law & Tax Editor

This time last year the economy was expected to eke out apaltry 0.9% growthamidrising levels of debtand ever higher spending.Then thingsgota lot worse, fast.

The dreaded Covid-19 struck and, from a fiscal perspective, precipitated an emergency budgeton June 24 2020 to replanthe rest of the2020/2021financialyear. The timing couldnot have been worseas risingdebt, runawayspendingandworsening economic conditions, amid acorruption plague, required greaterfiscal sustainability, bravepolicy decisionsand fortitudebythe long-suffering public.

SAwastrulystaringdown

the barrel whenit became apparent that losses of as much asR300bn intax revenue would need to be factoredin dueto thesuffering caused to businesses alone.

An estimated R26bnin direct reliefwouldneedtobeadded, withafurther R44bninthe formofinterest costlinkedto the deferral of certain taxes. And nowa one-offsolidarity tax, or surcharge, may beneededto fundthecrucial vaccinerollout. Theroomto manoeuvre especially in

YOU CAN’T WAVE A MAGIC WAND AT THIS AND SEE IT DISAPPEAR. IT IS UNFORTUNATELY A STRUCTURAL PROBLEM

theformof taxincreases is getting smallerby theday, leavingfinance ministerTito Mboweniwith adecidedly treacherous tightrope to walk. However, rushing through burdensome tax increasesat thistimecould domore damagethangood, according to many experts.

Director atAJM Tax,Dr Albertus Marais, doesnot see awealthtax orextensivetax increases on the cards as the taxpayeris alreadystretched andoverburdened. Hepoints out that whileboth the supplementarybudget andthe medium-term budgetpolicy statementof October28 2020proposed taxhikes, thesewereactuallyquitelimited when compared to the rising taxgap. Theseinclude an additional R5bn in tax revenue forthe 2022financial year, R10bnin eachof the

ENSafrica covers the full spectrum of mining-related work with continued prominence in mining law, regulatory, employment and M&A engagements.

2023 and2024 financial years andR15bn inthe 2025 financial, comparedto budgeted expenditureof more than R1.5-trillion annually.

Public wagesand payments towardsgovernment debtamount toastaggering 80% of the budget’s expenses in 2020, says Marais.

Ascloseto20%ofbudgetedexpenditureayearwillnot be receivedas income,this shortfall will need to be made up over time.

“You can’t wavea magic wandat thisandsee itdisappear. Itis unfortunatelya structural problem that has to be addressed over time.

“South Africanshave become used to the governmenthiking taxestoclose thisgapandthere isalotof concern among taxpayers. However,ifyou lookatthe measures bythe Treasury,

these aresurprisingly small numbersandwill notbesignificant toclose thisyawning tax gap. It isclear they are lookingat expenditureandit willbeinteresting toseeif government canachieve cuts here,” he says.

Head of tax in the Johannesburg officeof ENSafrica, Andries Myburgh,agrees withthe needfor alongerterm, committedapproach to achieving fiscaland economic sustainability

“Policy certaintyfor the corporate sectorand investorsis crucialifwe areto achieve longer-term sustainability, broaden the tax base andgenerate jobsandeconomic opportunities.Looking at the short term only will not solve these challenges.”

He says two areas where certaintyis neededonthe corporate taxfront wouldbe

clarityon theproposalin 2020to denycontractminers theaccelerated capital expenditure deduction and moreincentivestoencourage greenfield exploration.

“Further consultation between industryand Treasury is needed onthe controversial capitalexpenditure issue, as contractminers areintegral to a vibrant and growing sector.Anyadversechangein theirability toclaimdeductionswill havedireconsequences and soI hope this change is not rushed through in the budget and legislation following the budget.

“What is ratherneeded is high-leveltechnicalinputand discussions andclearer policy certainty.

“Meanwhile, Iwould also like tosee advanceson the

BUSINESS LAW & TAX

Miners in the dark on tax

• Proposal on hold to exclude contract miners from the accelerated capital expenditure deduction

Evan Pickworth

BD Law & Tax Editor

SA’sminingindustry was dealta cruel blow lastyear when an amendmenttotheIncome Tax Actproposed toexclude contractminersfromqualifying forthe acceleratedcapital expenditure deduction.

Asthings stood,thisprovision would havekicked in in January,placing many companies, notjust contract miners, in a dire position. But lobbyingby industryhasled to apostponement, placing the proposalon thebackburner for the time being.

Head of taxin the Johannesburg officeof ENSafrica, Andries Myburghdoes not expectto seethischange being implementedin the legislation immediately after the February budgetas further consultationbetween theindustryandTreasuryhas not yethappened. However, headmitstheindustryisconcernedif itis “pushed through” amidthe broader drive for tax revenue.

“Hopefully,that willnot happen and that allwe see in thebudgetis anupdateand mention ofdetails regarding the much-needed consultation with industry,” he says.

Myburghactedandassisted the Minerals Council SA in its consultationwith the Treasury andduring the submissionsattheparliamentary standing committee on finance lastyear, which paintedapicture ofwhythis change in its proposed form would not be workable.

“The reality is that these miners takeon significant upfront risks and would be placed in aparlous position if they cannotqualify forthe deduction.

“Therearemanyinstances where youlegally don’t requireaminingright,likethe pooling andsharing of resources, orwhere BEE companies participate directly but arenot the holders of the mining right itself.

“Contract mining also comes intoplay significantly onthecleaning upoftailings on mines, forinstance. Their specialist skillsare also increasingly beingused to assist miningrights holders on excavationand other work,” explains Myburgh.

THE KEY IS TO ENSURE TAX LEGISLATION PROVIDES CERTAINTY AND PREDICTABILITY FOR INVESTORS

Animportant legalprecedent at the Supreme Court of Appeal (SCA) hasserved as a precursor tothe proposed amendment.

InBenhaus Miningv CSARS (165/2018)[2019] ZASCA 17 on March 22 2019 the SCA made itclear that a company that excavates groundand digsupmineralbearingore forafee ondeliverytoanotherentitythatprocesses theore undertakes mining operationswithin the

meaningof ss1and 15(a)of the Income TaxAct 58 of 1968. Itis thusentitled to claim deductionsof thefull amount ofcapital expenditureon miningequipmentin the tax year inwhich it is incurred,interms ofs36(7C) of the act.

Anadditional remarkby one judge, however, was that a change in legislation should rather be looked at if the intention is fora contract minernotto benefitfromthe deductions.

Myburghpoints outthat the Davistax committeehad also lookedat contract mining amidan overarching recommendation for mining lawstobe updated.It recognised the landscape since the turn of century has changed, with there now beinga lot of use ofcontract miners,especially insmall-scale and junior mining.

Hesaysthe keyisto ensure taxlegislation provides certaintyand predictability forinvestors and enables the industry to grow.

“Contract miners typically buy yellowequipment like trucks, excavatorsand other movable mining equipment.

“Thereisno riskofadouble deductionas theparty incurringthecapitalexpenditureon themineequipment, whethertheminingcompany or thecontract miner,would claim the deduction.

“Anyfuture changestothe tax legislationapplicable to the miningindustry therefore needs to becarefully determined andrequires further and substantialtechnical input from industry,” he says.

Ailing Sars may see existing tax types as easiest target

Joon Chong & Wesley Grimm Webber Wentzel

Ina pre-Covid-19context,SA hadalready sufferedfroma trifectaof socialchallenges: inequality,poverty andhigh levels of unemployment.

This, coupled withthe economically crippling and seemingly unending Covid19 regulations, lootingof state coffers andbureaucratic paralysis in the SA Revenue Service’s collectionfunction has created a desperate situation for the Treasury.

Asmarginal incometax rates have not increased for some time (in the government’s view) thisis a likely targetfor taxhikes inthe forthcoming budget.Though it is possible that the Treasury could introduce anew, lower taxbracketto widenthetax base, itis morelikely that higherincome earnerswill continue to shoulderthe burdenof increasedpersonal income tax rates.

Taxpayers earningmore thanR750,000 perannum shouldbrace themselvesfor 2%-4%increases intheir marginal tax rates.

Anotherpossible targetis thecapital gainstax(CGT) rate. CGT inclusion rates currently are40% for individuals and special trusts;80% for companies and 80% for other trusts. These CGT rates were introduced onMarch 12016 andthe Treasurymaynow thinkittime totaxthefull capital gain realised on the disposal of assetsin certain

instances.

Inrecent times,mention hasbeen madeofincreasing thecorporate taxrate,which is contraryto whatmany countriesaround theworld are doingand willcontribute tofurther divestmentand capital flight fromSA. Nevertheless,given thedramatic downturnin SA’s economic fortunes since the last budget, it is possiblethat government may now belooking to raise the corporate tax rate to 30%.

TheVAT rateandtransfer duty rateshave beenraised recentlyand wouldtherefore not be a primary target for further increases in the forthcoming budget.

BURDENSOME

In our view,the government is morelikely totarget existingtax typesas opposedto introducing a wealthtax or solidarity tax. Thereason is that introducingnew taxesis moreexpensive andadministrativelyburdensome inan alreadyailing Sarssystem than increasingthe ratesof taxationof existingtaxtypes. Any attemptby thegovern-

Wealth tax to plug the gaps not the right answer

driveto encourageeconomic activity through the use of incentivesfor prospectingor exploration,like anincentive toencourage greenfielddevelopmentby adoptingaflowthroughshare model,which isadaptedto suitSA’s unique circumstances.

“Investors requirepolicy certaintyand ashort-term approach will not work to solving SA’s economicand budget challenges.”

JoonChong andWesley Grimm fromWebber Wentzelfeel thegovernment is morelikely totarget existingtaxtypes likeincreasing marginal rates forhigh earners, a 30%corporate tax rate andlifting capitalgains tax as opposed tointroducing a wealth tax or solidarity tax.

“Thereason being,introducing new taxesis more expensive andadministrativelyburdensome onan alreadyailing SARevenue Servicesystem thanincreas-

ingtherates oftaxationof existingtaxes.Anyattemptby governmentto introducea wealthtax orsolidaritytax would alsolikely bemet with strenuous opposition and contributeto increasedlevels of capitalflight, taxavoidance and tax evasion.”

DrFerdie Schneider,head of StaKonsult and a leading corporateVAT expert,also doubts aVAT increaseis on the cards.

“There is almostno space tomanoeuvretoincreaseany

taxes toraise enoughrevenue. Our economyis so flat and wedon’t needa little injection, weneed ahuge one.Tinkering oncorporate tax whichhas beenstabilised willnot raisesubstantial money, sothat I think isoutof thequestion.Unions and individuals would be up in arms,” he says.

Schneider saysrevenue hastraditionally beenraised throughincreased taxesor debt,sothegovernment“may be forced togo for debt

again”. Theother challengeis thatforeign directinvestment isdeclining andcompanies arepulling outorthreatening to pull out of the country.

A SHORT-TERM APPROACH WILL NOT WORK TO SOLVING SA’S ECONOMIC AND BUDGET CHALLENGES

ment to introduce a wealth or solidarity tax are also likely to be met withstrenuous oppositionand contributetohigher levels ofcapital flight, tax avoidance and tax evasion. It is afact that economic stimulationand growthare fargreater catalystsfor increasing taxcollections than increasing taxrates and introducingnew taxtypes.In our view, instead of increasingtaxes and/orintroducing new taxtypes, thegovernment should consider:

● Bolstering property rights;

● Reducingthe bloatedpublic service wage bill;

● Reducing serious crime such as murder, rape and robbery aswell asgenderbased violence;

● Reducing wasteful expenditure; and

● Halting thewidespread abuse andtheft ofstate resources.

Anyfurther attemptby government to taxSA into prosperity willfail asthe already highlytaxed andnarrow tax base has insufficient resourcesto improveSA’s position.

“To pull somethingout of thehat I can’tseeit. Ialso couldn’t see it last year. Even cuttingexpenditure ingovernment salariesis “ a veryfineline totread” at the moment dueto risingunemployment.

Schneidersays theproblemwithraisingdebtis“there is not enoughfloating around in theair” due topoor ratings and higher interest rates. “It is becoming an increasing problemtoget peopletofund us, ” he says.

ENSafrica covers the full spectrum of mining-related work with continued prominence in mining law, regulatory, employment and M&A engagements.

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SA’s MINING INDUSTRY

Mixed results with charter

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Lack of capacity prevents the state from dealing properly with firms circumventing the mining pact

Ntsiki Adonisi-Kgame, Mihlali

Sitefane & Zinzi Lawrence ENSafrica

On May 1 it will be 17 years since the Mineral and Petroleum Resources Development Act 2002 came into force.

Oneofits objectivesisto substantially andmeaningfullyexpand opportunitiesfor historically disadvantaged persons, including women andcommunities, toenter intoandactivelyparticipatein themineral andpetroleum industries andto benefitfrom theexploitationofthenation’s mineral and petroleum resources.In thefurtherance ofthisobject,onAugust2004 the Broad-Based SocioEconomic Empowerment Charterfor theMiningIndustry was gazetted. It is nowopportune to reflectonthe 17yearsofthe mining charter tosee how the industry has fared Oneofthe majorwinsof the charter is that many leadingmining companieshave metthe empowermenttargets, leading to the rise to prominenceof blackmining enterprisesheadedbyPatrice Motsepeof AfricanRainbow Minerals, Sipho Nkosi of Exxaroand DaphneyMashileNkosiofKalagadiManganese.

According to asurvey conductedby theMinerals CouncilSA mostmember companiesinvolved inthe researchhave largelycomplied withthe miningcharter in all its elements. However,thesuccessstoriesare dousedout bythe Mining Charter Impact Assessment Report2009, whichwas commissionedby thedepartment ofmineral resources & energyto assess theindustry’slevelofcompliance withthe charter. The report notes thatthere was minimalprogress inthe implementationof theelement of ownership.Some of

IF

THE GOVERNMENT AND THE INDUSTRY FAIL TO FIND EFFICIENT TOOLS, HISTORY WILL NOT BE KIND IN ITS JUDGMENT

the challenges thathave contributedto thelack ofprogress are the lack of access to fundingand indebtednessof historically disadvantaged partners;limited flowofdividendsto historicallydisadvantagedpersons toservice loan agreements,financially cumbersome dealstructures

and lackof representationon empowering companies’ boardsof historicallydisadvantaged persons.. Similarly, ininstances whereemployee stockownershipplans (Esops)have beenestablished tobenefit host communities and employees,thebenefitstothe intendedbeneficiariesarenot always evident. This has been exacerbatedbyEsopsinmost casesnot receivingtheir shares for free, and a vendor financing structurebeing used to fund such purchases. Accordingly,in mostinstances,aportionofthedividends declaredanddue totheEsop isused torepay thevendor loanandthebalanceispaidto the Esops.

These challengeshave undermined the government mandateof ensuringthat mineral resources entrusted tothe custodianshipofthe governmentfor thebenefitof thenationareputtogooduse. The state has tried to remedy thesechallenges bypublishing variousiterations ofthe miningcharter.However,ata substantivelevel, the charter fails to distinguish between: ● Entitiesthat havesuccessfullyconcluded andimplemented empowerment transactions wherehistorically disadvantaged personshave been effectively empowered; ● Entitiesthat havecon-

CHARTING A WAY FORWARD

cluded and implemented empowerment transactions thatat facevalue seemto comply withthe letterof the law, buthave failedto deliver valuefor historicallydisadvantaged persons; and

● Entitiesthat haveconcludedandimplementedtransactionsaimed atcircumventing the mining charter and misleadingthe departmentof mineralresources &energy intogranting rightswhenit should not.

Another challengethat undermines the empowermentobjective isthatthe

IT HAS BECOME CLEAR THAT GOVERNMENT AND INDUSTRY HAVE TO ENGAGE IN A DIALOGUE TO FIND A SUITABLE PANACEA

departmentdoesnothavethe capacity tosubstantially assess empowerment transactionstodeterminewhether theydoin factleadtomeaningfuleconomicparticipation. Thishas resultedinthe department shifting goal posts anddemoralising investors. SAis aresourcefulcountry and has managed to navigate the most contentious of issues throughdialogue. Now, more thanever, it has becomeclear that government and industryhave to engage ina dialogue tofind a suitablepanacea thatwill advance the empowerment objectivewhile alsorecognisingthe contributionsof miningcompanies thathave successfully empowered.No pointcanbe servedbythe government shifting goal postsfor compliantmining companieswhile failingto tackle noncompliant ones.

There are many options that canbe consideredto sharpenthe regulatorytools to achieve the empowerment objective.These includea totaloverhaul ofthemining charterthat removesallthe uncertainties ofsuccessful historical transactions while tackling noncompliantcompaniesand futureapplicants for mining titles. They also include the jettisoning of theconcept of a miningcharter andreplacing it with a more traditional and recognised legalinstrument, such asamendments tolegislation.If thegovernment andthe industryfail tofind efficient tools,history willnot be kind in its judgment. After17 yearsand amixed bagofresults,itistimeforthe miningcharter tobeput under a microscope to test its continuingutilityinthetransformation of themining sector of SA.

ESG funding an option for mines to consider

Lloyd Christie & Dalit Anstey ENSafrica

TheSouth AfricanFinancial Provisioning Regulations, 2015, whichwill commence onJune19 2021,meanthat many mining companies will needtomakeupforshortfalls createdby newcalculations forfinancial provisionforthe rehabilitation, remediation and closure of mines. With the compliance deadline closing in,one way that mines could make up for the shortfall isby obtaining sustainable financeand environmental social governance (ESG) investment.

Sustainable financehas beendefined bytheNational

Treasury ascomprising “financial models,services, products, markets and ethical practices todeliver resilience and long-term valuein each ofthe economic,environmentalandsocialaspectsand therebycontributing tothe sustainable development goals and climate resilience”

The scopefor sustainable financeisbroadandinclusive, andis becomingevermore important withthe needto finance critical green metals to ensure the energy future of the world.

A challenge facedby ESG investment isdeveloping standardisedmetrics orqualifying criteria forESG projects.Inthis regard,a “Green

Finance Taxonomy” has been proposed forSA, whichwill be animportant toolto standardise the activitiesof ESG qualifying projects.

Though still in working draftform, theGreenFinance Taxonomy defines activities, principles, metricsand thresholdsfor thecontribution forclimate changemitigation andclimate change adaptation. This standardisation will go along way to reduce disparities in the market and boostESG investor confidence. Mine closuresand rehabilitation projects,whose financing willbe affectedby the Financial Provisioning Regulations,could beprime

candidatesfor ESGfunding, as their aims,in line with international bestpractice, are to minimise environmental risks, ensure sustainable landuseandtoempowerand upliftsurrounding hostcommunitiesatthe endofa mine’s life cycle.

In tackling suchan event that has impact on the environment, social and economic environment,sustainable finance is essential. Forthese reasons,it seems likely thatthe goals of mineclosures wouldqualify underthe workingdraftof the GreenFinance Taxonomy,particularlyiftherehabilitation activity involves the introductionof watertreat-

ment or bioenergy plants. In fact,the GreenFinanceTaxonomy specifically lists platinum, gold and coal mining as activitieswithinthe“industry” taxonomy sector, and water treatmentandlandrehabilitationaredefined“asanyintentional activity that initiates or acceleratestherecoveryofan ecosystem froma degraded state”. Manymine closure projects could qualify for additional sources of funding andhelp plugtheshortfall created by theFinancial Provisioning Regulations, ESG projects often have stringent disclosure and oversight components.However, this should not be problematicas mostminingcom-

paniesarefamiliarwithregular reportingrequirements forregulatory authorities.In addition, mostmines already have asustainability manager,whoisoftenresponsible for stakeholder management, public participation, environmental compliance and remediation, and could easily provideoversightrequiredby international ESG standards. Withthe FinancialProvisioning Regulations deadline fast approaching, mining companies will needto consider financingsolutions to topup theirshortfallswhen rehabilitating, remediating and closinga mine.ESG couldbe aviable solutionand should be considered.

SA’s MINING INDUSTRY

Decision limits diesel refunds

• Judgment could have significant implications for mining operators and their ability to claim from Sars

Prenisha Govender Baker McKenzie Johannesburg

The recenthigh court judgment

Graspan Colliery v The Commissioner forthe SA Revenue Service (8420/18) [2020] couldhave significant implications formining operators and their ability to claim diesel refunds.

Thejudgment dealtwith the interpretationof Note 6(f)(iii) to Schedule6 of the Customs andExcise Act, 1964 and the limitations with regard towhat activities constitute primary production activities in mining, for the purposesof claiming diesel refunds.

What isincluded inprimary productionactivities in miningis definedinNote 6(f)(iii)(aa)-(vv) to Schedule 6.

Thelist ofactivities included in Note 6(f)(iii) was considered nonexhaustive, following the Glencore Operations SA (Pty) Ltd v The Commissioner forthe SA Revenue Service judgment. In this judgment,the court concluded thatthe word “include” inNote 6(f)(iii)goes beyond itsprimary meaning,

and activitiesthat qualifyas own primaryproduction activities in Note6(f)(iii) is nonexhaustive.

Inother words,activities may qualify asprimary production activitiesin mining even though theyare not specifically includedunder Note 6(f)(iii) but are operations whichthe legislature intended toinclude under primary activities in mining.

However,in therecent case of GraspanColliery v The Commissioner for the SA Revenue Service,the court

THE JUDGMENT LIMITS PRIMARY PRODUCTION ACTIVITIES IN MINING TO ACTIVITIES LISTED UNDER NOTE 6(F)(III)

was calledon todetermine whether rehabilitation was an activitythat constituted primary production activities in mining, prior to May 27 2016.Note6(f)(iii)toSchedule 6 was amended with effect from May 27 2016, to include

rehabilitation asan activity under subnote(vv). Indetermining whether rehabilitation activitiesconstituted miningactivities priortothe amendment, thehigh court dealt withthe interpretation of Note 6(f)(iii).

Thecourtheldthattheuse of the word “include” in the phrase “ownprimary production activities” in Note 6(f)(iii) was togive the phrase a more precisemeaning by listing whatwill encompass own primaryproduction activitiesin mining.Theword “include” istherefore aimed atillustrating thatthe listis exhaustive of themeaning of primary production activities in mining.

The judgment therefore limits primary production activitiesin miningtoactivitieslisted underNote6(f)(iii) oftheact. Priortoclaiming diesel refunds, mining operatorsshould ensurethattheir activities arespecifically listed under Note 6(f)(iii) and qualifyasprimaryproduction activities in mining.This is in addition to meeting all the other requirementsstipulated by theSA Revenue Service, suchas detailed record keeping

PRODUCTION CHAIN

Tax incentives could restore mining’s shine

Andries Myburgh ENSafrica

SA’s mining sectorneeds to receive support to become a sunrise, ratherthan asunset industry.

Ifwe leaveittoo late,the sector’s contributionto GDP will continue to dwindle and new businessopportunities will fade away.

Harnessing tax incentives to encourage more greenfield development stands outas a potential solutionto kickstart growth,investment and jobs.

The stark reality is that a countrythat doesnotexplore for new mineralsruns the risk of beingmarginalised as a miningjurisdiction and, according tothe Minerals Councilof SA,SA’s shareof global exploration budgets has decreased to about 1%.

The Minerals Council prepared apowerful, comprehensive proposalon how incentives throughflowthrough shares could be harnessed to breathelife into the

Andries Myburgh.

industry, withouteroding the tax base,and Ico-presented thisto theNationalTreasury latelast year.Itcan work,the time is right.

The researchshows how an incentive tailored to SA’s unique circumstancescould create much-needed jobs and then alsofeed back into the tax loopin other ways, such as employees’ tax, VAT andincome taximposedon service providersto the exploration firms so the major concernabout erosion of the tax base is mitigated.

Socioeconomic benefits

extend todevelopment of entire communities around the operation,with new housing and infrastructure, for example.Anecdotal evidence suggests thatfor each mine workeremployed, 10 peoplearedirectlydependent on mining activity. At a time when SA isdesperate for investment,it mustnotbe forgotten that mining is also a significant driverof export earnings, bringingin R421.7bn in 2019.

Canada is agood example of how the correct policy

choices canstimulate mining growth. Ithas beenhighly successful in developing these specialistjunior exploration companieslargely by using aflow-through share tax incentive modelto attract equity investors into the sector. From 2000to 2018, Canada attractedon average $2bn a yearin exploration expenditure, whileSA only attracted $194m annually.

However, theproposal for SAneeds tobedifferent asin CanadaitworksforCanadian tax residents,whereas in

RESEARCH SHOWS HOW AN INCENTIVE TAILORED TO SA’S UNIQUE CIRCUMSTANCES COULD CREATE MUCH-NEEDED JOBS

SA the ideais to attract essentially foreign shareholder investment.The proposal thereforeincludes

uniquely SAsolutions, such as theexploration firm renouncing a taxbenefit of 28%onthe expense which is the sameas the corporate income tax rate in favour of a shareholder who can set it off as a creditagainst any liability; orcan sellthat benefit toanyoneelse whocanreap the benefit.

There is noneed to re-inventthe wheel, as SA already haslegislative precedentforthis typeofoffset, where firmshave been allowed toconvert assessed losses into acredit they could sell to someone else.

Inmy viewthisis nowthe rightopportunity topushforward theseproposals as,in the long run, itwill be quite beneficial for SA.For SA to reach a necessarytarget of attracting 3%-5%of global exploration dollars,it needs to revise its tax incentive system with respect to exploration, aswell asmodernise its licensing system to ensure further investmentinto the mining sector. Time will tell.

BUSINESS LAW & TAX

Beware risks in fixed-term employment

• Contracts that are used improperly can expose employers to unnecessary risks and liabilities

Bradley Workman-Davies Werksmans

Fixed-term contracts ofemployment are allowable and acceptablein South African employment law,and are used frequentlywhere there is a justifiable usage.

TheLabour RelationsAct, 66of1995(act)evenspecifies when there will be a prima facie reasonableusage ofa fixed-term contract,such as wherethe employeeisneeded for only a limited period, suchas toreplacean employee who is temporarily absent (for example,while on maternity leave)or where there is aproject of limited duration or linked to limited external funding.

Wherea fixed-termneed exists, afixed-term contract is appropriate.

Itis surprisingtherefore, that fixed-termcontracts are still used improperlyin a manner thatexposes employers to unnecessary risks andliabilities. Arecent case highlights the issues. Recently, theCommission for Conciliation,Mediation and Arbitration(CCMA) held, in the caseof Chetty/Mid-

lands Communicationthat the parties had concluded the particular fixed-termcontract, in termsof which the employee was appointed as a sales agentand which allowedthe employertoterminate thecontract before the expiry dateonly in the event of a material breach by the employee.

The employerdismissed the employee forpoor work

THE ACT SHOULD BE SEEN AS THE OVERARCHING STATUTE WHICH GOVERNS AN EMPLOYEE’S RIGHTS AND ENTITLEMENTS

performance and the CCMA accordingly found that the employee had been unfairly dismissed. However,while thedismissaloftheemployee wascertainlyunlawful,itwas potentially not unfair merely because of this contractual restriction, and any liabilities couldhave beenavoidedby the employer makinga simple additionalprovision inits contract with the employee.

First, thedismissal ofthe employee could arguably still havebeen showntohave been fair, in the light of the fact that contracts of employment and the employment relationshipinSAdonotexist in a legislative vacuum and are notgoverned onlyby the contract of employment.

If so,the actwould be irrelevant; instead the act shouldbeseenastheoverarching statute which governs an employee’s rights and entitlements, aswell asthose ofthe employer,andthe framework within which the contract between the parties should be viewed.

In thiscase, theact provides that anemployer has the right todismiss an employee, provided thatit is able to demonstrate(if challenged) ithad afair reasonto dismiss, andfollowed afair procedure in doing so.

The actspecifically recognises incapacity(in theform of poor work performance) as grounds for a fair dismissal. As such,even if the contract ofemployment between the parties specified theemployeecouldbeterminated only for material breach, the overarching statute (the act) entitled the

employer todismiss forpoor work performance. In this regard, the employer may havebeen inbreach ofthe contractand couldhavebeen foundto haveaffectedan unlawful termination, but not an unfair dismissal.

Afinding ofunlawfultermination wouldsimply recognise the employer had contractually agreed not to dismissthe employeeforany reason other than material breach, and in terminating for a reasonother thanmaterial breach, had breached its own contractual undertakings.

The terminationin Chetty was accordinglyunlawful,

THERE IS NO REASON WHY A FIXED-TERM CONTRACT HAS TO BE ENTERED INTO WITH A START AND END DATE ONLY

but not necessarilyunfair (as defined andregulated bythe act, which recognises poor work performance as a ground fordismissal). Inthis case, since theemployer also failed to followa fair process todismiss theemployee,the dismissal was in fact unfair. It need not have been.

In addition,there isno reason why a fixed-term contract hasto beentered into witha startand enddate only, and without the employer reserving its right tofairly dismisstheemployee before the expiry date is arrived at.

The contractin Chetty triedtoachievethis,buterred in providing only that early termination could take place for material breach(which is, in any event, not a recognised groundofdismissalunderthe act).

The simplefix isfor employers to ensure that wherethey employanyperson on a fixed-term basis,

they do so with a simple contractual reservationentitling them to dismiss the employee before the expiry date for any reason recognised in the act andafter followinga fair process. In thismanner, the employer can (i) effect a fair dismissal for the purposes of the actand (ii)affect alawful termination which they are contractually entitledto implement under the employment agreement. As is always the case, sincetheact istheoverriding requirement, providedthat thedismissal isfair forthe purposesofthe act,andthe contract allows early termination for thisreason, any employer engaging an employee on a fixed-term basis should always ensure that, first, the contract is drafted properly when engaging the employee, and, second, thatit complieswith the statutory fairness requirements whenending the relationship.

FSCA moves to regulate crypto assets

Natalie Scott & Kyra South

Werksmans

On November20 2020,the Financial Sector Conduct Authority (FSCA)published a draft declaration anda statement insupport thereof whichsetsout itsproposalto bringcryptoassetswithinthe ambit ofthe definitionof “financial product” in Section 1of theFinancialAdvisory and IntermediaryServices Act 37 of 2002 (Fais Act). Cryptoassets are not regulated bythe FSCAin SA; however, the FSCA has identified anumber ofcrypto asset platformsoperating in SAwhich are “estimated to have 800,000registered South Africans,control 80%90% of themarket and hold R6.5bn assets”

Ifone considerstheabove numbers,it wouldseemSA investors areinvesting more frequently ormore substantially (orboth) intocrypto assets and are doing so without theprotection typically afforded to investors in SA. This hasprompted the FSCA(throughtheDraftDeclaration)totakestepstoregulatethis assetclass andto offer investors protection against unlicensed,unqualified and/orunscrupulous service providers. What is a crypto asset?

The DraftDeclaration defines acrypto assetas “any digital representation ofvalue that can bedigitally traded,or transferred,and canbeused for paymentor investment purposes, butexcluding digital representationsof fiat

currencies orsecurities that already fall within the definition of financial product.”

The definitionis broad enough to captureall existing cryptocurrencies aswellas those which will be developedin future and furthermore includesother related “digital” assets, suchas stable coins and utility tokens.

While theDraft Declaration sets out the FSCA’s intention toclassify crypto

THE FSCA HAS IDENTIFIED CRYPTO

assets asa financialproduct under theFais Actto provide, among others,greater protectiontoSouthAfricanswho invest in cryptoassets, the FSCA is at painsto clarify the classification ofcrypto assets asa financialproductdoes not legitimise theassetclass andis notintended toinfluence how crypto assets are treated underany other South African legislation. Implications ofthe Draft Declaration

If cryptoassets areclassified as financialproducts, then onlypeople whoareauthorised underthe FaisAct to provide adviceand/or intermediary servicesin respect of financialproducts willbe permitted tomarket, offer and/or sell cryptoassets and the sameconsequences for

anyfailuretocomplywiththe Fais Act will be applicable to financial service providers (FSPs) who make the asset class available to investors. Further, theservice provider(as alicensedFSP) anditsrepresentativeswillbe required to comply with the General Codeof Conductfor Authorised FinancialService Providers and Representatives, 2003 andthe Determination of Fitand Proper Requirements, 2017. Timeline for compliance Comments on theDraft Declaration wererequired tobe submitted tothe FSCA by January 28 2021. The declarationmakes provision for transitional arrangements which,at this stage, envisagesa fourmonth periodwithin which

crypto assetservice providers arerequired to submit theirapplications for authorisation to act as a FSP. The transitionalperiod willcommence onthedate onwhich thedeclarationis promulgated. Thedeclaration furthermoremakesprovision for allcrypto assetservice providers (includingthose providers whohave elected not to apply to become a licensed FSP) to continue to offer financialservices in respect ofcrypto assetsduring the transition period. Service providers considering makingan application tobecomeanFSPshouldalso be awareof theprovisions relating tothe saleand purchaseofcryptoassetsasproposedin theConductof Financial Institutions Bill.

BUSINESS LAW & TAX

Inclusivity to remain top of tie-up agenda

• As in 2020, competition watchdogs are expected to keep working on making economy more diverse

Elisha Bhugwandeen & Shawn van der Meulen Webber Wentzel

In 2020,the competition authoritiesrose tothe challengeof usingcompetition lawto dealwith manyof theproblems facing the country.

Although theCompetition Commission focusedon curtailing price-gougingof consumers duringthe Covid-19 pandemic, it hasalso prioritisedusingcompetitionlawto create an inclusive economy.

Many mergerswere approved subjectto conditionsthat thefirmsinvolved must increasethe participation of smalland medium enterprises (SMEs)and firms owned byhistorically disadvantaged persons(HDPs) within markets.For instance, the PepsiCo/Pioneermerger was the firstmajor transactionin whichthepromotion of agreater spreadof ownership byworkers andHDPs was a central issue.

Otherexamples wereof commitments by merger parties tomaintain supplier and distributionarrangements withSMEs andHDPcontrolledfirms, andtopro-

videfinancial supporttoHDP farmers.

Fromthe perspectiveof conduct, theauthority has been focusingon increasing awarenessof thenewbuyer power provisionsof the Competition Act.These provisions preventdominant firms fromimposing unfair prices and/ortrading conditions on SMEs or HDP-

THE COMMISSION WILL HAVE TO GRAPPLE WITH COMPLEX DIGITAL MARKETS AND THE BEHAVIOUR OF LARGE TECH FIRMS

controlled firms inthreedesignated sectors(agroprocessing, e-commerce and onlineservices, andgrocery wholesale and retail).

Although there have not beenany high-profilebuyer power cases yet, the commissionhas startedinvestigatingbuyer powercomplaints,particularly inthe milkprocessing anddairy industry.

Several of the commission’sadvocacy initiativesin 2020 were aimedat creating inclusivityin specificmarkets. Theseincluded thepublicationof automotiveguidelinesaimed atpromoting inclusion andencouraging competition throughgreater participationof smallbusinesses and historically disadvantaged groups inthe automotive industry.

Shoprite and Pick n Pay agreedwith thecommission thatthey wouldnolonger enforceexclusivity clausesin lease agreementsagainst SMEs and specialist stores.

Several banks gave commitmentsto thecommission that they would reform their conveyancing practicesto encourage transformation in the industry.

An impactstudy reporton the forestrysector waspublished,detailing thecommission’s views on the ability of SMEs and new HDP firms to successfully participate and compete in forestry

The commission publisheda paper, “Competition inthe DigitalEconomy”, which proposes several strategicactions toachieve equitableand morecompeti-

tiveoutcomes inthedigital economy. Itis expectedthat the competitionauthorities will continue tofocus on makingthe economymore inclusive in 2021.

Merger conditions,particularly on the promotionofa greaterspread ofownership and theability ofSMEs and HDP firmsto participatein marketsmoreeffectively,will continue to playa major role. Theseconditions couldhave significanteffects, from the timingof theproposedtransaction to the way the business of themerged entity is ultimately conducted.

IT WILL BE IMPORTANT FOR LARGE FIRMS IN THE DESIGNATED SECTORS TO HAVE TRANSPARENT CONTRACTS IN PLACE

CONSUMER BILLS

Another expectedtrend willbe third-partyinterventionsin mergerproceedings, especiallywhen themerger couldaffect aparticular regionor industry(forexample, in theThabong Coal/ South 32 mergerin 2020, it was reported that a forum representing30 smallcoal mining companies attempted tointervene inthemerger proceedings).

Advocacy initiatives will continue inconcentrated industriesthat havebeen characterised by long-term exclusive arrangementsand largefirms withthe abilityto leverage their market power.

In a similarvein, more buyer power complaints againstdominant firmsare expected.It willbeimportant for largefirms inthe designated sectors to ensure they haveclear andtransparent contracts in place with their suppliers.Costs willhaveto bequantified andbuyers must be able to show why anyunfair ordiscriminatory

tradingterms havefound their way into contracts.

Significantly, thecommissionis expectedto launcha marketinquiry intodigital markets. Thecommission hasnoted thattheseinquiries providea moreeffective meansof tacklingbarriersto participation in such markets, particularlyby SMEsand HDP-ownedfirms.Thescope of this inquirycould potentially be extensive,since the commission has acknowledged thatthe digitaleconomycuts acrossall marketsin whichgoods andservices utilise an internetbase for production,distribution,trade and consumption.

The commission will have to grapple with complex digitalmarketsandthebehaviour of large technology firms, in thecontext ofthegrowing numberof concernsbeing raised worldwideagainst these firms . Although the commission’s inclusivityobjectives mayappear dauntingfor businesses,it isarguablethat theseobjectives couldalso unlock opportunities for SMEs andthe broadereconomy in2021. Forexample, if businesses developrelationships with SMEs and HDP firmsat botha supplierand customer level, it may reduce therisk ofcomplaints,while demonstrating a commitmentto transformationofthe economy.

Competition lawcould also beused to openup marketswhere largedominant firmsconstrain thesupply chain orinhibit growth.The buyer power provisions could beused bySMEs and HDP firmsto facilitateconstructive engagements with large buyers orsuppliers to avoidunfair treatment,and investment opportunities may be more readily available asmerger partiesbegin toprioritise publicinterest outcomes.

Cheques finally bounced out of payment system

The beginning of 2021 saw the demise of cheques in SA, and the paper-based method can no longer be used in the national payment system.

It is a good time to do away with this inefficient payment method no matter how much history or nostalgia may be attached to it. Cheques were used from the 9th century in Muslim countries by merchants to avoid travelling on long journeys carrying bags of coins.

These customs were adopted into the laws of all European nations, starting with France in 1673. Our own 1964 statute arose out of the English Bills of Exchange Act of 1882.

The SA act has been the

PATRICK BRACHER

bane of many law and commerce students’ lives. I found it a pleasure because it ticked a number of boxes I consider important. It is logical, in plain language, uses short sentences and few cross-references. Lawyers have not escaped the act because it was passed to govern not only cheques but also promissory notes and other conditional and unconditional payment instruments.

As soon as bills of exchange laws were enacted, the form of cheques was formalised and has existed since then in the commonly recognised form that has now met its end.

A cheque is a true example of a picture saving a thousand words. Many devices had to be used to prevent the free negotiability of cheques and prevent fraud. Cheques have been known to carry so many endorsements in favour of new holders that it became like musical chairs, with the last holder of a dud cheque having no support. The end of the cheque was inevitable in the electronic information age. More than 80% of current transactions are done by

electronic funds transfers (EFTs). Credit cards are used for most of the rest of the retail transactions, with cheques trailing far behind.

In part, the end of the cheque is another victim of the Covid-19 pandemic. Between September 2019 and September 2020, the use of cheques went down more than 50% and is falling all the time, especially as more and more people are transacting online.

The clumsiness of the system is graphically illustrated by the fact that when 9/11 occurred in New York and the airports were shut down, it materially affected the US banking system because the delivery of cheques for clearance by air couriers was suspended.

Despite that experience, the cheque is still accepted and commonly used in the US.

The UK still persists, apparently for as long as customers need them (a strange test), and Australia and New Zealand are doing away with them soon.

Interestingly, a cheque did not have to be written on paper. AP Herbert, in one of his amusing fictional UK court judgments, wrote of the “negotiable cow”, where the cheque had been written

I WROTE OUT A CHEQUE IN FULL ON THE CARDBOARD PACKING OF A SIX-PACK. THE BANK PAID IT

on the side of the animal and had to be met when the cow was presented to the bank. Following that example, when I ran out of cash at my hockey club (which was also a successful shebeen), I wrote out a cheque in full on the cardboard packing of a six-pack. The bank paid the cheque.

For those of you who are sorry to see the end of the cheque, bear in mind that anyone who reached commercial age after 2020 is unlikely to have seen a cheque, let alone used it, and will not miss it at all. Finally, don’t get too attached to the credit card.

Key trends in the workplace

• Major concern of CEOs is safety and productivity of employees

Johan Botes Baker McKenzie

Arecent survey conducted by Fortune 500 of the CEOsof 2020’s Fortune 500 listof companieslooked athowthesecompaniesdealt with the pandemic and how their CEOsare planningfor the future.

The majority of CEOs predictedthat businesstravel anda continuedphysical presencein theofficewill never returnto thelevels seenbefore Covid-19.The accelerated technological transformation oftheir organisations, experienced bythree-quarters ofthe CEOs surveyed, was cited as themain reasonforthis changing trend.

In thesame survey,the number one concernof 60% oftheCEOs washowthey couldkeep employeessafe andproductive duringthe pandemic. But more than half ofthe companiesalso expectedto employslightly fewer employees in2021 than they did in 2020, and therewasanincreasingtrend towards restructuring and redundancies inthe lastsix months of2020. Thiswill continue to addpressure to theincreasing globalunemployment problem.

Exploring creative alternatives to job losses

Theglobal pandemichas certainlybrought focusto optimal staffingin anybusiness. While redundancies abound,many employersare also keeping their gaze on the horizon to planfor the eventual upturn inbusiness. To that end, creativesolutions to job losses are finding favour.

Withasignificantlydiminishedlikelihood ofsecuring alternative employmentin theshort term,many employees are forced to be morereceptive toalternative workarrangements inan effortto staveoffredundancies. Such arrangements includesalary cuts,deferring bonuspayments andother benefits,even agreeingtoa periodof unpaidleave inan effort to retain employment.

Businesses thatcan unlockthe solutiontoretainingstaff ata costsuited tothe business mayfind notonly a repayment inemployment loyaltywhen workstarts streaming inagain, butalso trainedand experiencedstaff at theready to rampup production in no time.

Working from home

Workingfrom homeisone creativealternative thatcould assist struggling businesses or those keen to stay lean and managetheir profitability. But willthis experimentcontinue after Covid-19?

Even those wholong for the camaraderie of the office, thejoviality ofthe staffcanteenandtherecountingofthe weekendaround thewater coolerarelikelytoremember thebenefits ofourenforced working from home

Many businesses are now implementingfull orpartial work-from-home strategies, withthe viewtorequiring smallerbricks andmortar premisesfor sharedoffice spaceasandwhenstaffcome to the traditionaloffice. A smallallowance toassist employeesto setthemselves up in ahome office may makefinancial sensewhen contrasted with lease costs typicallyoneofthemajorcost elements in most businesses.

WORKER WELLBEING

Employee’s right to privacy

Employershave begunlookingat waysto monitortheir employees’ productivity in thework-from-homesetting. However, severallaws governthe monitoringof employee communications andinformation, aswellas their closely guarded right to privacy, andthere arehefty finesfor noncompliance.In 2020,several keyprovisions of the Protection of Personal InformationAct came into forcein SA,withimplications foremployees withregards tothe processingandstorage ofemployee data.Regulationsarounddataprivacyand protectionare expectedto takecentre stageacross Africa in the coming years, as the worldfully embracesthe digital economy.

The rise of the flexible workforce

Afterthe pandemic,itis expected fixed-term employment contracts will become increasinglyvaluable businesstools thatallow employersthe flexibilityto manage theimpacts ofa volatile businessenvironment. Employersare increasingly using limiteddurationcontracts tocreate certainty andlimit legalrisk in respect of staffing

Appointing employeesfor a fixed period or defined project allows employers to planfor theiremployees’ exits in advance.

Gender equalityneeds protecting

The long-term effectsof the pandemiccould havesevere implications for gender equality. Employersseeking toplaya meaningfulpartin protectinggains madefor gender equality inthe workplacehave beguntaking steps toensure thatroles occupiedby femaleemployeesreceive therequired flexibility totelecommute, where possible.

Progressive employers are already implementing equalparental leaveprovisions, irrespective of the genderofthe parent.Byallowing their partners to take time off toshare thechildcareduties, female employees should benefit fromnot onlythe

WORKPLACE

STRESS HAS BEEN INCREASING SUBSTANTIALLY FOR SOME TIME BUT WAS MADE WORSE BY THE PANDEMIC

sharedworkload butalso frombeingable totakeup employmentin roleswhere flexibleworking isnot possible.Creatingamalleable platformfor womento equallyparticipate inall sectors ofthe economywill reduce the disproportionate impact of the next crisis on those sectors of the economy withsignificantfemaleworkforce participation.

Dealingwith violenceand harassment at work

Indark timeslike these,with high ratesof globalviolence against women, employers should take timeto assess theircurrent policiesand considerwhether theyare fulfillingtheir commonlaw and statutoryobligations whendealing withviolence and harassmentin theworkplace. Some employersare going further and considering theestablishment of workplace rulesthat makeit a workplace offence to commit actsof violenceagainst women, stating employees who are convicted of genderbasedviolent crimesmaybe dismissed, evenif thecrime tookplace awayfromthe workplaceand againsta private person.

Diverse and inclusive teams In the rapidlychanging environment,a successful diversityand inclusion(D&I) programmeis animportant partof any resilience and recovery strategy. Diverse and inclusivecorporate cultureslead toincreased productivity andmeaningful employee engagement, which offer immensevalue to businesses.

D&I fosters innovative participation, whichgives rise toa confluenceof creativeideas arisingfromthe richnessof differentbackgroundsand experiences,all ofwhichworktogetherinthe formulationof solutionsto

businesschallenges andidea generation. Simplyput, diverse spacesultimately lead tobetter outcomesthan homogenous spaces. As such, conscious and forward-looking businesses considerD&Itobeameasure oftheir successandindispensable totheir overallsustainability.D&I isfirmlyon theagenda ofmostorganisationsand businessesaround the world.

Stress management

According to asurvey by mental health service providerGinger,nearlyseven in10 employeessaidCovid19 was themost stressful thingto happento themin their careers to date. Workplacestress hasbeen increasing substantially for some timebut wasmade worseby thepandemic, whereemployees oftenfelt isolatedand anxiousabout thepossible physical,social and economic consequences of the virus.For businesses andteam leaders,managing thisstress viaworkplace healthand wellbeingprogrammeshasbecomeabusiness imperative.

Attentioncapital isrunning dry

Attention capital defined as employees’ ability to focus on value-creatingwork is sufferingdue an “always online” environment. Employees,now morethan ever,are being bombarded withinformation fromwhich there is no escape. This is havinga detrimental effect onan employee’s ability toget the jobdone and drasticallyimpacts onfatigue and burnout.

Protection from bombardment mightinclude limiting unnecessarycommunications, implementing mindfulness programmesor setting asidedays forstaff to focus on special projects.

Great strides by Sars in overhauling voluntary disclosure

Joon Chong & Wesley Grimm

Webber Wentzel

During2020,theSARevenue Service (Sars)embarked on anextensive overhaulofthe Voluntary Disclosure Programme (VDP)process with stakeholders, including tax practitioners and taxpayers.

The VDPprocess isa legislated meansfor taxpayers to voluntarilyapproach Sars toregularise theirtaxaffairs andpayadditional taxtoSars after adefault. Adefault may arise whenincomplete or inaccurate information has been submitted to Sars or

when a taxpayerhas failed to submit relevant information

Thedefaultmust resultinan understatement oftax payable.The VDPprocess is a unique opportunityfor Sars toincreasecollectionsastaxpayers arevoluntarily offeringto giveit additionaland much-needed revenue.

To assistSars with overhauling the VDP process, we and otherpractitioners as well asrepresentatives from industry bodiesparticipated in Sars’ Voluntary Disclosure Programme FeedbackSurvey for 2020and in workshops and contact sessions. The opportunityfor tax

practitionersandtaxpayersto engage with Sars on practical issues in relationto the VDP process wasvaluable. The persontaskedwith thejobof overhaulingtheVDPprocess, Nicholas Nemalili,consistently andcontentiously engaged with us. In our most recent contact sessions withSars during September and October 2020,it wasableto givefurther positive feedbackon the strides madein overhauling the VDPprocess. Sars informed usthat nearly three-quarters ofthe historical backlog in the VDP process has been cleared and

where mattersremained unresolved thiswas primarilydue tooutstandinginformation fromtaxpayers; and more than halfof VDP matters submittedto Sarsduring 2020 hadalready been resolved. Sars’ progress in this regard is noteworthy.

PRE-SCREENED

During these engagements, Sarsalsoprovidedinsightson how VDPapplications are now pre-screenedto determineifthey mayberesolved on an expeditedbasis. This enhancement alonestands to significantly improverevenuecollectionsand istobe

welcomed. Nemalili did,however, caution taxpractitioners that allVDPapplicationsarescrutinisedin detailandwhere questions areraised or requests foradditional information made,it isbecause such requestsusually havea direct, positive impacton the amount ultimatelyassessed as part of the VDP process.

Simply stated, the relevant Sars official taskedwith processing aVDP application applies theirmind toall aspects of the application.

Furthermore, whena taxpayer is dissatisfied with the outcomeof aVDPprocess,

they mayrequest that Sars review that decisionin terms of section 9of the Tax Administration Act, 2011. Sars’s, and Nemalili’s, candour inacknowledging andengaging withtaxpractitioners andtaxpayers on issues regardingthe VDP process is adecisive departurefromthestatusquoanda step in the right direction towards anenhanced and more “taxpayer-friendly” VDP process.

Given Sars’ constrained collections, thegreat strides made in overhauling the VDP process wereoverdue and necessary.

BUSINESS LAW & TAX

Africa must protect animals

• Policy makers should address the damaging loopholes in protection laws in their

Brittany Dodds, overseen by John Bell Baker McKenzie Johannesburg

The cruel treatment and killing of African wild animals has decimated them,and the continent is cryingout for standardised guidelines on animal welfarethat follow international best practice.

Africancountries suchas SA, Kenyaand Nigeria became signatoriesrecently to the AfricanUnion’s Animal Welfare Strategyfor Africa, (AWSA) launchedin 2017.

AWSAsetoutafive-yearplan for animalwelfare inAfrica witha visionof onewelfare system for animals in Africa that treats animals as sentient beings.Butanimal-protection legislation inthese countries is not yetstandardised. Some legal frameworksafford more protectionthan others, and there are major regulatory omissionsand loopholes that shouldbe addressed urgently.

Globalanimal rightsand animal welfare organisations existtoensureanimalsdonot suffer needlesslyin thatthey areconsidered tobesentient beings, capableof suffering and worthy of protection.

The welfare ofan animal isconsideredtobegoodifitis healthy, comfortable,wellnourished, safe,not suffering pain,fearor distressandable toexpressbehavioursimportant for itsmental and physical state.

Guidelinesexist toensure that these rights are afforded

toanimals.TheWorldOrganisation forAnimal Health (OIE) overseesanimal health and treatmentstandards for the WorldTrade Organisation. The OIE has implemented internationalstandards, including one code and two manuals thatprovide guidelines forthe treatmentof terrestrial and aquatic animals.

Whilethecodesandmanuals traditionally addressed animal healthand zoonoses (diseases orinfections that transmit fromanimals to humans), theywere expanded recentlyto coveranimal welfare, animal production and food safety.

OIErecognises fivefreedoms affordedto animals,

MANY COUNTRIES AROUND THE WORLD HAVE THEIR OWN ANIMAL RIGHTS AND WELFARE WRITTEN INTO LAW

including freedomfrom hunger, thirst and malnutrition; fearand distress;physical and thermal discomfort; pain,injury anddisease;and thefreedom toexpressnormal patterns of behaviour.

Many countriesaround the world havetheir own animal rights and welfare written into lawand are members of the OIE, including in SA.

SA hasimplemented animal protection acts criminal-

countries

isingcrueltyagainstdomestic and wild animals, regardless ofwhethertheyareincaptivity or under human control.

This includesthe Animal Protection of 1962 (Animal Protection Act) and the Amended PerformingAnimals Actof 2016,which requires alicence forany organisation that trains animals for exhibition or performance purposes.

There aremore than100 animal welfare societies in SA, andwhile theagriculture, landreform &ruraldevelopment (department) has the overriding responsibilityof enforcing these laws, animal welfare societies have expressed their concern that important omissions exist in the legislation governing animalwelfare,suchasthetrade in wildanimals andanimal trophies.

The absenceof legal guidelines and vague guidelines have resulted in complexandperennialchallenges fortheprotection ofSA’s wild animals.

With the strokeof a pen, the contentiousAnimal Improvement Act of 2019 (AIA) waspromulgated, reclassifying 32 wild animals as farm animals, including lions and rhinos.

On the face ofit, the AIA seems innocuous. However, it isarguably notin linewith the country’s constitution, which affords animals rights and protection. Neither does AIAuphold theguidingprinciplesoftheOIE.Asnoprovision in theAIA protects the welfare andhealth ofwild

animal when incaptivity, and with thedefinitions of “wild”, “wild management” and “captive” now having been redefined, the resultant loopholes have caused concern around the laundering of wild-sourced live animals, thetradeinanimalbodyparts and the increase in wild animals living in captivity.

Examples ofthe lawful exploitation of animals include canned lion hunting and the widely condemned trade in rhino horn.

Failure toallow public participation that would have afforded interestedparties and organisations the opportunity to engage and consult with the government before giving effect to AIA, as well as thefailure toobtainscientific research, is concerning, and does notbode wellfor the

futureprotection ofwild animalsinSA. Whatiseven moreconcerning isthe recently proposed amendment to the Meat Safety Act that will legalise the slaughter ofrhinos, hipposandgiraffes forhuman andanimal consumption.

As African organisations begintorecoverandbuildthe necessaryresilience tosuccessfullynavigate theCovid19disruption,a focusonthe environmental, social and

GLOBAL ANIMAL RIGHTS AND ANIMAL WELFARE ORGANISATIONS EXIST TO ENSURE ANIMALS DO NOT SUFFER NEEDLESSLY

corporate governanceis proving to beessential for long-term success.

After the pandemic, we expectinitiatives inAfrica will have a heightened focus onimprovingAfrica’scapacity forgreen, low-carbonand sustainable development, withwildlife protectionbeing akey focusof suchinitiatives in the continent. It is thereforeessential for businesses operating in Africa toensure theyhave their ownanimal-protection principles in placethat follow international guidelines, regardlessof currentregulatory frameworks in Africa. Policy makers in Africa shouldaddress thedamaging loopholesin animalprotectionlaws intheir countriesto ensure environmentaland economic sustainability.

Numerical targets key to equity act tweaks

Jonathan Goldberg Global Business Solutions

Critical fororganisations are the amendmentsthat were tabled andapproved by Cabinet inFebruary 2020 concerning theEmployment Equity Act.

In July 2020, the employment &labour ministerpublishedthatthebillwouldgoto theNationalAssemblytostart the parliamentaryprocess. The NationalAssembly then put the bill outfor the public tocomment andtheprocess is coming to finalisation. What dothe amendments propose?

The mostsignificant amendment tothe proposed Employment EquityAct is section 15,which empowers the ministerto prescribe

numerical targetsfor sectors at all occupationallevels to ensure theequitable representation ofsuitably qualified people from designated groups.

This is followed by section 42, which deals with the assessment of organisational compliance. Specifically,section42 dealswith ifthe employer iscomplying with numerical targetsprescribed in that sector by the minister.

Finally, section 53(6) is a listof fivecriteria anemployer must meetto obtain a compliance certificate.Key to thisissection 53,whichhas alwaysbeenintheactbuthas notbeen operational.Itwill be put intoeffect by these amendments. Thiswill mean state contracts mayonly be issued toemployers who

havebeen certifiedasbeing compliant withthe obligations underthe Employment Equity Act. One of these is the requirement toachieve the above numeralsector targets prescribed by the minister. Whatdoes notattaininga compliance certificate mean?

Not attaininga compliance certificate wouldmean these businesses would notbe able to do businesswith the state.

SECTION 53(6) IS A LIST OF FIVE CRITERIA AN EMPLOYER MUST MEET TO OBTAIN A COMPLIANCE CERTIFICATE

Currently, broad-based BEE status ismeasured interms of thePreferential Procurement Framework Act in relationtoa10%and20%evaluation of the totalscore. This is dependent onthe monetary amount ofthe tender.Should this amendmentgo through, it willhave far-reaching implications forthose sectors that have not achieved these targetsand arenot gettinga certificate.

Whatiscritical isthatsection 42 isnot definitive enoughand doesnotcontain aclausethatwouldrecognise reasonable stepstowards the employer achievingthe applicable targets.

Intermsof section64,the draft regulationsmake provision for adesignated employer who applies for a cer-

tificateofcompliance to be but has not achieved the applicable targets to record justifiable reasonsfor not doingso. However,it isnot goodenough tohave thisin theregulations asit needsto be in the act.

In addition,it actively empowers theminister to delegate hisauthority of compliance toinspectors. This couldlead tofar-reaching powers for inspectors.

The fivecompliance criteria in section 53

Interestingly,if onelooksat section53ofthebill,thereare fivecriteria ofcompliancefor a certificate of compliance:

● The employerhas complied with anumerical target setin section15A thatapplies to that employer.

● If an employerhas not

complied withany targetset, the employer has raised a reasonable ground,to justify its failure to comply as contemplated by section 42(4).

● The employerhas submitteda reportinterms ofsection 21.

● There has been no finding bytheCCMAoracourtwithin the previous three years that theemployer breached the prohibition on unfair discrimination in chapter 2.

● The CCMAhas notissued an awardagainst the employer inthe previous three years for failing to pay the national minimum wage. These amendmentswill have far-reachingconsequences if they are passed into law and potentially some significant unintendedconsequences.

BUSINESS LAW & TAX

Antitrust bodies kept busy

• Covid-19 brought claims of excessive pricing, while cartels remained in watchdog’s sights

Heather Irvine Bowmans

Lastyearwasabusy

one forthe SA competition authorities, and 2021lookssettobe justasactivefortheCompetition Commission,as itcontinues to play akey role in efforts to createmore competitive marketsand foster greater economic inclusion.

Oneof thecommission’s mainpriorities in2020was the investigationand prosecutionof firmsaccusedof excessive pricing, following the publication bythe trade, industry &competition ministerin mid-Marchofregulations aimed at curtailing price gouging onessential medical and food items.

The commissionreported thatit handledabout1,800 investigations, withcompanies eventually agreeing topay R9.3minadministrative penaltiesand R5.6m in contributions to the Solidarity Fund.

After the tribunalfound a small Pretoria hardware company guiltyof increasing prices onnonmedical masks and fined it R78,000, the Competition AppealCourt (CAC) upheldthe findingof excessive pricing,but set aside the fine. Though the decisionwas basedonthe factual circumstancesof the pandemic, itwas decided under thenormal provisions ofthe CompetitionActrather than the Covid-19 rules This is thefirst case in which theamendments to theexcessivepricingprohibi-

tionin section8of theact have beenapplied, including the newrequirement that if a prima faciecase of excessive pricingis madeout, the dominantsupplier is required toshow itsprice was reasonable.

Theapproachtakenbythe CAC may wellbe applied in future complaintsto prosecutesupplierswhoraisetheir prices withoutgood reasons for doingso. Thedecision suggests eventemporary dominancemaybeabasisfor a prosecution,which signals a riskof excessivepricing complaints evenfor firms that don’tgenerally consider themselves to be “dominant”

Excessive pricing, particularly bylocal monopolists pricing aboveimport parity, islikelyto continuetoattract complaints. Forexample, the commission isinvestigating a complaint laid inlate 2020 by thesteel industryassociation, Neasa,which alleges excessive pricingby Arcelor Mittal SA.

Ingeneral, however,aside from theCovid-19 prosecutions, settlementsand successful prosecutionsof dominant firms werefar less common in2020. Latelast year, forexample, theCAC overturned thedecision of the tribunal that Uniplate (one of the twomajor suppliers of number-plate blanksand the machines usedto emboss number platesin SA)had abused itsdominant position by tying the supply of number-plate blanksto its embossing machines. It remainsto beseen whether theamendments to

LETTER OF THE LAW

the CompetitionAct improve either the speed orthe rate of successful prosecutionsof dominant firms. However, the commissionhas clearly speltoutitslikelyapproachto boththe newpricediscriminationand abuseofbuyer power restrictionsin draft guidelines,anditseemslikely the commission will be looking out forsuitable complaints to test these powers. Dominant buyers and sellers shouldreview their commercial agreementsand practices, particularlyif they sell to, or buyfrom, small and medium enterprisesor historically disadvantaged firms.

Itisalso likelythecommission willcontinue to tackle pricingand business practices thatare perceived as “unfair”orwhichhavedisproportionately harsh effects onsmallerfirmsorpoorconsumers,throughmeansother

IN THE MOBILE DATA MARKET INQUIRY, THE COMMISSION RECOMMENDED A SERIES OF REGULATORY CHANGES

than formal complaints.

Forexample, in2020the commission issuedfinal guidelines on automotive aftermarkets which,though not legallybinding, suggest original-equipment manufacturers shouldadopt measurestoallowforsmall,independent andhistorically disadvantaged service providers to repairvehicles; encourage more historically disadvantaged peopleto owndealerships; andensure thefair allocation of repairwork by insurers.

In the mobile data market inquiry, thecommission recommended a series of regulatory changesto address concentration inwholesale and retailmobile markets. The commissionalso reached settlementswith all ofthemobilenetworkoperators(not justthedominant operators), which,inter alia, reduced mobiledata prices on certainlow-volume data bundles.

Market inquiries are potentially aswifter and more cost-effectiveway for the commissionto tackle structural features,in particular sectors of the economy that hamper competition. Agreements were also

reached withgrocery retailers to phase out clauses in shopping centreleases that prevented smallerretailers from enteringthese centres for extended periods of time.

Theamendments tothe acthave furtherextendedthe potentialeffect of these market inquiries,particularly in sofar asthe commissioncan make recommendations directly tothe Competition Tribunal foran appropriate order totackle concerns identified in the course of a market inquiry.

These new provisions haveyet tobe testedbefore thetribunal ortheCompetition Appeal Court.

Cartelsremained afocus for the commission in 2020, with thetribunal confirming 18 settlementagreements as consent orders, involving administrative penalties of R10.5m.This isasignificant reduction from the 25 cartel consent ordersconfirmed in 2019 (totallingR120m), perhapsreflectinga shiftinthe commission’s focusto deal with thesubstantial number of Covid-19excessive pricing complaints.

CARTEL CONDUCT

The commissionfailed to sustain allegationsof cartel conduct in anumber of longrunning prosecutionsin 2020, includingagainst NPC in the cement cartel case; against I&J in a complaint aboutalleged divisionofbeef product markets;involving Stuttafords andothers inthe furniture removalcase; and several companiesthat suppliedoffice stationerytogovernment departments.

Inthe complaintagainst Tourvest Holdingsand Trigon Travel relating to a government tendersfor flightsand accommodation for mem-

bers of parliament, the commission basedits caseon, among other factors, that the bidprice wasidenticaland thebids weresubmittedon the sameday. However,the tribunal dismissedthis complaint, on the basis this circumstantial evidencealone wasnotenough tomeetthe onus on the commission to prove allegationsof cartel conductonabalanceofprobability.

It seemslikely thatin additiontoactingoninformation fromapplicants for leniency in termsof its Corporate LeniencyPolicy, the commission willintensify its investigations beforereferring cases to the tribunal. Though it has been several years sincethe commission conducted a dawnraid, this remains apowerful weapon in the commission’s arsenal. Punishing collusion is likely toremain highon the commission’s agenda in 2021, particularlyin industriesthat supplythe stateand government departments.

Followingthe CAC’s decision on the scope of the commission’s jurisdictionin the complaint about forex trading against variousforeign and localbanks,we mayseethe commission tacklingmore complaints involvingcrossborder cartels

The developments in 2020 signalwe should expect evenmore intensive competitionlawenforcement in 2021,particularly asthe country begins vaccinations, the economy returns to normal activitylevels and pandemic-related cases reduce. Comprehensive and effective competitionlaw compliance policies remain a crucialdefensive mechanism forcompanies doing business in SA.

Formal inquiry not mandatory for axing

Bradley Workman-Davies Werksmans

Labour relations andthe fairnessstandards fordismissal ofan employeein SAhave long been centredaround the formalityof disciplinaryor incapacity inquiry processes, andthetradition oftheuse of these processeshas builtup anexpectation thattheyare mandatory.

However, not only is this not the correct approach in termsof theLabourRelations Act, 66of 1995(LRA), but recentcaselawcomingoutof anumber ofdiverseforums isdemonstrating agreater acceptance on thepart of commissionersand judgesto acceptthata lessformal,less

rigorousapproach isjustified, andespecially wherecompelling circumstances exist.

Inthe recentbargaining councildecision ofNational Union ofFurniture &Allied Workers SA onbehalf of Javulani/Dreamworx Bedding(Pty) Ltd,theFurniture Bargaining Councilagreed that an employee who had incited violencein theworkplace, bullied colleagues, abusedfemale staffand threatened the livesofcolleagues, especiallyhaving madeexplicit deaththreats against foreign employees, hadbeen fairlydismissed even without a formal disciplinary inquiry being held or theemployee beingformally notifiedof theholding ofa

meetingtodiscusstheallegations against him.

In thiscase, theemployer calledameetingtohearcomplaintsagainst theemployee, andthen calledasecond meetingat whichthe employeewas presentwhen thesecomplaints werepresented.

Theemployee didnot challenge thesecomplaints, otherthantoallegetheywere all lies. In the face of the consistentversions presentedby hiscolleagues, thiswas demonstrably untrue.Was theemployeeentitledtoinsist ona formalinquiry andto receive notice to prepare?

Not necessarily, since, Item4of Schedule8ofthe Code ofGood Practiceon

Dismissals providesthat “normally, the employer shouldconduct aninvestigationto determinewhether thereare groundsfordismissal. This does not need to be a formalinquiry. The employershould notifythe employeeof theallegations usinga formandlanguage thatthe employeecanreasonably understand.

“Theemployee shouldbe allowedan opportunityto stateacaseinresponsetothe allegations. The employee should be entitledto a reasonable time to prepare the response and toassistance of atrade unionrepresentative or fellow employee.”

Itis importantto notethe scheduleprovides thatordi-

narily the investigation should beconducted, butthe corollaryisthatifthecircumstancespermit, suchas wherewitnesses maybe intimidatedor wouldotherwisenotbe willingtoparticipatein a courtroom-style inquiry, this can be forgone. Also,ordinarily theemployee shouldbe givenadvance noticeofthe process,butitis clearthatwhere thematteris relatively uncomplicatedand theemployee couldbe expectedto providea responseto thecomplaints againsthimorher,thereisno reason why aformal notice period of not less than 48 hours has tobe presented to the employee.There isno reasonwhy theemployeein

Dreamworx wouldhave beenunable torespond tohis accusers in the meeting in which he waspresent. The Furniture BargainingCouncil correctlyfound thatthedismissal was fair.

Employersshould, inlight of this andother cases, be aware that strictformality is notalwaysrequired,andprovided theprocess isfair fairness mustalso bemeasured in respectof the employernot justthe employee,and theemployer shouldnotbe exposedtoan unnecessarily formal,costly or time-consuming process to discipline an employee the employee canbe dismissed withoutrecourse against the employer.

BUSINESS LAW & TAX

Hesitate before you vaccinate

• Law does not exist for employers to force staff to take vaccines, so the constitution comes into play

Mehnaaz Bux & Shane Johnson Webber Wentzel

With the imminent arrival of SA’s first batch of Covid-19 vaccines, many employers areconsidering the vaccinationpolicies they need to put inplace in the workplace.

Wecaution against implementing amandatory policy requiring allemployees tobe vaccinated.

Beforethe arrivalof Covid-19, vaccineswere primarily necessary atbirth to prevent life-threatening infectious diseasesthat have high mortalityin children, such asmeasles. Although the departmentof health strongly encourages parents to ensure children are vaccinated, thesevaccinations are not compulsoryunder the law.

AfterCovid-19, andwith the rollout ofvarious Covid19 vaccines,an important question is whetherSA has legislation thatmakes vaccination compulsory. Although yellow fevervaccinations are

compulsory fortravel to certain countries,there is currently nosuch legislation Given thelatest announcements byhealth minister Zweli Mkhize,we considerit unlikely thatthe government will enforcea compulsory vaccination regimefor SA citizens.

It iswithin thiscontext that employers need to consider workplace Covid-19 vaccination policies.

Employershave alegal obligation toprovide and maintain(asfarasreasonably practicable) asafe and healthy working environment foremployees. Despite this obligation, SAlaw currently does notimpose any legalduty orobligationon employers toprovide or enforce vaccination Employerswho seekto enforce acompulsory vacci-

OBLIGING EMPLOYEES

TO BE VACCINATED MAY LIMIT ONE OR MORE FUNDAMENTAL RIGHTS IN THE CONSTITUTION

nation regime for employees shouldconsiderthefollowing important aspects:

Constitutional rightsof employees: Obliging employees tobe vaccinatedmay limit oneor morefundamental rightscontained inthe constitution, particularly section12 (freedomandsecurity of the person) and section 15 (freedom of religion, belief and opinion).Although itis possible for theserights to be limited, thatlimitation hasto be reasonable and justifiable andvarious factorsneedto be considered:

● The nature of the right;

● The importance and purpose of the limitation;

● The nature and extent of the limitation;

● The relationshipbetween the limitation and its purpose; and

● Less restrictive ways of achieving the same purpose. However, it maybe possible for employers to argue that section11 (rightto life) andsection24 (righttoan environment that is not harmful to healthor wellbeing) canbe usedto support a compulsoryvaccination regime for employees.

Dueto theinterplayof

INOCULATION ISSUES

constitutional rights involved, the issue of workplace Covid-19 vaccinationpolicies may ultimately endup before the Constitutional Court for determination. This determination will involve a balancing exercise, with employer obligations and responsibilities towards employees on the one handand employee rights on the other.

Apart fromthe constitutional rights of employees, employers should also bear in mind certainsections of the relevant employmentrelated legislation, such as:

● Section 187(1)(f) of the Labour Relations Act66 of 1995,which dealswithautomaticallyunfairdismissalson account ofdiscrimination (including on groundsof religion, conscience, belief, political opinion, and cultural or arbitrary grounds);

● Sections 5 and 6 of the Employment Equity Act 55 of 1995,whichoffersimilarprotection to employees against unfair discriminationby employers.

Practical implementation and costs: From apractical

perspective, it should be noted that theSA government is currentlythe sole procurer and distributor of Covid-19 vaccines. It will thereforenot bepossiblefor employers to launch an onsite vaccinationdrive atthe workplace. Accordingly,at the present time mandatory

THE

SA GOVERNMENT IS CURRENTLY THE SOLE PROCURER AND DISTRIBUTOR OF COVID-19 VACCINES

vaccination is a nonstarter. Theotherissueisthecosts associated with the vaccine. Once the vaccinesare more easily availableto thepublic, if an employer requires employees to be vaccinated before theyare allowedto return to theworkplace, it will have to cover the costs of procuring and administering those vaccines.

Employers shouldalso be aware that a compulsory vaccination regimefor employees will involve a consideration ofvarious other additionalissues, including but not limited to:

● Changestotermsandconditions of employment and reaching agreement with employees on those changes;

● Personal information management ofvaccination records/history submittedby employees;

● Reputation management issues (such as employers who employ large workforces and do not seek to make vaccinationcompulsory facing public criticism for failing to do so).

Workplace Covid-19vaccination policies involve a host of legal considerations. There is a need to balance various competing rights and interests.

Itisthereforeadvisablefor employers who are contemplating the implementation of a compulsory vaccination programme to seek legal adviceon whetheritwould be permissible to do so.

Shift on loop structures will help SA grow

Dr Albertus Marais AJM Tax

There has beena longstanding need almost since the introduction of exchange controls to this country in 1961 forthe prohibition of so-called “loop” structures to be lifted.

These structureswere not always usedfor nefarious tax-related purposes and couldresult inmanylegitimate instances,for example, among entrepreneurialbusinesses seekingto expand withthehelp offoreigndirect investment.

It wasoften thecase that legitimate, nontax-related reasons existedwhy investments fromoffshore were soughttobe madeinthis country, yetthey became hamstrung dueto that

investor havingsome distinct indirect SAinterests held in it.

Loop structures would generally involveSA exchange controlresidents holdinginterests inSA assets viaanoffshorestructure,beit throughanoffshorecompany or trust.

Previously, theseregimes were the subject of strict regulation and “loop structures” would only be allowed in limited instances,such as where SAresidents held shares in aforeign company that heldinterests ofup to 40%of aninvestmentback into SA.

The prohibitionexisted to address taxavoidance being perpetrated throughusing such structures,predominantly SA capital gains and dividend taxes.For example,

ifanSAindividualwouldhold sharesin anSA firm through a Mauritian entity, the Mauritianentity wouldhavebeen able to receivedividends and realisegains onsaleof theSA sharesata muchreducedtax cost, comparedto wherethe SA individualheld those shares directly.

BANK DECISION

The recentpolicy decisionby the ReserveBank, therefore, is to be applauded. This move came in Januarywhen the Bank’s financialsurveillance department publishedits first circular of theyear, ending the long-standingexchange control prohibitionof these structures.

The mostencouraging aspectof thechangeis thatit should supportSA’s growth as an investment and finan-

cial hub for Africa, and encourage investments into this country.

The changeshave been effected throughamendments tothe Currencyand Exchanges Manualfor Authorised Dealers.

Under theamended subsection(l) ofSectionB.2(B)(i), itis madeclear thatexisting unauthorised loopstructures (that is,created byindividuals prior to January 1 2021) and/or unauthorisedloop

WHAT IS THEREFORE IMPORTANT IS THAT THE RELAXATION APPLIES ONLY TO LOOP STRUCTURES

CREATED FROM JANUARY 1 2021

structures wherethe 40% threshold was exceeded, must stillbe regularisedwith the financialsurveillance department. What istherefore importantis thattherelaxation appliesonly to “loop structures” created fromJanuary1 2021; it doesnot cater for unauthorised “loop structures”thatexistedbeforeJanuary 1 2021. It also only applies to people who are bothSA tax and exchange control resident. Intermsofapolicyreconsideration, communicatedby the financeminister during the 2020 budget,the government took adecision to no longer combattax avoidance throughthe useofexchange controls,buttooktheencouraging decision ratherfor tax avoidance tobe addressed

through taxavoidance legislation. In accordancewith new government policy, exchange controls shouldbe employed primarily to protectthe rand; tax legislationshould be developed totax “loop structures” more effectively. In advancingthis policy narrative, thegovernment has introducedtax legislation over the pastfew years to more effectivelytax both direct SAshareholdings in offshore companies,as well asdistributions oftrustcapitalfrom offshoretrustsin low-tax jurisdictions. With SA’seconomy under significant strainand the fiscus undergrowing pressure, it is encouraging to see investment intoSA will receivea fillipasa resultof the amendment.

BUSINESS LAW & TAX

DUES DATE

Ruling sheds light on VAT on imported services

The Court of Appeal recently delivered its findings on the claiming of VAT incurred as an input tax deduction and the raising of VAT on “imported services” in Consol Glass (Pty) Ltd v The Commissioner for the SA Revenue Service (1010/2019) [2020] ZASCA 175 (December 18 2020).

The court had to consider whether VAT incurred on local services acquired relating to a debt reorganisation could be claimed as an input tax deduction. And, whether VAT on foreign services acquired for the same purpose should be subject to VAT on imported services.

Consol Glass manufactures and sells glass containers. In 2007 Consol (at the time a shell company) was part of a company restructuring and undertook debt reorganisation in terms of which it ultimately issued Eurobonds. To hedge against a possible weakening of the rand, Consol also entered into hedging arrangements. The hedging was entered into since the debt was denominated in foreign currency while the business conducted in SA was in rand.

In the years after 2007, Consol experienced a cost in debt increase which needed to be dealt with. In 2012 Consol entered into agreements with a consortium of banks which effectively swapped the foreign currency debt or exposure for rand debt or exposure. The pre- and postdebt refinancing left the primary business of Consol completely intact, namely to sell glass containers.

Consol claimed the VAT on local expenses incurred relating to these

FERDIE SCHNEIDER

reorganisations as “input tax” for VAT purposes. In addition, Consol did not account for VAT on imported services on the acquisition of foreign services relating to these reorganisations. Both these VAT treatments indicate that Consol viewed these transactions and expenses as directly relating to the making of taxable supplies.

The SA Revenue Service (Sars) raised assessments on the claiming of the input tax deductions and imposed VAT on imported services, on the basis that the expenses were not incurred to make taxable supplies. Sars argued that the raising of finance was not part of Consol’s business as was the manufacturing and selling of glass containers. Consol objected against the assessments. Sars

THE PRE- AND POSTDEBT REFINANCING LEFT THE PRIMARY BUSINESS OF CONSOL INTACT

disallowed the objections. Consol appealed to the Tax Court and the court dismissed the appeal, but for a 10% penalty imposed by the commissioner.

To assess the first issue, namely claiming VAT on expenses incurred as an input tax deduction, the definition of “input tax” needs to be considered. The VAT

IN THE BUSINESS OF GLASS

Act defines “input tax” as “(a) tax charged under section 7 and payable in terms of that section by (i) a supplier on the supply of goods or services made by that supplier to the vendor; where the goods or services concerned are acquired by the vendor wholly for the purpose of consumption, use or supply in the course of making taxable supplies ”

The court found that this requires answers to two questions: What was the purpose for which Consol acquired the services? And, second, did Consol acquire the services in the course of making taxable supplies?

The court found that Consol did not acquire the services in the course of making taxable supplies.

To assess the second issue, namely whether VAT on imported services should be declared and paid on foreign services acquired, the definition of “imported services” needs to be

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considered. The VAT Act defines “imported services” as “a supply of services that is made by a supplier who is resident or carries business outside of the Republic to a recipient who is a resident of the Republic to the extent that such services are utilised or consumed in the Republic otherwise that for the purpose of making taxable supplies”

The second issue as with the first inquires whether the services were acquired in the course of making taxable supplies. The court found that Consol did not acquire the services in the course of making taxable supplies.

The court also considered and rejected what it termed Sars’ “exempt supply submission”. Sars argued that Consol issued a “debt security” which, for VAT purposes, is an exempt supply. The court rejected this argument on the basis that “Consol is simply not a vendor of financial services.

It registered as a vendor in respect of the enterprise upon which it engaged, that is, as manufacturer and seller of glass containers and so it remained.”

The court also found that the refinancing (2012) did not have a functional link by reason of the cost savings it caused, and did not link to the making of taxable supplies.

The court in effect found that the original company restructuring and raising of capital through the issuing of Eurobonds (2007) and the subsequent refinancing through the local bank consortium (2012) were not done in the course or

THE SECOND ISSUE INQUIRES WHETHER THE SERVICES WERE ACQUIRED IN THE COURSE OF MAKING TAXABLE SUPPLIES

furtherance of making taxable supplies and that no input tax should have been claimed and that VAT on imported services should have been paid.

The fact that the court found the funding raised did not comprise a debt security issued by Consol (and did not explore any other supplies) seems to indicate the court identified no supplies made by Consol in relation to the financing and refinancing and that the local VAT incurred and VAT on imported services related to no supplies and did not relate to the making of taxable supplies.

The court also only applied a close connection test (immediate purpose) between VAT incurred and the making of taxable supplies and did not apply the so-called “ultimate purpose ” test.

● Dr Ferdie Schneider is CEO of Sta Konsult.