Search:  
Gauteng Business News
2962
VIEWS

Send  Share  RSS  Twitter  18 Mar 2011

LAW: Johannesburg Tax Court Finds Sars Out Of Line

 





Recent Gauteng Business News

The Johannesburg Tax Court recently dealt with an attempt by the South African Revenue Service (SARS) to disallow the deduction of certain marketing and management fees paid by a subsidiary to its JSE listed holding company.

The two companies involved were both South African, so this case did not involve an application of the transfer pricing provisions. SARS instead argued that the fees were excessive and therefore were either not incurred in the production of income, or were not expended for the purposes of trade. SARS also contended that the fees were calculated to take advantage of the holding company’s assessed loss.

The subsidiary company (Op Co) was involved in the mining of fluorspar. It became a wholly owned subsidiary of its holding company (Hold Co) in 1999. Shortly after the acquisition, marketing and management agreements were concluded between Hold Co and Op Co. The court applied the same principles in considering both agreements, so only the marketing agreement will be mentioned in this article.


In terms of the marketing agreement, Hold Co was appointed as the sole marketing agent of Op Co. An up-front fee of R3 million was paid by Op Co, followed by monthly fees of R200 000 (escalating annually by 10%). Hold Co appointed sub-agents to assist with the performance of its obligations under the marketing agreement.

The court recognised that arrangements between holding companies and their subsidiaries are amenable to manipulation and exploitation. It also recognised, however, that the effective functioning of many subsidiaries is utterly dependent on their holding companies. The court found that each case must be decided on its own merits.

In this case, the court found that the reasons for incurring the fees were legitimate. Hold Co did also provide real assistance to Op Co, which gave the necessary substance to the arrangements. The court, having reviewed the relevant case law, confirmed that it is not for the courts (or SARS) to say with the benefit of hindsight, that expenditure is not deductible because it was not strictly necessary or that it was not as effective as it could have been. The purpose of the expenditure is more important.

The court then also considered the quantum of the fees and found them to be in line with industry norms. In fact, it was found sufficient that they were not so devoid of commercial rationality, that it could be said they were induced by a motive other than the production of income. The court also stated that taking advantage of an assessed loss is not inherently wrong.


 
 
 
ohse-consultancyperfect-weddingBusiness ProfilesHBC-Solutionsdecor-and-furniture
 
   
 
 
 
  Accomodation
Accommodation


Online Foreign Exchange
Foreign Exchange


Directory
Directory


Fax
Fax 2 Email


Finance
Finance


Furniture
Furniture


Casino
Online Casino


Restaurant
Restaurant


Auctions
Shop Online


Study IT
Study IT Online


Web design
Web Design


Weddings
Weddings


Work
Work from Home
 
 
 
 
 
Company News
 
 

 

© 2019 www.gbn.co.za. All rights reserved.

Daily Newsletter Subscription

 

Subscribe to the Gauteng Business News Daily News and information email (it's free).

Thank You
Your email address has been added.

Name:
Email Address: