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[2018] ZAGPJHC 720
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BMW South Africa (Pty) Ltd v Commissioner for the South African Revenue Service (A553/16) [2018] ZAGPJHC 720; 81 SATC 157 (28 June 2018)
REPUBLIC OF SOUTH AFRICA
THE
HIGH COURT OF SOUTH AFRICA
GAUTENG
LOCAL DIVISION, JOHANNESBURG
Case
No A553/16
BMW
SOUTH AFRICA (PTY)
LTD
Appellant
and
THE COMMISSIONER FOR THE
SOUTH AFRICAN REVENUE SERVICE
Respondent
Judgment
Carelse
J:
[1]
This is an appeal against the judgment and order of Keightley J in
terms of
section 138(2)
of the
Tax Administration Act 28 of 2011
read
with rule 49(2) of the Uniform Rules of Court.
Brief Background Facts
[2]
The appellant is the BMW group of South Africa, a world- wide
organisation who from time to time seconded its expatriate employees
from their home countries to work in South Africa for a short or
medium term period.
[3]
Material to the secondment and by agreement between the appellant and
the expatriate employees is that the appellant will settle
the
expatriate employees, tax liability during the expatriate employees'
secondment to South Africa. The objective was to ensure
that the
expatriate employees remain tax neutral and are in no worse a
position in South Africa. This practice is commonly known
as tax
equalisation.
[4]
The expatriate employee is required to comply with the relevant tax
legislation of both the host country and that of South Africa.
In
terms of the agreement between the expatriate employees and the
appellant, the appellant had to instruct a tax consultancy firm
in
this case KPMG, PWC and Raffray Tax Consultant CC ("the
consulting firms'') for taxation services. Professional fees rendered
by the consulting firm were paid by the appellant for taxation
services provided in respect of the expatriate employees of the
appellant.
[5] The
Commissioner
for
SARS
issued
assessments
for
the
expatriate
employee's
tax
for
the
period
2004-2009
on
the
basis
that
the
payments
to
the
consulting
firms
constituted
taxable
benefits
which
accrued
to
the
expatriate
employees
in
terms
of
paragraph
(i)
of
the
definition
of
"gross
income"
in section 1 of the Income Tax Act 58 of 1962 ("Income tax
Act")
[1]
read
with
paragraphs
2(e)
and
2(h)
of
the
Seventh
Schedule
to
the
Act.
The
assessments
issued
against
the
appellant
is
for
an
amount
of
R2378407.72
for alleged
taxable benefits.
Findings of the court a
quo
[5]
The
court
a
quo
found
that
the
payments
for
professional
fees fell
within the ambit of paragraph (i) of section 1of the Income Tax Act
read
with
para 2(e) of the Seventh Schedule to the Act. The court a quo further
found
that
it
was
not
necessary
to
address
the
applicability
of
paragraph
2(h)
of
the
Seventh
Schedule to the Act.
[2]
[7]
In the view we take of the matter, it is not necessary to deal with
paragraph 2(h) of the Seventh Schedule to the Act for the
reasons set
out herein below but pertinently it is not before us.
The Pertinent issue
[8]
What this court is required to determine in this appeal is whether or
not SARS was correct in its determination that the professional
fees
paid by the appellant to the consultancy firms amounted to taxable
benefits in terms of paragraph (i) in section 1 of the
Income Tax Act
read with paragraph 2(e) of the Seventh Schedule and accordingly it
was not necessary to deal with the applicability
of paragraph 2(h) of
the Seventh Schedule.
[9] Turning
to
the
definition
of
gross
income
[3]
.
The
high
water
mark of the
appellant's
case
is
that
if
no
cash
equivalent
is
included
in
the
expatriate
employees'
remuneration,
the
expatriate
employees
do not
receive
''a
benefit
or
advantag
"
therefore
paragraph
(i) in
section
1
of
the
Income
Tax Act
does not
apply, so the appellant submits.
[10]
During argument counsel for the appellant conceded that if local
employees of the BMW group were given the same services as
expatriate
employees for all intents and purposes such services in respect of
local employees would amount to a taxable (fringe
benefit). The
appellant strongly submits that expatriate employees ate different
primarily because of the taxable equalisation
policy to the extent
that expatriate employees receive the same remuneration as if they
were in their home country. The professional
services rendered did
not place the expatriate employees in an advantageous position. That
being so, the payments to the consultancy
firms did not affect the
expatriate employees remuneration, therefore "no benefit or
advantage" as contemplated in paragraph
(i) in section 1of the
Income Tax Act was received, so the appellant submits.
[11]
The test it
was conceded was an objective one.
[4]
Therefore
in our view the
court
a
quo's,
approach cannot be faulted. The complaint of the appellant is that
the court a
quo incorrectly approached the matter when it compared the position
of
the
local
employees
to
that
of
the
expatriate
employees.
Pertinently
it
was
submitted
that the consultancy firms only rendered professional services to
expatriate
employees and not to local employees.
[12]
The
court
a
quo
correctly
held
that:
"In
my
view,
this
approach
is
consistent
with
the
above-cited
dicta. As
a
consequence
of the
contractual
agreement
between
the
appellant
and
the
expatriate
employees,
the
latter
became
entitled
to
the
services
of
a
tax
consultant
free
of
charge.
The
same
benefit was
not bestowed on local employees.
Whether the
tax consultants' services a
c
tually
resulted in a further benefit to the employees concerned, or
to
the
appellant
is
irrelevant.
The
service
itself,
which
was
provided
free
of
charge
to the expatriate employees, was the benefit. It has monetary value,
and
accordingly
falls
within
the
definition
of
"gross
income"
for
purposes
of
the
first
issue
in dispute between the parties"
[5]
We
agree
that the expatriate employees
received
a
benefit
or
advantage
when
the
appellant
paid
the
tax
consultancy
firms
for tax services.
[13]
This is not the end of the matter. I now turn to deal with the
question
whether or not the benefit falls squarely within the ambit of
paragraph 2 (e) of
the
Seventh
Schedule
of
the
Income
Tax Act.
If
so,
the
benefit
is taxable.
Counsel
for
the
appellant
submits
that
paragraph
2(e)
supra
deems
a
taxable
benefit
to
have
been
granted
to
an
employee
where
a
service
rendered
at
the
expense of
employer has been utilised by the employees for his private or
domestic
purposes.
Because
the
services
rendered
by
the
consultancy
firms
were
not
used
for
private
or
domestic
purposes
by
expatriate
employees
as
contemplated
in the sub-paragraph, and accordingly the deeming provisions does
not
apply,
so
counsel
for
the
appellant
vigorously
submits.
This
submission
is
supported
on
the
basis
that
it
was
common
cause
that
"In
order
to
protect
the
interests
of
the
appellant
and
the
BMW
group,
certain
payments
were
made
to
identified
tax consultancy firms for services rendered in respect of the
appellant's expatriate employees".
[6]
[14]
The appellant vigorously contended that the services rendered by the
consultancy firms were not used for private or domestic
purposes by
expatriate employees as contemplated. In a general engagement letter
written by KPMG Services (Pty) Ltd, to BMW South
Africa setting the
services offered
inter alia
herein below:
"Expatriate Tax
Consulting Services KPMG will also provide South African tax
consulting services in respect of any issues arising
from the
assignment of expatriate employees to South Africa, or in respect of
South African residents assigned to foreign locations,
as the case
may be. We will advise BMW SA regarding the tax implications of any
specific matters referred to us from time to time.
The scope of
assistance in each case will depend on the nature of the assignment.
Pre- approval of both scope and fees for this
work will be obtained
from
BMW SA . . . "
[7]
[15]
In relation to the phrase ". . . where that service has been
utilised by the employee for his or her private or domestic
use".
Dennis Davis and Others in regard to the aforegoing phrase state the
following in Juta's Income Tax
"It
is
the
actual
use
to
which
the
service
was
put,
not
the
intention
with
which
it
was
provided, which is the determining factor here. The determination of
this use
1s
one of fact. The use must be wholly private or domesitc -
if used
partially for
the
business or affairs of the employer, It falls outside this
provision."
[8]
[16]
I understand the appellant's case to be that the services rendered by
the consultancy firm were not wholly private. The appellant's
reliance on the common cause facts as well as the engagement letter
from KPMG to BMW groupis misplaced. There is no evidence that
KPMG
rendered any services to the BMW group.
[17]
For the aforegoing reasons the services rendered by the consultancy
firm were rendered wholly for private use. not partially.
Reiterating
there is no evidence that the tax services that were rendered was
partially for BMW group and partially for the expatriate
employees.
In our view the tax services rendered by the consultancy firm falls
squarely within the meaning of paragraph 2(e) of
the Seventh Schedule
of the Income Tax Act.
[18]
In our view having regard hereto it is not necessary to deal with
paragraph 2(h) of the Seventh Schedule of the Income Tax
Act. In any
event paragraph 2(h)
supra
is not before us on appeal.
[19]
In the result, we make the following order:
19.1
The appeal is dismissed with costs, such costs to include the costs
consequent upon the employment of two counsel.
Carelse J
Judge
of the High Court of South Africa
I
agree
Molopa
- Sethosa J
Judge
of the High Court of South Africa
I
agree
Bagwa
J
Judge
of the High Court of South Africa
Appearances:
Counsel
for the Appellant: Mr PJJ Marais SC
Instructed
by: Macrobert Inc
Counsel
for Respondent: Mr L Sigogo with him
Mr
Radichidi Tsele
Instructed
by: The Commissioner: SARS
[1]
Gross
income
is
defined
in
section
1
of
the
Income
Tax
Act
58
of
1962:
"gross
income"
in
relation
to
any
year of assessment; means-
(i)
In the case of any resident, the total amount, in cash or otherwise,
received by or accrued to
or
in favour of such resident; or
(ii)
In the case of any person other than a resident, the total amount,
in cash or otherwise, received by or accrued to or in
favour of such
person from source within the Republic'
During
such year or period of assessment, excluding receipts or accruals of
a capital nature, but including, without in any way
limiting the
scope of this definition, such amounts (whether of a capital nature
or not) so received or accrued as
are
described hereunder,
namely-
Paragraph
(i) of the definition of gross income provides as follows :
(i)
The cash equivalent, as determined under the provisions of the
Seventh Schedule, of the value during the year of assessment
of any
benefit
or
advantage granted in respect of employment
or to the holder of any office, being a taxable benefit as defined
in the said Schedule,
and any amount required to be included in the
taxpayer's income under section
BA;
[2]
Paragraph 2 of the Seventh Schedule provides as follows :
"For
the purposes of this Schedule and of paragraph (i) of the definition
of "gross income" in section 1 of this
Act' a taxable
benefit shall be deemed to have been granted by an employer to his
employee in respect of the employee's employment
with the employer,
if as a benefit or advantage o f or by virtue of such employment or
as a reward for services rendered or to
be rendered by the employee
to the employer-(e) any service(other than a service to which it the
provisions of subparagraph (j)
or (k) or paragraph
.
9(4)(a) apply has at the expense of the employer or by some other
person), where that service has been utilized by the employee
for
his or her private or domestic purposes and no consideration has
been given by the employee to the employer in respect of
that
service or, if any consideration has been given, the amount thereof
is less than the amount of the lowest fare referred
to item (a) of
subparagraph (1) of paragraph 10, or the cost referred to in item
(b) of that subparagraph, as the case may be;
or
[3]
Para(i) in section 1 of the Income Tax Act
[4]
C: SARS V Brummeria Renaissance (Pty)Ltd
2007(6) SA
601 (SCA at 610 0 -H
[5]
page 144 para 31 vol
3
[6]
Volume 3 page 135 paragraph (4.9)
judgment
[7]
Page 84 of the record
[8]
Davis et al Juta's Income Tax, Volume 3 schedule 7 para 2-4