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[2019] ZASCA 107
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BMW South Africa (Pty) Ltd v The Commissioner for the South African Revenue Service (1156/2018) [2019] ZASCA 107; 2020 (1) SA 484 (SCA); 82 SATC 1 (6 September 2019)
Links to summary
THE
SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Reportable
Case
No: 1156/2018
In
the matter between:
BMW
SOUTH AFRICA (PTY)
LTD
APPELLANT
and
THE
COMMISSIONER FOR THE
SOUTH
AFRICAN REVENUE
SERVICE
RESPONDENT
Neutral
citation:
BMW South Africa (Pty) Ltd v The Commissioner for
the South African Revenue Service
(1156/18)
[2019] ZASCA 107
(6
September 2019)
Coram:
Navsa, Leach, Mbha, Van der Merwe and Nicholls JJA
Heard:
21 August 2019
Delivered:
6 September 2019
Summary:
Payment by employer to tax consultants to render assistance to
expatriate employees – whether a taxable ‘benefit or
advantage’ as contemplated in the definition of ‘gross
income’ in s 1 of the Income Tax Act 58 of 1962 read with
s
2
(e)
or
(h)
of the Seventh Schedule.
ORDER
On
appeal from:
Gauteng Division of the High Court, Pretoria
(Carelse, Molopa-Sethosa and Baqwa JJA sitting as court of appeal):
The appeal is dismissed
with costs, including the costs of two counsel.
JUDGMENT
Navsa
JA (Leach, Mbha, Van der Merwe and Nicholls JJA concurring.):
[1]
BMW is a world-renowned German marque. The appellant, BMW South
Africa (Pty) Ltd (BMWSA), is part of the BMW Group (the Group)
that
manufactures and markets BMW vehicles and conducts worldwide
operations. It has a presence in numerous countries throughout
the
world. The question at the centre of this appeal is whether payments
totalling R6 795 540 made by BMWSA to tax consulting
firms KPMG,
Price Waterhouse Coopers and Raffray Tax Consultants CC (the firms)
in relation to services rendered to expatriate
employees in respect
of their domestic tax obligations, constitute a taxable benefit and
consequently forms part of gross income
in respect of which the
employees are liable to taxation. Simply put, the question is whether
the payments to the firms fall within
the ambit of the definition of
‘gross income’ in s 1
(i)
of the Income Tax Act 58
of 1962 (the Act), read with paragraphs 2
(e)
or
(h)
of
the Seventh Schedule thereto. The basis for BMWSA’s adoption of
tax liability on behalf of expatriate employees and why
it
is
the appellant, will become clear in due course. The background is set
out in the paragraphs that follow.
[2]
As part of the Group’s international business policy employees
are required to work for short or medium term periods in
locations
where the Group has a presence, other than in their home countries.
Such employees retain their connection with their
home countries and
continue to submit tax returns there. Additional costs are incurred
by the expatriate employees as a result
of the Group requiring them
to work in foreign countries. The employment relationship between the
expatriate employees and the
Group operates on an agreed ‘tax
equalisation’ basis, which is standard in the Group. In simple
terms, this means that
the Group, wherever it has a presence, will
ensure that the net income of their employees, in countries where
they are placed,
is no less than in their home countries. So, for
example, if the marginal tax rate is higher in another jurisdiction,
the Group
will ensure that the impact is nullified by structuring
remuneration in such a way that the employee is not worse off in
terms
of net remuneration.
[3]
BMWSA, in order to facilitate tax compliance by their expatriate
employees in South Africa, engaged the services of the firms
to
complete their registration as taxpayers. It also required them to
assist expatriate employees with their tax returns as well
as to deal
with queries and objections to assessments in respect of the domestic
tax regime. It is common cause that the reason
for engaging their
services is that the tax regime, insofar as it applies to expatriate
employees, is fairly complex. I shall,
later in this judgment, deal
in some detail with the terms of engagement of the tax consulting
firms and the evidence in relation
thereto.
[4]
In November 2009 the respondent, the South African Revenue Service
(SARS), addressed a PAYE
[1]
letter of enquiry to BMWSA, in which it queried the payments made to
the firms. SARS wanted to know why those payments did not
constitute
a taxable fringe benefit, in respect of which each expatriate
employee would be liable. In SARS’ view the payments
to the tax
consultants by BMWSA constituted such a benefit. BMWSA wrote back,
denying that the payments constituted an advantage
or a benefit. SARS
was unmoved and issued an assessment for the tax years 2004 –
2009, on the basis that the payments to
the firms referred to above
were a taxable benefit in the hands of the employees in terms of the
definition of ‘gross income’
in s 1
(i)
of the Act read with paras 2
(e)
and
(h)
of the
Seventh Schedule. The tax due on the amount set out in para 1 above
was calculated at a rate of 35 per cent and amounted
to
R2 378 407.72.
[5]
BMWSA objected to the assessment from SARS. It disputed that the
payments constituted a benefit or advantage that formed part
of gross
income. The relevant and rather extensive parts of the objection are
reproduced hereunder:
‘
The arrangement
for expatriate employees
. . . The following
should be emphasised:
·
The
secondments are not provided to employees as a “benefit or
advantage” of employment. The employee is required to
provide
the relevant documentation to KPMG for tax return filing purposes, to
protect the interests of BMW AG in the foreign country,
and not to
provide a private or domestic benefit to the employee.
. . .
· Expatriate
employees invariably remain residents in their home countries and
will continue to submit tax returns in those
countries. As such, they
will need to continue incurring professional fees in their home
countries to comply with local laws.
· The fact that
the expatriate employee is required by BMW to serve in a foreign
country results in additional costs that
need to be incurred before
the expatriate employee may legally serve BMW in that country. This
includes work permits, visas and
in this case, the correct filing of
local tax returns.
· Since the
expatriate employee is merely complying with the instructions of its
employer (namely BMW (SA)) it is agreed
that a so-called “tax
equalisation” process will be applied which is standard
practice within the BMW Group.
· This means that
the employee’s effective rate of tax will be exactly the same
as it would have been, had the employee
remained in his/her home
country (say Germany). The employees’ packages are determined
with reference to the home country
net pay, and BMW agrees to take
responsibility for the payment of tax in the host country (South
Africa in this instance). All
tax payments made are grossed-up for
tax purposes to account for the fringe benefit created.
·
In order to
protect the interests of BMW AG and BMW (SA), KPMG is appointed to
ensure that the South African taxes paid are not
overstated or
understated. The employee has no choice in this regard, and it is one
of the conditions of his secondment agreement
.
· It follows that
the employee receives no benefit from the services provided by KPMG
as he is in a financially neutral position,
irrespective of whether
the taxes are overpaid or underpaid. The party benefiting from the
KPMG services is BMW (SA) and not the
employee.
· It should also
be noted that a large component of the fee is directed towards
providing assurance to BMW (SA) regarding
its responsibilities in
relation to the tax due by the employees, which is ultimately a
company cost, and not the cost of the individuals.
As such, the
services are rendered to the employer and not the employee as
certainty in relation to the correct disclosure of taxable
income and
tax paid, in these circumstances, is the responsibility of the
employer and not the employee, contractually.
Conclusion
Based
on the above, it is clear that:
· The services
rendered by KPMG is to the “benefit or advantage” of BMW
(SA) and not for the employee. As such
it follows that par (i) of the
definition of the gross income definition cannot be applied as no
“benefit or advantage”
is granted to the employee.
· The services are
not for the expat’s private or domestic purposes as it
represents a bona fide business expense directly
associated with the
placement of the employee by BMW AG in South Africa. There is
absolutely no “private or domestic”
benefit to the
employee.
. . .
We are not aware that
SARS has ever attempted to tax such necessary payments and the
practice generally prevailing appears to be
to encourage employers to
administer the local taxes to the benefit of SARS.
. . .
· We believe that
we have illustrated above that the costs should not be taxable in
terms of par 2(e) of the 7
th
Schedule.’ (My
emphasis.)
[6]
SARS disallowed the objection. BMWSA, in turn, lodged an appeal
against the assessment that was heard by Keightley J (with two
assessors), sitting as the tax court. That court had regard to the
provisions of s 1 of the Act, the relevant parts of which define
gross income in relation to any year or period of assessment as
follows:
‘
(i) . . .
(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 a 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 –
. . .
(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 8A
[2]
. . .’
(Emphasis in judgment.)
[7]
The tax court went on to consider the relevant paragraphs 2
(e)
and
(h)
of the Seventh Schedule which read as follows:
‘
(2) 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
of
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 . . . has at the expense of the employer been
rendered to the employee
(whether by the employer or by some
other person), where that service has been
utilised 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 . . .
(h)
the employer has, whether directly or indirectly,
paid any
debt owing by the employee to any third person
, . . . without
requiring the employee to reimburse the employer for the amount paid
or the employer has released the employee from
an obligation to pay
any debt owing by the employee to the employer, . . .’
(Emphasis in judgment.)
[8]
Against the aforesaid provisions the tax court was called upon to
consider BWMSA’s contentions. First, that the appellant's
expatriate employees received no benefit or advantage, within the
meaning of ‘gross income’ in s 1, through the appellant’s
payment of the tax consultants’ fees. Accordingly, so BMWSA
contended, the assessment raised by SARS in this regard must
fail at
the first hurdle.
[9]
Second, that in the event the first submission did not find favour,
the payment to the firms does not fall within the categories
of
taxable benefits identified in paragraphs 2
(e)
or
(h)
of the Seventh Schedule. In order to reach a decision the tax court
had to have regard to the evidence tendered by BMWSA, namely
that of
Ms Du Plessis, the payroll manager at BMWSA, and Ms Chambers, a
director of KPMG. The relevant parts of their evidence
are set out in
the paragraphs that follow.
[10]
Ms Du Plessis was responsible for paying the salaries of expatriate
employees. She explained how tax equalisation in relation
to those
employees worked. It meant that an expatriate employee would not pay
any more tax than required in their home country.
In other words, the
employee’s take-home pay remained the same as it would have
been had he or she not been seconded to work
away from home. BMWSA
undertook to pay the employee’s tax in South Africa. The
written agreement recorded that BMWSA would
‘bear all salary
costs’. It was an integral part of the employment agreement
between BMWSA and its expatriate employees.
Ms Du Plessis understood
this to mean that BMWSA undertook to ensure that it would pay
sufficient PAYE in respect of each expatriate
employer.
[11]
The following clause of the standard written employment agreement is
relevant:
‘
During your
international assignment you will be subject to taxation in your host
country. By using the method of “Tax Equalisation”
you
will be treated as if you were still taxable in Germany. The
calculation will be done on a yearly basis. The tax payable shall
be
calculated by an independent external tax consultancy entrusted with
this task by BMW. The tax consultancy will also draw up
your tax
declaration in home and host country during your assignment.’
[12]
According to Ms Du Plessis, an employee in terms of the contract of
employment has no choice but to utilise the tax consultant.
Significantly, she accepted that it remained, in terms of the
domestic statutory tax regime, the responsibility of each employee
to
register for tax and to submit his or her tax returns. Simply put, in
terms of the Act, the employee bore the tax obligation
towards SARS.
The consultancy services were rendered only to expatriate employees
and not to South African residents employed by
BMWSA. Ms Du Plessis
explained that the tax consultancy services were necessary because
the tax regime, as it applied to expatriate
employees, was too
complex for employees to navigate unaided.
[13]
Ms Chambers from KPMG testified. She explained that BMWSA engaged the
services of KPMG and stated that she regarded the company
to be
KPMG’s client, rather than each individual expatriate employee.
BMWSA was charged a flat rate for the services rendered
to individual
employees. Any tax refunds due to an employee from SARS would be paid
to BMWSA rather than to the employee.
[14]
Ms Chambers described the services rendered to expatriate employees,
which included registration and de-registration as a taxpayer,
preparation and submission of annual income tax returns and a review
of annual income tax assessments, the preparation of letters
of
objection to SARS on behalf of the expatriate employees and, if
necessary, the submission of provisional tax returns.
[15]
The tax court considered the primary question to be whether the
expatriate employee received or accrued any benefit or advantage
from
the payment by BMWSA of the consultancy fees. It had regard to the
submission on behalf of BMWSA that what fell to be considered
was
whether the expatriate employees were better off than had they
remained in their home country and whether they received more
of a
financial benefit than had they not come to South Africa. That was
the principal submission on behalf of BMWSA. It was contended
that no
advantage had been gained by the expatriate employee by virtue of the
use of the consultancy services and the payment by
BMWSA of their
fees.
[16]
The court went on to hold that it was a benefit that could be valued
in money and fell within the definition of ‘gross
income’
in s 1 of the Act. Alongside s 1 of the Act, the court considered the
provisions of paragraph 2
(e)
of the Seventh Schedule. As
regards paragraph 2
(e)
it noted that a benefit is taxable if
it is in the form of a service rendered to the employee, at the
expense of the employer and
where the service was used for his or her
private or domestic service. The court concluded as follows:
‘
Thus, if one has
regard to the actual nature of the services rendered, it appears to
me that they were for the employees’
private use, i.e. to
comply with the individual tax obligations of the employees vis-à-vis
SARS.
. . .
Applying the principle to
the present case, the question of whether tax consultancy services
are for private use must be determined
objectively. They are
manifestly for the private use of locals. Consequently, and
objectively, they remain so in respect of expatriate
employees as
well.’
[17]
The tax court went on to say the following:
‘
I point out that
the position of the individual taxpayers is not adversely affected
nor is the contractual relationship ignored.
The effect of the
approach I have adopted is simply that the appellant will be required
in terms of its contractual obligations
to its expatriate employees,
to shoulder the additional tax burden associated with the tax
consultant’s fees. However, this
remains a private matter
between the appellant and its expatriate employees.’
In
the result the court dismissed the appeal by BMWSA and made no order
as to costs.
[18]
BMWSA appealed further, to the full court of the Gauteng Division of
the High Court. The full court (Carelse, Molopa-Sethosa
and Baqwa
JJA) agreed with the conclusions of the tax court. The full court
understood BMWSA’s case to be that since there
was no cash
equivalent of the consultancy services included in the cash
remuneration of the expatriate employees, no benefit or
advantage as
contemplated in s 1
(i)
of the Act was therefore received. The
full court rejected the submission on behalf of BMWSA that expatriate
employees were differently
placed in relation to local employees
because of the tax equalisation policy and that the consulting
services therefore did not
place them in a more advantageous position
so as to bring them within the ambit of gaining a benefit or an
advantage as contemplated
in s 1
(i)
of the Act.
[19]
The full court concluded that ‘the expatriate employees
received a benefit or advantage when the appellant paid the tax
consultancy firms for tax services’. It went on to consider
whether the benefit fell squarely within the ambit of para 2
(e)
of
the Seventh Schedule. In this regard, it rejected BMWSA’s
contention that the consultancy services were not for the expatriate
employees’ private or domestic use. The full court found that
there was no evidence that KPMG rendered any services to the
Group.
It made the following order:
‘
1. The appeal is
dismissed with costs, such costs to include the costs consequent upon
the employment of two counsel.’
It
is against that order that the present appeal, with the leave of this
court, is directed.
[20]
Before us, BMWSA’s case was that no causal link had been shown
between the employment as contemplated in paragraph 2
of the Seventh
Schedule and ‘the benefit, advantage or reward allegedly
received by expatriate employees by reason of the
services of the tax
consultancy firms’. It was contended that the services of the
firms were procured by BMWSA in pursuit
of
its
tax
equalisation policy. Thus, so it was submitted, the firms’
services were, at least in part, rendered for the benefit
of BMWSA,
‘which utilised such services to ensure it paid the correct
amounts of income tax, and deducted the correct amounts
of employees’
tax, on behalf of expatriate employees’. In this regard, D
Davis
et al
Juta’s Income Tax
, Volume 3, Schedule
7, para 2-5 was relied on:
‘
The use must be
wholly private or domestic – if used partially for the business
or affairs of the employer, it falls outside
this provision.’
[21]
It is correct that the benefit or advantage contemplated in the
definition of ‘gross income’ in s 1
(i)
of the Act
must have been granted in respect of employment or to the holder of
any office. As stated by D Clegg
Taxation of Employees
(2019),
issue 68, para 2.2:
‘
This requirement
forms the foundation for the transformation of a benefit or advantage
into a taxable benefit or advantage.’
[22]
A good starting point is the general engagement letter addressed by
BMWSA to KPMG which, ostensibly, is the basis upon which
all the tax
consultants were employed. The letter of engagement commences as
follows:
‘
General
Engagement Letter – Expatriate tax compliance and consulting
services.
’
The
introductory paragraph, at first blush, appears to indicate that KPMG
will provide taxation and related services to BMWSA. It
reads as
follows:
‘
We wish to confirm
the arrangements for KPMG Services (Pty) Limited (“KPMG”)
to provide the taxation and related services
set out in this
engagement letter to BMW South Africa (Pty) Ltd (“BMW SA”).’
However,
under the heading, ‘Inbound Expatriates – Tax Compliance
Services’, the services to be provided by KPMG,
alongside a
flat fee per expatriate employee, are listed as follows:
·
‘Registration/deregistration of expatriate employee as a
taxpayer with the South African Revenue Service.
· Preparation and
submission of annual income tax return and review of annual income
tax assessment from SARS.
· Letter of
objection to address any inaccuracies reflected on the assessment.
These include section 79A requests for amendment
of an assessment or
lodging an objection where amounts have been erroneously included or
omitted by SARS from the expatriate employee’s
IT34 assessment.
· Preparation and
submission of provisional tax returns, if required.’
[23]
Under the heading ‘Outbound Expatriates – Tax Compliance
Services’, the services to be provided by KPMG,
also alongside
a flat fee per expatriate employee, are listed as follows:
· ‘Exit
meetings to be held at the Midrand offices of BMW SA or at the
Johannesburg offices of KPMG, with the exception
of meetings with
executive level employees, which will be held at the offices of BMW
SA at Rosslyn, if required.
· Preparation and
submission of annual income tax return and review of annual income
tax assessment from SARS.
· Letter of
objection to address any inaccuracies reflected on the assessment.
These include section 79A requests for amendment
of an assessment or
lodging an objection where amounts have been erroneously included or
omitted by SARS from the expatriate employee’s
IT34 assessment.
· Preparation and
submission of provisional tax returns, if required.’
Under
the title ‘Other Services’, indicating a flat fee per
expatriate employee, further services, such as an objection
to
incorrect assessments, are listed. All of the services set out in
this and the preceding paragraph are in relation to the expatriate
employees’ tax obligations under our tax regime.
[24]
The completion of the tax registration process and of an expatriate
employee’s tax returns are admittedly complex. The
services
rendered by the firms to expatriate employees, set out in paras 22
and 23 above, were to ensure that the latter met their
obligations to
SARS. It is undisputed that the amount set out in para 1 above,
constitutes payments by BMWSA for the services rendered
to the
expatriate employees set out in paras 22 and 23. That payment was
made in terms of the contract of employment. These were
services that
the expatriate employees would otherwise have had to pay for
personally. The ineluctable conclusion is that the services
provided
are a benefit or advantage as contemplated by s 1 of the Act, read
with paragraph 2
(e)
of the Seventh Schedule.
[25]
That there might have been some peripheral advantage to BMWSA in that
the tax returns of the expatriate employers and the results
of the
other services rendered to them could be utilised in checking the
accuracy of their own calculation and otherwise utilising
the data is
irrelevant. The statement by Davis
et al
referred to in para
20 above on which BMWSA relied, is too strongly worded. There will be
instances in which benefits or advantages
contemplated within s 1(i)
read with the Seventh Schedule have some residual or marginal
advantage for an employer. The primary
question however, is whether
an advantage or benefit was granted by an employer to an employee and
whether it was for the latter’s
private or domestic purposes.
In the present case, as stated above, the compelling conclusion is
that the services were correctly
valued and utilised for the
employees’ private or domestic purposes as contemplated by s 1
of the Act read with para 2
(e)
of the Seventh Schedule.
[26]
I agree with what the tax court said as set out in para 17 above,
that the confirmation of the assessment will not lead to
the
expatriate employees being worse off in terms of their employment
with BMWSA. In terms of their tax equalisation policy, they
will have
to bear the additional tax burden on behalf of the expatriate
employees. BMWSA’s policy and terms of employment
cannot
dictate the application of the provisions of the Act. The conclusions
by the tax court and the court below confirming the
assessment cannot
be faulted.
[27]
The following order is made.
The
appeal is dismissed with costs, including the costs of two counsel.
__________________
M
S Navsa
Judge
of Appeal
Appearances:
For
Appellant:
P J J Marais SC (with him K J Burt)
Instructed by:
Macrobert Attorneys,
Pretoria
Claude Reid Inc.,
Bloemfontein
For
Respondent:
L Sigogo (with him R Tsele)
Instructed by:
The Commissioner: SARS,
Pretoria
The State Attorney,
Bloemfontein
[1]
PAYE
stands for ‘pay as you earn’. It is a withholding tax on
income payments made by an employer to an employee. Amounts
withheld
are treated as advance payments of income tax due. In other words, an
employer is obliged to deduct tax from the monthly
remuneration of an
employee and to pay it over to SARS.
[2]
Section 8A in relation to the present dispute is inapplicable. It
relates to gains made by directors of companies or by employees
in
respect of rights to acquire marketable securities.