Business Day Law & Tax (May 2023)

BUSINESS LAW & TAX

Rate hikes can be even bigger challenge for employers

• Fluctuations can quickly lead to pressures from all around that put the enterprise’ s survival at risk

Alex Taylor, Prencess Mohlahlo & Matlhatsi Ntlhoro ENSafrica

henever the governor of the Reserve Bank, Lesetja Kganyago, announces a hike in the repo rate, the first thing that comes to mind when we see the headlines, is the impact of the hike on homeowners or consumers with financed vehicles or other lines of primelinked credit

The effect of the increase in the repo rate on employers is seldom spoken of, or even written about

Yet it is important to understand the relationship between the repo rate and the prime rate, how employers

are exposed to the impact of an increase in the repo rate and how that inevitably affects the liquidity position of the employer, which may, in severe cases, result in retrenchments

WThe repo rate is the rate at which the Bank lends money to commercial banks in SA The rate is adjusted from time to time by the Bank in accordance with its monetary policy to regulate inflation to

allow for a stable and growing economy

The prime rate is the rate at which commercial banks lend to their most favoured customers Since November 2021, there has been a cumulative 425 basis points increase (4 25%) from a low of 3 5% for the repo rate and 7% for the prime lending rate This has increased pressure on consumers with assetbacked credit such as mortgage bonds and vehicle finance On March 30, Kganyago surprised the market by announcing that the repo rate would be hiked by 50 basis points, thus increasing the repo rate to 7 75% and the prime rate to 11 25% the highest level since 2009

The fluctuation of the prime rate affects not only the growth of a business but also

determines whether a business can keep meeting its financial obligations and ultimately keep its doors open When the repo rate increases, this increases the prime rate and results in lenders (such as banks) increasing credit rates, making it more expensive for businesses to secure funding and/or to repay the existing debt that the business requires to sustain its operations An increase in the prime rate can have various effects on businesses These include:

● A reduction in cash flow: business owners will have to set aside more cash towards repaying loan amounts;

● Consumers having less discretionary cash available

to use on goods and services (especially nonessential goods and services) which may affect revenue;

● Difficulty in obtaining business loans: long-term and short-term debt becomes more expensive;

● Difficulty in repaying prime-linked intercompany loans; and

● Making it more difficult for employers to create or retain jobs

This may force some employers to consider restructuring their businesses to optimise their resources When all else fails, employers may have to terminate employees employment on the basis of their operational requirements

Operational requirements are based on the economic, technological, structural or similar needs of an employer Generally, economic reasons are those that relate to the financial management of the enterprise; technological reasons refer to the introduction of new technology that affects work relationships; and, structural reasons relate to the redundancy of posts consequent to a restructuring of the employer’ s enterprise A restructuring based on an employer’ s difficulty in securing funding for its business due to the high prime rate, or a reduction in its revenue or profit as a result of

THE FLUCTUATION OF THE PRIME RATE … DETERMINES WHETHER A BUSINESS CAN KEEP MEETING ITS FINANCIAL OBLIGATIONS

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Sars ups red tape for small taxpayers

Evan Pickworth

Business Law & Tax Editor

In a perfect world, everyone declares all their income in a transparent way, and tax is paid fairly and equitably But this is not a perfect world and so the aggressive moves by the SA Revenue Service (Sars) to rely on data and analytics and third-party sources to give it information on income in close to real time makes a lot of sense

In this way, the effective tax rates for each taxpayer based on third-party data will make PAYE deductions more accurate, providing clarity, certainty and, hopefully, a sharing of the tax burden across those dwindling numbers who pay their share and the many who don’t

However, any moves towards this near tax utopia for government must be balanced with what is achievable and realistic in practice

For instance, the red tape tax burden for trustees, charitable institutions and even installers of solar photovoltaic (PV) systems at a residence for domestic purposes is rising as the above takes shape at a faster pace than advisers can match

Essentially, this will require extensive third-party data collection by businesses and trustees so that the information can be prepopulated on a beneficiary or recipient s tax return

While greater transparency is to be welcomed, especially where it improves compliance, the timelines and changes for trustees of

September 30 this year are especially tight

Trustees will have to be more vigilant, for sure, but getting compliance up to speed just got a lot tougher

Last year ’ s submission by the SA Institute of Chartered Accountants (Saica) to Sars on the draft business requirements specifications (BRS) documents for trusts (IT3(t)) and donations (IT3(d)) is helpful in highlighting some of the key challenges

FAMILY TRUSTS

The letter notes that there is a concern that the administrative burden for small family or business trusts and public benefit organisations (PBOs) could be unwarranted

Sars is proposing a near real-time reporting system, which would imply that these taxpayers would need to prepare monthly financial accounts to comply with Sars reporting proposal Most of these smaller trusts and PBOs only prepare financial accounts on an annual basis, after all

Many of these taxpayers

may not have the funds to develop the systems or to employ tax practitioners to enable these kind of data submission events

Then there are problems with eFiling declarations, which take time to resolve Often the Sars contact centre is not able to resolve these discrepancies on the first call, requiring additional time and resources to resolve such issues

Furthermore, the cost of implementing an application programming interface would be unduly burdensome for some taxpayers

Saica proposed that Sars consider implementing the reporting responsibility for taxpayers above certain thresholds, in addition to gradually phasing in the

representatives to enable these taxpayers to build and facilitate data submissions

In practice, the income earned by trusts is generally from a number of different sources and historically the IT3(s) tax certificates in respect of the various assets are only made available by the various institutions in April/May Some tax certificates, particularly in respect of capital gains, are only received in May/June

The financial statements of trusts are seldom produced by a “live system” and in practice many, if not most, are produced by accountants based on information provided to them by trustees/ administrators

distributed by the end of September so that beneficiaries’ tax returns can be prepopulated

Similarly, an IT3(d) will need to be issued by certain charitable institutions (approved PBOs that issue section 18A certificates) in respect of donations received in order for this to also be prepopulated on the tax return This is, however, proposed to apply from the 2024 tax year

SOLAR INSTALLERS

For the 2024 tax year, installers of PV systems at a residence for domestic purposes will need to submit third-party data

trustees in other ways too While trustees have always needed to make a determination by way of a signed resolution before the end of February as to the amount of the trust’ s taxable income vested in beneficiaries, Sars is looking at this far more closely Should there not be evidence that this was done before the end of February, the trust will be taxed on the income at the higher tax rate

The reality is that many trustees, for instance of smaller family trusts, are not involved in full-time administration They are running

reporting responsibility over a number of years, which does make sense if it takes the reporting burden away from smaller players without the means, time or capacity to pull off the reporting miracle expected of them in such a short space of time

There is instead a need for Sars to provide coherent and easily accessible training to PBOs and trust registered

Given that most of the information used to produce the financial statements is only available in April/May, it will be practically impossible for the financial statements, which are needed to establish the distribution information, to be finalised before May 31

I believe Sars was listening and has given a reprieve of a few months on certain timelines, but the cold reality is this is a major shift coming

A Sars draft notice requires trustees to submit an IT3(t) which provides details of any amount vested in a beneficiary, including income (net of expenditure), capital gains and capital amounts

Apart from the above, trustees need to take heed of amendments to the Trust Property Control Act, which require trustees to, among other things, establish and record the beneficial ownership of the trust

Beneficial owner transparency is one of the measures used to combat financial crimes, including tax evasion

In line with Sars sharpening its teeth on enforcement, failure to comply with the above obligations is an offence and on conviction is liable to a fine not exceeding R10m, or imprisonment for a period of five years or both

The stricter enforcement and timelines apply to

Rate hikes can be even bigger challenge for employers

CONTINUED FROM PAGE 1

the high cost of servicing its existing debts, may constitute an economic reason for restructuring and retrenchments However, if an employer wishes to rely on an economic reason for restructuring, it may be

required to disclose its financial and other information to trade unions and affected employees during the consultation process leading to possible retrenchment

Of course, the courts may investigate whether the employer s reasons for restructuring are based on a

rational commercial decision, having properly consulted with the trade unions and/or affected employees and having considered alternatives to the retrenchments

If the need to retrench employees arises, employers must heed the Labour Appeal Court s warning, in General

Food Industries Ltd v Fawu, where the court stated that the loss of jobs through retrenchment has such a deleterious impact on the life of workers and their families that it is imperative that even though reasons to retrench employees may exist they will only be

businesses or working as professionals by day The raft of compliance changes has radically increased their red tape burden

The key going forward will be to get a good handle on the changes and ensure greater compliance to avoid nasty surprises But Sars must also be realistic on its timelines and what can be done on the ground

THE PRIME RATE IS THE RATE AT WHICH COMMERCIAL BANKS LEND TO THEIR MOST FAVOURED CUSTOMERS

accepted as valid if the employer can show that all viable alternative steps have been considered and taken to prevent the retrenchments or to limit these to a minimum

The Bank s responsibility to regulate inflation to stabilise SA s economy is therefore a double-edged sword

• It’ s become a lot tougher for trustees, charitable organisations and installers of solar panels to comply

THE REALITY IS MANY TRUSTEES, FOR INSTANCE OF SMALLER FAMILY TRUSTS, ARE NOT INVOLVED IN FULL-TIME ADMINISTRATION

BENEFICIAL OWNER TRANSPARENCY IS ONE OF THE MEASURES USED TO COMBAT FINANCIAL CRIMES

BUSINESS LAW & TAX

Business rescue is not certain

Evan Pickworth Business Law & Tax Editor

It is never good to see a business go down, especially when they have so much potential

However, times are tough and many businesses are walking that fine line between being able to make their month-end salary run and pay suppliers on time

Golden Harvest is well known in the agriculture and food space in SA and from humble beginnings as a fruit and vegetable store it soon operated a large wholesale fruit distribution business at premises in Cape Town and

Johannesburg

The staff complement in its heyday was at 180 employees It had met the president, was majority black-owned (via Forty Squares) and was focused on supporting local supply chains, while having a strong export footprint, but it hit hard times in 2022 and could not pay suppliers, despite being in business for 40 years

However when the rubber hit the road after Covid19, a disgruntled supplier was owed R1 4m and lodged an application for provisional winding-up A final order of winding-up was later granted and the liquidators

secured an order to proceed with an inquiry into the affairs of the company Total liabilities were said to be more than R136m, with R12 5m owed to the landlord

Forty Squares and some of the employees of Golden Harvest then lodged an application to place the liquidated company into business rescue in terms of section 131 of the Companies Act 71 of 2008 Major creditors said they would not support the plan

In essence, business rescue can be initiated either by means of a company resolution (s 129), or by court order (s 131) A company resolution

may, however, not be adopted once liquidation proceedings have been initiated by or against the company (s 129(2)(a)) The bar is higher when a company has been wound up But the applicant does temporarily lift the liquidation proceedings

LEGAL SCOOP

The court found that there were no anticipated circumstances that would radically improve the prospects of Golden Harvest being returned to solvency and commercial viability The proposed three years for the rescue plan was also found to

be extraordinarily long and the haste with which this the rescue application was brought suggested “that it is not bona fide”

Clearly, business rescue is not going to work in all cases, especially when creditors have lost faith

Law (net yet) on side of robots in the boardroom

As long ago as 2014, a Hong Kong-based venture capital management fund, Deep Knowledge Ventures (DKV), announced that it had appointed a machine learning algorithm called VITAL (Validating Investment Tool for Advancing Life Sciences) to its board of directors

According to DKV s senior partner, VITAL was to be consulted and its views on potential investments were to carry equal weight to those of the fund s human directors

Revolutionary as the idea of a robot company director was in 2014, advances in the field of artificial intelligence (AI) have ensured that it has continued to gather momentum in a number of countries

Over the past few months, the possibility of computers supplementing or even replacing human decision-making has gathered renewed momentum with the advent of ChatGPT a chatbot with interactive capacity and ability to answer complex and nuanced problems exceeding anything previously available in the public domain

The advantages of using intelligent algorithms to assist corporate decision making are obvious its ability to assimilate retain and recall in fractions of a second vast quantities of information and to provide answers to questions unaffected by the problems that beset so many top-level human decision makers

bias, emotions and stress

For centuries, through the transition from a predominantly agrarian society to a predominantly urban one, and through successive industrial revolutions, lawyers have had to grapple with how existing laws would answer questions posed by new technologies and changing social and economic conditions The advent of AI, and its increased role in business decision making is no exception

In this article, we examine some of the issues that would arise in SA law if a company wanted to involve an AI system in its corporate decision making

AI AND THE LAW

Can a robot be appointed to a company board in SA?

There is no express statement in the Companies Act, 71 of 2008, that a company director must be a person (defined as a person or entity that the law recognises as being able to exercise rights and incur obligations)

However, the act confers rights and imposes obligations on directors By implication therefore, the act assumes that directors must be persons

Section 69(7)(a) of the act

provides that a juristic person (a company, trust or other created association of persons recognised by law as having rights and obligations) is ineligible to be appointed as a director So, it would seem that only natural persons (human beings) can be company directors in SA

Although suggestions have been made in some jurisdictions that AI could be accorded legal personality, based on its capacity for autonomous thought and even displaying behaviour akin to human emotions, it would appear SA law would currently not allow an AI “robot” to be registered as a director

CORPORATE GOVERNANCE AND AI

Given that it would not be permissible to register them as directors, certain questions arise as to whether a robots can validly be given the authority to make, or participate in making, board decisions

There would not seem to be any obstacle to the company s effectively granting AI robots these powers by a simple amendment to the memorandum of incorporation, shareholders agreement or both

The relevant clause could provide that the AI must be consulted before, any decision, or any decision in regard to specified subjects, is made or that the AI must be consulted in the event of a deadlock between the members of the board

The latter arrangement is similar to the common

provision for the chairman to have a casting vote in the event of a deadlock, or that the company ’ s auditors may be called on to resolve deadlocks on certain topics; only that in this case the decision maker may arguably be better “informed” and less likely to be swayed by personal interests

The question is: are the directors allowed to relinquish their decisionmaking authority to a nonhuman resource, no matter how sophisticated?

Section 76 of the Companies Act is headed “Standards of directors conduct” Section 76(3) states that a director must perform his or her functions

● in good faith and for a proper purpose;

● in the best interests of the company; and

● with the degree of care, skill and diligence that may reasonably be expected of a person

● carrying out the same functions in relation to the company as those carried out by that director; and

● having the general knowledge, skill and experience of that director

Section 76(4)(a) of the act states that a director will have satisfied the second and third requirements of section 76(3) if (inter alia)

● he or she has taken reasonably diligent steps to become informed about the matter; and

● he or she had a rational basis for believing, and did believe, that a decision that he or she made or supported was in the best interests of the company

Section 76(4)(b), read with section 76(5), allows a director, when making or supporting a decision, to rely on the performance of, or information, opinions, recommendations, reports or statements prepared or presented by various persons including

● professional advisers, within the spheres of their professional competence, or

● employees of the company whom the director reasonably believes to be reasonably competent in the functions performed or, information, opinions, recommendations, reports or statements provided; or

● a board committee of the company (unless the director has reason to believe that the actions of the committee do not merit confidence)

Looking at the duties imposed on directors in terms of section 76, it is a notable requirement that, for a director to have complied with his or her obligations, he or she must have taken reasonably diligent steps to become informed about the matter and must have had a rational basis for believing that a decision that he or she made or supported was in the best interests of the company

THE POSSIBILITY OF COMPUTERS

A director can never be exempt from applying his or her own mind to the issue at hand and forming an opinion as to the correctness of a course of action

As mentioned, the act does allow a director to rely on the advice of professional advisers, competent employees of the company and board committees However, when allowing for these exceptions, the act expressly refers to the providers of the advice as persons , in other words, people or companies capable of being held to account in law if they are negligent Systems such as VITAL and ChatGPT demonstrate just how sophisticated an AI system may be, and the huge advantages they can have over the human mind, especially when it comes to the ability to retain and recall vast quantities of information and to make decisions and give advice unaffected by biases and emotions

However, as our law currently stands, directors cannot avoid consciously seeking to become informed about company affairs, applying their own minds and exercising their discretion in the best interests of the company

Before that is possible, amendments to the Companies Act would be required, which would raise other issues as to who would then be liable if the system made a mistake This is a separate and equally complex discussion

● Ian Jacobsberg is a Director at Fluxmans

• Court found the prospects of Golden Harvest being returned to solvency were slim

BUSINESS LAW & TAX

Sars taking a closer look at offshore arms

Mohammed Mayet PKF Octagon

Given the SA Revenue Service’ s (Sars’) intensified approach with regard to taxpayers who are structuring their businesses offshore, it would be prudent for these taxpayers to seek proper advice to ensure their offshore structuring does not affect them negatively should they be audited or investigated by the receiver

As and when SA taxpayers consider planning offshore structuring, they must primarily give consideration to the provisions set out in the double tax agreement (DTA) between the resident country, namely SA, and the country in which they intend doing their offshore structuring Insofar as there is a limitation or nullity in terms of the provisions set out in the applicable DTA, subsequent reference and application must then be given to the domestic law of each contracting state

Typically, Article 7 of the DTA sets out the manner in

which business profits of an enterprise are to be taxed

Article 7 states as follows:

“The profits of an enterprise of a contracting state shall be taxed only in that state unless the enterprise carries on business in the other contracting state through a permanent establishment ”

In other words, the taxing

business environment, and results in the elimination by Sars to have a right to tax such business profits on income in terms of Article 7 of the DTA

Sars has identified a trend in SA resident companies, which have adopted an attitude whereby they make use of complex tax structures to minimise or eliminate their tax liability in SA through the exploitation of gaps and discrepancies in the tax rules of contracting jurisdictions, thus receiving a taxable benefit

Sars has responded proactively to this sort of attitude through the implementing of various antiavoidance provisions and one which is relevant when considering offshore structuring is discussed below

through a controlled foreign company (CFC)

A CFC refers to any foreign company where more than 50% of the total participation rights in that foreign company are held by, or where more than 50% of the voting rights in that foreign company are directly or indirectly exercisable by, one or more residents of SA

up or acquires existing shares in a foreign company located in a low-tax jurisdiction outside its home country

rights on business profits from income originates in the jurisdiction where the source of income is created and a permanent establishment (PE) can be attributed to that source

Practically speaking, a shift in the source of income and PE from an SA resident company to a foreign company has become common practice in today’ s global

Section 9D of the act is among the various sections which must be considered when setting up these complex offshore structures

It is an anti-avoidance provision and the purpose for its implementation is to prevent SA resident companies from shifting tainted forms of taxable income outside the SA taxing jurisdiction by investing in or transacting

The mischief at which the CFC rules are targeted generally arises in situations where an SA resident company sets

CONSUMER BILLS

The SA resident company then uses this foreign company to conduct activities that could have been carried on from its home country, ie the sole or primary reason for housing the activities in the foreign company is to avoid tax in the home country on the income they produce CFC legislation taxes the resident shareholders of the CFC, and not the CFC itself

As the same resident is not being taxed twice on the same amount, no double taxation arises It therefore cannot be said the CFC legislation overrides any DTA

Where the SA resident shareholder is taxed on foreign amounts that are calculated according to pro-

portional holdings in the CFC, this would amount to economic double taxation in the absence of the granting of appropriate foreign tax credits and not juridical double taxation

We note that the purpose of a DTA is to avoid double taxation and determine the taxing rights between treaty parties We further note that the DTA does not prevent treaty partners from protecting their tax base

Therefore, by implementing CFC legislation, Sars is mitigating the shift in tainted forms of taxable income outside the SA taxing jurisdiction by investing in or transacting through a CFC and this legislation is, according to the Organisation for Economic Co-operation and Development, not inconsistent with the spirit of DTAs

Less combative language only benefits a client

Lawyers of all types

have been notorious for centuries for the use of anything but ordinary language

The persistent excuse for legalese up to the present day is that legal language must not be ambiguous despite ambiguity being a synonym of obscurity

A recent report by the UK Family Solutions Group set up by a judge in 2020 has highlighted another important reason why the use of language can make the law hostile and inaccessible

The group was set up to examine the use of language in family law and has called for an end to combative language particularly where the interests of children are at stake The group points out

that the words we use shape our mindset, which in turn affects how we think and how we behave Where spouses and parents compete against each other for what they each see as justice, the outcome has effects on the wellbeing of the children

The use of words that are part of the daily vocabulary of lawyers, such as custody, versus, opponent, rights and dispute, are considered by

family law professionals to be harmful to family relationships The word custody disappeared from the UK statute with the passing of its Children Act 1989 and is considered to be 30 years out of date in the UK, but the word is still used in SA A custody battle is the language of fights between spouses and parents competing for the control of their children The plea of the group is to lead parents away from a tug-ofwar mentality of a custody battle and towards a shared responsibility for their children s wellbeing

The language legal professionals use on behalf of their clients can be intentionally or unintentionally intimidating

Acronyms and legal speak are not easily understood by anyone not legally trained Add to this clients who are emotionally charged and distressed, and you end up with barriers, and not solutions

The problem becomes even more acute when the language used is English and it is not the first language of those involved

Family problems should not be escalated into legal issues by unnecessarily using legal terminology and jargon People need help, not justice The group s appeal is therefore not only for plain language but for language that preserves the dignity of all the parties, language proportionate to the issues, problem-solving language

and a future-focused mindset avoiding past recriminations and substituting creative positive solutions

Interestingly, the group criticises the descriptions of lawyers commonly used in legal directories as promoting the language of aggression and war like describing a lawyer as a robust advocate who will fight their client s corner , or when up against a particular lawyer you know it s fists up

ACRONYMS AND LEGAL SPEAK ARE NOT EASILY UNDERSTOOD BY ANYONE NOT LEGALLY

and a fight These descriptions come from other legal professionals who are seemingly of the view that battle terminology is appropriate, and that aggression is something to be admired in lawyers

The group has been looking at legal language in relation to family law, but the lesson is not limited to family law cases Shifting language to promote mindsets that are solutions-focused and focused on an outcome that does not destroy relationships would be helpful in any legal context Stoking the fire of battle is in no client s interests

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

• Receiver implements steps against SA companies that avoid paying

tax by using overseas businesses

SARS HAS PROACTIVELY RESPONDED … THROUGH THE IMPLEMENTING OF ANTI-AVOIDANCE PROVISIONS

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THE PURPOSE OF A DTA IS TO AVOID DOUBLE TAXATION AND DETERMINE THE TAXING RIGHTS BETWEEN TREATY PARTIES

BUSINESS LAW & TAX

Practice note cuts abuse of patent system

Tyron Grant Spoor & Fisher

The South African Patent Office

issued Practice

Note 21 of 2023 on April 7 2023 setting out the requirements for expedited acceptance of patent applications

The practice note will go some way to curbing the abuse of the non-examination system by applicants who request expedited acceptance and grant of South African patents, for example, to leverage governmental rebates and incentives awarded on grant of foreign patents

In a bid to promote innovation, the governments of some countries offer financial incentives and rebates, based on the number of granted patents obtained by their nationals The China State Council, in the most recent plan of its National Intellectual Property Strategy, targets 12 invention patents per 10,000 people by 2025 and incentivises nationals to achieve this goal

The Indian government, through its Patent Facilitation Scheme, also aims to encourage innovation and provide financial support to those who seek to protect their inventions through patents In some instances, an Indian national can be awarded INR

10 lakh for a granted foreign patent (about R200,000)

A non-examining patent system allows for a patent to be granted without undergoing any substantive examination (ie without consideration as to whether the invention claimed in a patent application constitutes patentable subject matter and is novel, inventive and useful) Plans are afoot to introduce Substantive Search and Examination (SSE) in SA; however, this may still take a number of years to implement

It makes sense that countries having a non-examining patent system would be the

GOVERNMENTS OF SOME COUNTRIES OFFER FINANCIAL INCENTIVES AND REBATES, BASED ON THE NUMBER OF GRANTED PATENTS OBTAINED BY THEIR NATIONALS

first choice for applicants seeking the grant of a patent, without concern for whether that patent is, in fact, valid or enforceable For the South African Patent Office, the implication of governmentbacked, patent-based incentive schemes, is a noticeable increase in the number of

applications filed by foreign applicants, especially from China or India In many cases, these applications are nonconvention applications, meaning they do not claim priority from an earlier application and are often filed with a request for expedited acceptance and grant

According to the Patent Registrar, Thandanani Cwele, 13,976 patent applications were filed through the South African Patent Office in 2022, which is an increase of 28% compared with 2021 A staggering 34% of these applications were filed by foreign applicants in the first instance, claiming no priority Cwele has indicated the South African Patent Office has limited capacity to identify patent applications that patently do not meet intrinsic and/or extrinsic patentability requirements The nonexamining patent system is left vulnerable to abuse, where an applicant applies for and obtains a patent for subject matter that it knows to be lacking in novelty or inventiveness, for example Furthermore, requests for expedited acceptance prejudice applicants of legitimate applications, which are relegated to the back of the acceptance queue Records show that where expedited acceptance is not requested, acceptance of the application is currently being delayed by

anything from three to six months from the date on which it is scheduled to be accepted

The practice note sets out new requirements for applicants requesting expedited acceptance of patent applications, and came into effect from April 11 2023

The practice note requires that going forward supporting documents must be submitted with any request for expedited acceptance of a South African patent application made within the first 12 months of filing, if the application is a national phase application stemming from an international application (PCT), or within the first 18 months of filing of all other applications

The following are acceptable as supporting documents:

● For PCT national phase patent applications, a copy of a corresponding Written Opinion of the International Searching Authority (WOISA) or International Preliminary Report on Patentability (IPRP), where the WO-ISA or IPRP has considered the subject matter of at least one claim of the PCT application to be both novel and inventive;

● A copy of a search and/or examination report of an equivalent foreign patent application where an examining patent office has considered the subject matter of at least one claim of the equivalent foreign application to be both novel and inventive; or

● An affidavit from at least one applicant, providing the reasons that expedited acceptance is required for the specific patent application, the affidavit having been properly authenticated as referred to in Rule 63 of the Uniform Rules of Court

The practice note is a bold and proactive step by the South African Patent Office to relieve the delay in acceptance and grant of legitimate applications and to deter those seeking to abuse the system to obtain patents for subject matter that they know to be ineligible for patent protection

The Patent Offices of other non-examining African countries, such as Nigeria, may be the next targets for applicants seeking rewards from patent-based incentive schemes It is likely that these offices will experience the same threat to their efficiency and to the integrity of the

patent systems

We believe these offices should also proactively take steps to deter abusive filings and ensure that legitimate applicants are not prejudiced

Hopefully, the Chinese and Indian authorities will acknowledge that their patent-based incentive schemes are being abused and will amend these schemes or implement further controls to avoid applicants from abusing nonexamining patent offices to obtain expedited grant, for patents which, at least on the face of it, appear to be invalid While it may be tempting to offer financial rewards and rebates for granted patents, it also encourages patenting without innovating, which falls hopelessly short of the objective Applications aimed at obtaining granted patents that do not meet patentability requirements prejudice other legitimate applications and undermine the integrity of the patent system It is essential for all stakeholders to work together to prevent such abuses and ensure the patent system serves its intended purpose of promoting innovation and development

Platforms question competition watchdog report

Heather Irvine

Bowmans

Various platforms took issue with the Competition Commission s provisional report s identification of leading platforms and the application only to these particular platforms of proposed remedies

Several platforms raised that in many instances, the provisional report has not defined relevant markets properly (or at all), which is a necessary step in determining whether competition really has been impeded, restricted or distorted In the

context of online retail, for example The provisional report also did not examine any evidence on the extent to which SA consumers switch between traditional brick and mortar stores and online marketplaces that sell third parties products such as Takealot, Loot and Jumia, or use omnichannel retailers such as Mr Price, Checkers or Makro

The provisional report also did not identify, after defining the relevant markets, which companies are dominant firms, which have market power, and hence are restricted from

engaging in price discrimination and other abuses of dominance in terms of sections 8 and 9 of the act

Instead, various platforms said, the provisional report had simply used the results of a business user survey as the basis for drawing conclusions that business users are dependent online platforms; that business users would price differently in the absence of certain terms and conditions being applied by online platforms; and to conclude that the way platforms approach ranking on their websites negatively affects business user s sales

However, this survey involved a small number of respondents, and did not apply well-established principles of survey design

Nonetheless, the provisional report had relied on the survey rather than investigating the nature and level of competition in the various business user markets, and

IT IS PERHAPS NOT SURPRISING THE DEADLINE FOR THE INQUIRY TO PUBLISH ITS FINAL REPORT WAS EXTENDED

whether or how the business practices adopted by any online platform, or the fees paid to any online platform by business users such as hotels, product sellers, restaurants or software developers) may have impeded, restricted or distorted competition

Nor did the provisional report identify how any particular business practice or pricing model applied by any online platform had an effect on the ability of any small business to participate in their relevant markets

Lastly, various platforms commented that the provi-

sional report did not consider the extent to which the use of online platforms by smaller SA businesses had significantly improved efficiency or lowered their costs over time

Given the scope of the comments received, it is perhaps not surprising that the deadline for the inquiry to publish its final report was extended

In the meanwhile, however, the inquiry has published a notice in which it outlined additional proposed remedial action

The final report is due to be issued on May 19 2023

•

SA

Patent Office sets out requirements for expedited acceptance of patent applications

Change to act lifts chicken import quotas

Virusha Subban

Baker McKenzie

In an amendment to Schedule 4 of the Customs and Excise Act (1964), published in the Government Gazette on March 31 2023, it was announced that the annual quota for frozen bone-in cuts of the species Gallus Domesticus originating in or imported from the US, would be increased from 71,290 tonnes to 71,632 tonnes, with retrospective effect from April 2022 Schedule 4 of the Customs and Excise Act allows US frozen chicken to be sold in SA via a specific permit or recommendation of the director-general of the SA department of agriculture & land reform, subject to conditions set out by the International Trade Administration Commission (Itac)

At present the US exports bone-in chicken meat to SA under a tariff rate quota arrangement, which exempts bone-in chicken imports from anti-dumping duties

Trade between the US and SA is governed by the African Growth and Opportunity Act (Agoa), a nonreciprocal trade preference programme that provides eligible Sub-Saharan African (SSA) countries with duty-free access for certain exports into the US market

The purpose of Agoa is to expand US trade and investment with SSA, stimulate economic growth and encourage the continent’ s

US exporters having to pay antidumping duties normally applicable on these goods

The US is one of the leading poultry exporters to SA, in addition to Brazil and the EU In 2022 Itac made a determination in the investigation into the alleged dumping of frozen bone-in portions of chicken imported from Brazil, Denmark, Ireland, Poland and Spain

economic integration

During negotiations for the renewal of Agoa’ s preferential treatment for SA in 2015, it was agreed that an annual quota of US bone-in chicken could be imported into SA from the US, without

Itac concluded its investigation and recommended to the South African trade & industry minister that antidumping duties be imposed on these countries However, although the minister accepted Itac’ s recommendation, the decision was made to suspend the imposition of antidumping duties on these countries for a period of 12 months, as published in the Government Gazette on August 1 2022

The minister noted that the decision was based on the current rapid rise in food prices in the South African Customs Union (Sacu) market and globally, and the big effect this has, especially on

the poor Also considered was the effect that the imposition of the antidumping duties may have on the price of chicken

As the main source of protein for low-income households, it is imperative South Africans have a range of price options when purchasing chicken

However, the price of chicken has continued to increase since then In December 2022, Bloomberg’ s Shisa Nyama Index revealed that 10kg of frozen chicken pieces was the most expensive item on the index The index uses data from the

Pietermaritzburg Economic Justice & Dignity Group and tracks the prices of ingredients used in a traditional local dish shisa nyama

The decision to again increase the quota of frozen chicken allowed to be imported into SA from the US

THE ANNUAL QUOTA FOR FROZEN BONE-IN CUTS … WOULD BE INCREASED FROM 71,290 TONNES TO 71,632 TONNES

may be seen by some to be a compromise that must be made for SA to continue to benefit from the Agoa programme However, it will hopefully also assist in bringing down the price of chicken for poverty-stricken households

It is also hoped that the Sacu, and SA in particular, will soon be able to conclude a reciprocal, mutually beneficial trade agreement with the US that further addresses the challenges around this issue, especially considering the Agoa programme’ s preferential stipulations are set to expire again in 2025

Medical certificate holds no weight in court

Jacques van Wyk Werksmans

In the case of Nehawu obo Matras v Commission for Conciliation, Mediation and Arbitration and Others Mr Matras (the employee) was employed by Mediclinic from 2006 until his dismissal in 2012

The employee informed his employer that he was ill by submitting a medical certificate (sick note) issued by a general medical practitioner

He was absent from work from June 1 to June 3 2012

On the first day of his sick leave, the employee s supervisor informed him via SMS that she believed he was booked off sick to attend a family member s wedding

This suspicion emerged because of a conversation that the employee previously had with her

Upon the employee s

return to work, the employer charged the employee with the following charge:

Very serious misconduct due to your dishonest behaviour in that you submitted a sick certificate to cover your absence for the period 01 June 2012 to 03 June 2012 at Mediclinic Potchefstroom

However, during this period you attended to private matters in the region of George

The employee was found guilty as charged and was dismissed following an internal disciplinary hearing held by the employer The employee, dissatisfied with the outcome, referred the matter to the Commission of Conciliation Mediation and Arbitration (CCMA)

The CCMA found the employee s dismissal to both be procedurally and substantively fair

The employee subsequently applied to the Labour

Court to have the CCMA s award reviewed on the grounds that the commissioner of the CCMA committed a gross irregularity by not applying her mind to the evidence before her, resulting in the decision not being one that a reasonable decision maker could have reached

The employee contended that Mediclinic had no basis and/or reason to dispute that he was ill during the weekend of June 1 2012 to June 3 2012, given that he had submitted a medical certificate to cover this period of absence

He alleged that Mediclinic failed to call the medical practitioner who issued the sick note to him to dispute the recordal by the medical practitioner that he was too sick to work during this period

The employee s supervisor testified that she believed the employee had dishonestly informed the medical prac-

titioner that he was ill

In considering the matter, the Labour Court stated that medical certificates constitute hearsay evidence of a person s incapacity, which must be dealt with as such

The onus to substantiate the medical certificate and call the medical practitioner in question as a witness rests on the employee and not the employer

The fact the employee did not call the medical practitioner therefore meant the probative value of the medi-

cal certificate was reduced

The version of events tendered by the witnesses of the employer and the witnesses of the employee differed in material respects The commissioner was therefore faced with two conflicting versions of evidence before her

The Labour Court held that the CCMA Guidelines on Misconduct Arbitrations provides that when analysing evidence, the evidence must be weighed up as a whole, taking into account factors such as the probability of the different versions and the reliability of witnesses This approach is endorsed by our courts

The Labour Court found that it was evident that the commissioner considered all the evidence as a whole and that she was intimately aware of her duties as an arbitrator and how she needed to

approach the conflicting versions presented to her, as well as the hearsay and circumstantial evidence she was required to analyse to come to her ultimate findings

The commissioner ultimately preferred the employer s version and found the employee s dismissal both substantially and procedurally fair The Labour Court confirmed this decision, ruling that her finding was reasonable

Medical certificates constitute hearsay evidence of a person s incapacity An employer is therefore entitled to interrogate the same, should it suspect that an employee is being dishonest about his or her illness The onus to substantiate the medical certificate and call the medical practitioner as a witness rests on the employee and not the employer

• Move will hopefully help to bring down the price of chicken for poverty-stricken households in SA

AT PRESENT THE US EXPORTS BONE-IN CHICKEN MEAT TO SA UNDER A TARIFF RATE QUOTA ARRANGEMENT

THE ONUS TO SUBSTANTIATE THE MEDICAL CERTIFICATE AND CALL THE MEDICAL PRACTITIONER AS A WITNESS RESTS ON THE EMPLOYEE

/123RF MOZART3737

Unravelling risks for ESG investments

Jessica Blumenthal & Talia Cullinan ENSafrica

Savers and investors rely on their financial advisers to counsel them to prudently invest hard earned savings to meet their long-term needs

SA has a large advisory and financial planning industry serving the retail public, but is this industry evolving quickly enough to provide advice cognisant of emerging risks? Will advice ignore the effects on investment portfolios of climate change, biodiversity loss and water scarcity, among other environment, social and governance (ESG) factors? Or will financial advisers and planners become the missing link between sustainable finance products and customers?

With all the noise around ESG investing it can be difficult for customers and their advisers to distil what is relevant Certainly, ESG investing has become mainstream, being discussed around boardrooms and dining room tables There are a growing number of investors wanting to align their investments with their values by investing in companies that prioritise ESG factors and outcomes, and arguably all investors are increasingly becoming aware that to ensure long-term financial value they need to invest in companies pursuing

a sustainable strategy and managing ESG-related risk ensuring resilience

This change in investor sentiment has led to the development of investment products labelled by product houses as “green” or “ sustainable” , designed to soak up this increasing demand Unfortunately, not all of these labels accurately reflect the real world impact of the packaged portfolios, leading to distrust and accusations of greenwashing Unhelpfully,

a retail investor, or even institutional investors like pension funds, to know how best to invest to ensure the longterm sustainability of their investments and to align their money with their values

the ESG discussion in the US has become politically charged, suggesting that savers and investors funds should be invested with no other objective than targeting financial returns

Complicating factors such as lack of data available in respect of portfolio companies, inconsistent disclosure and reporting, multiple divergent frameworks categorising projects and portfolio companies, and philosophical difficulties in addressing transition in certain sectors, make it almost impossible for

From as early as 2011, Regulation 28 of the Pension’ s Fund Act, 1956 has required pension funds to adopt socially responsible investment approaches that promote and give appropriate consideration to any factor which may materially affect the sustainable long-term performance of a fund’ s assets, including factors falling under the ESG umbrella This regulation recognises that ESG matters may impact the long-term performance of an asset and should be explicitly considered in a due diligence assessment because a failure to do so could mean underor overestimating the expected returns to be generated by the asset

This reflects an acknowledgment by South African authorities that to meet at least the first aim of an investor requires a consideration of ESG factors But notwithstanding that pension fund trustees have been required to act in accordance with this duty for more than a decade, uncertainty remains and we continue to see pension funds investing in assets with dubious sustainability strategies (with potential risk to long term return) to realise

short-term gain

Asset consultants and asset managers are not routinely mandated by pension fund clients to weigh ESG factors pertaining to a portfolio company equally against the expected financial returns posed by the investment This means that even though service providers may consider ESG metrics when evaluating an investment, they remain incentivised by short term financial return and in some instances prohibited from disinvesting from an asset providing a short-term financial gain, but scoring badly against ESG metrics

Against this backdrop, imagine then the position of a retail customer either wanting their discretionary investments or pension fund to align capital with positive sustainable impact, or even if indifferent to impact, wanting their investment to deliver sustainable long-term performance Should an adviser to such a customer be required to talk about ESG and sustainability when providing their advice?

South African law does not currently impose this specific duty on financial services providers (FSPs) and their representatives in so

many words, but arguably existing obligations could incorporate this duty Board Notice 80 of 2003 (General Code of Conduct for Authorised FSPs and representatives) published under the Financial Advisory and Intermediary Services Act, 2002 (Fais Act), imposes a duty on financial services providers to render services in accordance with reasonable requests or client instructions, with due regard to the interests of clients which must be accorded appropriately over any interests of the FSP and to provide a client with “appropriate” advice with reference to the client’ s needs and objectives

The latest draft of the Conduct of Financial Institutions Bill, 2020 confirms this principle by requiring advice to be given in respect of appropriate financial products and services to targeted financial

WE CONTINUE TO SEE PENSION FUNDS INVESTING IN ASSETS WITH DUBIOUS SUSTAINABILITY STRATEGIES

customers and requiring financial institutions to monitor and review the suitability of their financial products and services on an ongoing basis

As such, where a client’ s interests, needs, objectives and instructions require that their capital be invested either to achieve long-term sustainable growth or align with their values a FSP would have a duty to take ESG factors into account when advising their clients This is in line with the laws of other jurisdictions, which impose similar duties on their financial services firms

In the UK, guidance on the Consumer Duty issued in 2022 requires firms to consider the diverse needs of customers and ensure that financial products and services are suitable to meet such needs

In the EU, MiFID II, the legislative framework instituted by the bloc to regulate financial markets and improve investor protections, has recently been amended to incorporate sustainability and impose an obligation on firms to assess the suitability and appropriateness of investment products and services which are provided to clients

Top court rules on right to lock out workers

Sandile July

Werksmans

On April 18 2023, the Constitutional Court delivered a judgment on the interpretation of section 76(1)(b) of the Labour Relations Act 66 of 1995 (LRA) in Numsa v Trenstar (Pty) Ltd[2023] ZACC 11 Numsa s members embarked on a strike in the form of a total withdrawal of labour that continued for several weeks On Friday, November 20 2020, Numsa notified Trenstar that it decid-

ed to suspend its strike and their members would return to work on Monday, November 23 2020, but indicated that it did not withdraw its demand (which was the cause of the strike) Shortly after receipt of this notification Trenstar gave 48 hours notice of its intention to lock out all Numsa members On Monday, November 23 2020, Trenstar proceeded to lock out the members and made use of replacement labour

The issue to be decided was whether an employer

may institute a lockout when at the time it was instituted employees had already suspended their strike

The Labour Court and the Labour Appeal Court both held that an employer may do so and the lockout would be regarded as a defensive lockout, entitling the employer to use temporary labour

The Constitutional Court differed in its approach and upheld Numsa s appeal by finding that Trenstar could not lawfully make use of temporary labour as at the time

that the lockout actually began, Numsa s members were not on strike

The court reasoned that suspending a strike merely means that the employees do not waive their unconditional right to strike which previously accrued to them It does not mean that they continue to strike

The right to make use of temporary labour as provided for in the LRA applies only when the use of temporary labour is in response to a strike (defensive lockout)

If employees have suspended their strike, no strike action takes place and no temporary labour may be used

THE DECISION WAS SIMPLY AN ISSUE OF TIMELINE IT DOES NOT DETRACT FROM THE EMPLOYER’S ABILITY TO MAKE USE OF TEMPORARY LABOUR

The Numsa decision was simply an issue of timeline

The decision does not detract from the employer s ability to make use of temporary labour

The judgment should thus not cause any concern to employers who seek to exercise their collective bargaining power by locking out

It merely confirms that the decision to lock out and use temporary labour should flow as a consequence of an ongoing strike (defensive lockout)

• Will advisers become the missing link between sustainable finance products and customers?

WITH ALL THE NOISE AROUND ESG INVESTING IT CAN BE DIFFICULT FOR CUSTOMERS AND ADVISERS TO DISTIL WHAT IS RELEVANT

/123RF LILIYAFILAKHTOVA

BUSINESS LAW & TAX

Human rights not only the duty of states

Pooja Dela & Paula-Ann Novotny Webber Wentzel

Raised expectations that businesses will be proactive and constantly monitor their effectiveness in promoting respect for human rights have arisen in 2023

International human rights law and guiding principles recognise that governments are the primary dutybearers and trustees of the international human rights regime, meaning governments must respect, protect, promote and fulfil human rights and fundamental freedoms in the first instance

However, these frameworks also provide that the responsibility for respecting human rights is a global standard of expected conduct for all business enterprises wherever they operate, thereby imposing a responsibility on corporates/business enterprises to respect human rights

The world’ s greater focus on and understanding of environment, social and governance (ESG) benchmarks has seen business and human rights (BHR) rise up the corporate agenda, make its way into “hard law” in certain jurisdictions and raise the stakes of good corporate citizenship BHR represents the tangible relationship between

conflict with the international human rights law that binds them They have to actively foster a closer alignment with the values of BHR culture and constantly revisit this as the context for their operational landscape changes

commercial operations and the human rights of their stakeholders It is both inward and outward looking and requires proactive and continuous attention It is not enough for businesses to ensure that they are not in

Businesses thus have to take ownership of, and commit to, the need to respect human rights They need to act on identifying, preventing, mitigating and remediating negative human rights efects in their sectors and across the broader value chain, by putting controls and frameworks in place Controls include human rights due diligence (HRDD) and human rights impact assessments (HRIA), which are governed by the UN’ s Guiding Principles on Human Rights the internationally accepted framework for enhancing BHR standards and practice

An example of the strategic integration of BHR practice into operational business models is Volkswagen’ s recent announcement of its plans to invest directly from

the mines that source the raw materials for battery cells used in electric vehicles Its motives are not only to bring down the cost of and meet increasing demand for battery cells, but also to ensure greater control over parts of the supply chain traditionally left to third parties

But where do corporates start? The UN guiding principles as the first global standard for preventing and addressing the risk of adverse impacts on human rights linked to business activity require business enterprises to (a) avoid causing or contributing to adverse human rights impacts through their own activities, and address such impacts when they occur; and (b) seek to prevent or mitigate adverse human rights impacts that are directly linked to their operations, products or services by their business relationships, even if they have not contributed

They should do this by carrying out HRDD, encompassing four broad steps under principle 17 of the UN

VIEWPOINT AFRICA

guiding principles, with reference to the internationally recognised human rights enshrined in key frameworks such as the International Bill of Rights (comprising the UN Declaration of Human Rights, the International Covenant on Civil and Political Rights, and the International Covenant on Economic, Social and Cultural Rights); the African Charter on Human and Peoples’ Rights; and the International Labour Organisation’ s Declaration on Fundamental Principles and Rights at Work

Human rights due diligence is, however, a continuous risk management process, and must be tailored to each organisation within the context of country-, company- and project-specific nuances

And given the links between ESG and BHR in driving integrated operational strategies and the consideration of sustainability-related impacts, risks, and opportunities at the same level as corporate objectives it is crucial to understand that the human rights framework is

not something to be considered in a business’ s operations, but rather its operations in entirety need to be located within the human rights framework

The values of human rights culture must come to permeate every facet of the business’ s identity, and this can only be achieved through robust and proactive strategic ESG and BHR plans, policies and controls Appreciating this mindset change will support the creation of a business that will be sustainable, resilient in the future and create long-term, shared value for its stakeholders

It will also meet the increasing demands and scrutiny of stakeholders particularly in investment spaces where we are experiencing that large-scale investors require HRDD from entities before forging any commercial relationship

This scrutiny is often more stringent in countries regarded as being high risk those where significant incidences of human rights violations have been reported

Kenyan tax exemption notice ‘unconstitutional’

The high court in Kenya recently delivered a judgment declaring that Legal Notice No 15 of 2021, issued in February 2021 by the cabinet secretary for national treasury & planning that exempted Japanese companies, consultants and employees from tax, was unconstitutional

The notice mentioned 16 agreements entered into between Kenya and Japan from 2007 to 2020

According to the notice, Japanese companies, consultants and workers involved in the projects executed under such agreements would not have to pay income tax on money earned in Kenya, as outlined in the agreements

The exemptions, which were adopted by national assembly on May 19 2021, were issued pursuant to

section 13(2) of the Income Tax Act, which empowers the minister to issue a gazette notice providing that income or a class of income which accrued in or was derived from Kenya shall be exempt from tax to a specified extent

According to the court, under article 210 of the constitution, every waiver must be specifically authorised by legislation, reported to the auditor-general, and accompanied by a reason for the waiver There should also be a public record of the

waiver and amount waived The court also pointed out:

● Section 13(2) of the Income Tax Act grants the power to exempt income or a class of income and not people or a class of people; and

● The legal notice was not subjected to public participation, which is a right that cannot be waived

Because the legal notice did not specify the amounts waived but simply stated that the exemptions were issued to the extent specified in those financing agreements , it did not comply with the requirements of under the constitution and Income Tax Act

Unless an appeal against the decision is filed and allowed by the court of appeal, the immediate effect of the judgment is that the cabinet secretary for national treasury & planning cannot grant a tax exemption to

any entity or individual by simply issuing a legal notice, but must be based on legislation

Meanwhile following amendments introduced by Kenya s Finance Act, 2022, with effect from July 1 2022, the exportation of taxable services is a standard rated supply attracting VAT at a rate of 16%, except where the exported services are in respect of business process outsourcing

In a bid to counter the change in law, a number of petitioners filed a constitutional petition at the high court in September 2022, seeking to challenge the legality of the amendment However, through its judgment delivered on January 31 2023, the court dismissed all the petitions pertaining to the Finance Act 2022 The practitioners are appealing

this decision at the court of appeal and are seeking to overturn the outcome in the high court

On February 7 2023, Kenya s cabinet secretary for national treasury & planning issued the Tax Procedures

(Common Reporting Standards) Regulations, 2023 The regulations, which are effective from January 1 2023, prescribe guidelines for the reporting by both financial and nonfinancial entities as required under the Tax Procedures Act

Another important decision relates to the 30%

KENYA INTRODUCED

A 30% TAX ON LUMP-SUM PENSION

WITHDRAWALS

EXCEEDING 600,000 KENYAN SHILLINGS

tax on lump-sum pension withdrawals being suspended by high court

Following the filing of a petition by the Association of Retirement Benefits Scheme and the Association of Pension Trustees and Administrators, the Kenya high court has suspended the 30% tax on lump-sum pension withdrawals by persons aged 65 years or older pending a hearing and determination of the petition Kenya introduced the 30% tax on lump-sum pension withdrawals exceeding 600,000 Kenyan shillings with effect from January 1 2021, but both associations cited that there was a lack of public participation before the introduction of the tax

Celia Becker is an Africa regulatory and business intelligence executive at ENSafrica

• Business needs to step up with constant vigilance to adhere to established benchmarks and protocols

THE VALUES OF HUMAN RIGHTS CULTURE MUST COME TO PERMEATE EVERY FACET OF THE BUSINESS’S IDENTITY

STANDING TOGETHER

/123RF LIGHTWISE

Online platform report looms

“strengthen enforcement going forward”

Heather Irvine Bowmans

Some 26 months

after initiating a wide-ranging market inquiry into online platforms, the Competition Commission has been given a further extension to publish its final report

The Commission’ s Provisional Report identified 10 “leading” online platforms Google, Property24, Private Property, Autotrader and Cars co za, Mr Delivery and UberEats; Booking com; Takealot and Apple which it says enjoy “first-mover to scale advantages” and employ “strategies to retain and extend leadership” in markets which have irreversibly tipped

This, the commission says, is a “feature of a market” which has distorted, impeded or restricted competition in SA and, accordingly, the commission has recommended a series of sweeping “remedies” using its new market inquiry powers set out in section 43A-G of the Competition Act

For SA’ s most successful homegrown tech player, Takealot, for example, the commission recommends a substantial internal business restructure, to separate its own retail operation from its marketplace hosting third-

party sellers The commission suggests that leading online platforms should refrain from applying parity clauses which require that those customers who do choose to use their online services should refrain from undercutting their pricing on their own website, or on other online platforms

In the case of Mr Delivery, the commission recommends the implementation by restaurants of a standardised rate card for online delivery services and a restriction on the ability of international and national restaurant chains to contract with it on a national basis, across the whole store network To address various different kinds of perceived “unfairness” to small busi-

food delivery and travel) and even price regulation (software application stores)

Finally, the provisional report concluded that all “leading” platforms “attract some obligation to offset the cumulative disadvantages” faced by business owned by “historically disadvantaged persons ” (HDP) and, accordingly, that they should all be “required” to “institute an HDP programme targeted at overcoming barriers to participation”

under the act and/or in which the commission has stepped outside of the boundaries of its powers under the amended legislation

This, the notice says, “differs from the provisional report proposal insofar as it does not set out to prohibit certain conduct, or make determinations on leading platforms, but rather to identify factors relevant to the assessment of market power and conduct subject to existing provisions in the act in the context of online intermediation platforms as guidance to the commission and the courts”

torted competition, whereas future entrants, or platforms already in SA who grow, will only face complaints in terms of the act if once they can be considered to be “dominant” and engage in conduct which constitutes an abuse of their dominant position

ness and/or firms owned and controlled by historically disadvantaged persons, the provisional report suggested significant interference with current contracts (ecommerce, online classifieds,

The comments on the provisional report (on the commission’ s website) identify a number of conceptual flaws in the commission’ s analysis, as well as instances in which the commission hasn’t gathered any evidence of the effect on competition which is required by the act as the trigger for any exercise of the commission’ s powers

Given the scope of the comments received, it is perhaps not surprising that the deadline for the inquiry to publish its final report was initially extended to April 18 2023 In the meanwhile, however, the inquiry published a notice in which it outlined additional proposed remedial action, namely that the department of trade industry & competition (DTIC) minister should publish regulations under the act which will apply “in guiding the courts in interpreting the existing legislation within specific contexts, by providing a list of factors that are relevant to the assessment of existing provisions in the act in that specific context” , to

In addition, the notice proposed that nonbinding guidelines would be published by the commission in terms of section 79 of the act, to complement the minister’ s section 78 regulations through “providing guidance on best practice by online intermediation platforms such that they remain compliant with the act”

The inquiry subsequently clarified that these proposed regulations were not in lieu of the remedial action and recommendations that will be contained in the inquiry’ s final report, but rather were intended to apply in addition to these

This creates the rather peculiar outcome that online platforms who are currently identified as “leading” may face findings or recommendations by the commission pursuant to this market inquiry based on the fact that their conduct (and only their conduct) is a feature of a market which has allegedly impeded, restricted or dis-

It is also not clear whether the commission intends to codify all of its findings and recommendations into guidelines and apply them to all online platforms going forward and, if so, whether this kind of rule-making by an administrative body like the commission will pass constitutional muster

Perhaps most importantly, it is unclear how the commission’ s efforts will support SA’ s broader strategy to attract more investment into the country by global technology companies and drive the greater adoption of new digital technologies which the president identified in his annual ANC statement on January 8 2023 as crucial for SA’ s economic growth and development, especially in areas such as healthcare, education and community safety

The impact of any proposed findings and/or recommendations by the commission on these imperatives, and on the work of other departments such as communications & digital technologies to support them, will need to be carefully considered by the commission and the DTIC before the final report is issued on May 19 2023

Compulsory screening of employees

Johan Botes & Ethan Chetty

Baker McKenzie

Financial institutions, law firms, estate agents and other accountable institutions operating in SA must vet all employees for competence and integrity, or risk sanction, including a fine of up to R50m

On March 31 2023, the department of finance published Directive 8 on the compulsory screening of employees In terms of this directive, accountable institutions including lawyers, estate agents, financial services providers and other forms of companies listed in Schedule 1 of the Financial Intelligence Centre Act (Fica) must periodically screen prospective and current employees for competence and integrity, and to determine whether such employees are persons subject to UN

Sanctions in terms of Section 26A(3) of Fica

Additionally, accountable institutions are obliged to record how the screening has been conducted and must keep records of the outcome of such screening These records must be made available to the Financial Intelligence Centre (FIC) upon request

In February 2023, the Financial Action Task Force (FATF) plenary concluded that it would adopt the report on SA anti-money laundering and counter-terrorist financing measures and officially greylist SA

The FATF sets out a comprehensive framework that countries should strive towards to combat money laundering and terrorist financing SA aims to be removed from the greylist by implementing its legal framework for combating money laundering more effectively

Although not yet confirmed at the time, greylisting was explicitly mentioned as the trigger for certain proposed amendments to Fica in 2022

This new directive seems to be one of the actions taken to assist SA in overcoming its greylisting

In Public Compliance

Communication 55 (PCC 55), the FIC advised the public on mechanisms to abide by Directive 8 Such mechanisms include:

● Screening for competence must entail determining whether an employee has the necessary skills, knowledge and expertise to perform their function effectively and includes scrutinising, among other information, the employee s previous employment history, employment references, qualifications and relevant accreditations

● Screening for integrity involves scrutinising the

morality and integrity of the employee, which may include considering criminal records (with a particular emphasis on crimes involving an element of dishonesty) and financial crimes

The FIC emphasised that such screening should be more stringent in respect of employees that pose a greater risk of money laundering, terrorist financing and proliferation financing (including senior management and certain other categories of employees)

RISK-BASED APPROACH TO SCREENING

In Directive 8 and PCC 55, the FIC emphasises a risk-based approach to the screening of employee information

This involves a proportionality exercise in which an employer is required to balance the risk of a particular employee/category of employees (from a money

laundering, terrorist financing and proliferation financing perspective) with the measures taken, detail and frequency of employee screenings (with high-risk employees being screened in greater depth and more often than low-risk employees)

SANCTIONS AND PENALTIES

Accountable institutions that fail to uphold the directive may be subject to administrative sanctions in terms of Section 45C of Fica

These sanctions vary and could take the form of a caution, reprimand, directive to take remedial action, restriction on business activities or financial penalty not exceeding R10m in respect of natural persons and not exceeding R50m in the case of legal persons such as companies

PCC 55 explicitly states that these mechanisms and

Directive 8 must be applied in compliance with applicable SA labour laws

Additionally, when conducting such screenings, employers must abide by the provisions of the Protection of Personal Information Act, which adds further considerations when contracting with third parties that process personal data (such as outsourced background checks), evaluations of security measures to store personal data, mandatory notifications and obtaining of consent

PCC 55 obliges accountable institutions to perform screening for competence and integrity and targeted financial sanctions (following the risk-based approach)

At the time Directive 8 was gazetted on March 31 2023, and without giving specific timelines for enforcement, PCC 55 stipulated that screenings should begin as soon as possible

• Competition Commission was granted an extension to May 19

IT IS UNCLEAR HOW THE COMMISSION’S EFFORTS WILL SUPPORT SA’S BROADER STRATEGY TO ATTRACT MORE INVESTMENT

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BUSINESS LAW & TAX

Court ruling on arbitration law cuts two ways

In February, the first case on the interpretation of the International Arbitration Act in SA was heard in the Supreme Court of Appeal (SCA)

In Tee Que Trading Services (Pty) Ltd vs Oracle Corporation SA (Pty) Ltd and Another, the SCA was faced with a decision of the high court to stay proceedings instituted before it on the basis that the parties were subject to an international arbitration clause in the agreement under dispute

The International Arbitration Act, by incorporating the Uncitral Model Law, provides that a court faced with a matter subject to an international arbitration agreement shall, on request by a party, stay those proceedings and refer them to arbitration in accordance with the agreement

The SCA held that the courts had no discretion in relation to such matters

In 2018, Tee Que (the appellant) instituted a civil action in the high court against Oracle for damages arising out of a breach of contract Oracle responded to the civil action by way of an application for a stay of those proceedings pending referral of the dispute to arbitration

where a court finds an arbitration agreement to be null and void, inoperative or incapable of performance, may it hear the matter in dispute

Oracle contended that in circumstances where an international arbitration agreement is at play, a court must stay the proceedings before it when called on to do so, pending referral of the dispute to arbitration

This was based on the International Arbitration Act, which provides that only

The high court agreed, finding that the provisions of the Uncitral Model Law, which forms part of the International Arbitration Act, applied to the dispute, and that in terms of article 8 of the Model Law, on a proper interpretation of the applicable agreements, it was compelled to order a stay of the action proceedings pending referral of the dispute to arbitration It held that, unlike with the provisions of the Arbitration Act, under the International Arbitration Act, it had no discretion Tee Que took the decision on appeal to the SCA By way of a judgment dated May 17 2022, the SCA dismissed the appeal In doing so, it considered the question of whether the International Arbitration Act and the Uncitral Model Law applied to the dispute It pointed out that the Arbitration Act was enacted in SA

with the specific purpose of domesticating the Uncitral Model Law, and that the act and the Uncitral Model Law, as incorporated into the International Arbitration Act Act, is SA law It then had to consider whether, in the context of international arbitrations in accordance with the act, the high court had a discretion to refuse a stay of the civil action proceedings

On the question of the court’ s discretion, the SCA highlighted that the “[Uncitral] Model Law reflects the international approach to international commercial arbitration agreements that, unless an arbitration agreement is null and void, inoperable or incapable of being performed, courts are obliged to stay action proceedings pending referral to arbitration ”

TAXING MATTERS

The agreements between the parties being valid and operative, the SCA found that there was no basis for interference with the arbitration agreement underlying the dispute, and accordingly that no discretion exists for a court to refuse a stay application in the circumstances

The impact of the SCA’ s judgment cuts two ways

On the one hand, a SA court has no discretion to hear a matter subject to an international arbitration clause where a party to proceedings raises such a clause

In these circumstances the inherent jurisdiction of the high court is effectively ousted by the provisions of the International Arbitration Act

On the other, a party to an international arbitration agreement effectively loses

its right of access to court in relation to a dispute and must refer that dispute to arbitration in accordance with the agreement

Failure to do so entitles a counterparty to raise the arbitration agreement and effectively force the matter to arbitration

The SCA’ s judgment will impact litigants’ right of access to courts This raises a potential constitutional issue which was not dealt with before the SCA, and which may in due course occasion a decision by SA’ s apex court, the Constitutional Court, on the issue

In the case of Tee Que however, no appeal to the Constitutional Court has been lodged, and the SCA’ s decision remains the authority on the issue in SA

Venture capital company requirement onerous

The section 12J venture capital company (VCC) regime was extremely popular among private equity pundits between 2016 and 2021 when the last contributions were allowed to qualify for a beneficial tax dispensation

While the VCC regime has been on our law books since 2009, it was only in the latter years that its popularity grew exponentially While the past few years have been relatively quiet on the VCC front, activity appears to be picking up again since many early investors in those companies have remained invested for the required five-year term, after which they will not trigger tax recoupments of amounts previously allowed as a deduction for their investment The renewed focus relates particularly to the exit mechanisms

employed by those taxpayers to monetise their investment or exit a cumbersome regulatory structure

Various structures or products that can absorb the investor’ s tax liability on realisation are being marketed with a greater or lesser degree of commercial success While these activities are generally aimed and marketed at the VCC investor on a shareholder level, the VCC itself should tread carefully that exiting shareholders do not result in it any longer complying with the provisions of section 12J

There is a common misconception that the strict requirements that apply to VCCs in terms of their shareholding structure also lapsed along with the sunset clause for contributions in June 2021 This is not the case, and the onerous requirements and restrictions for VCCs remain in place indefinitely and must be measured at each year of assessment VCCs face two potential pitfalls with exiting shareholders The first is that no person, whether alone or together with any other connected person , is allowed to be a connected person in relation to a VCC The connected persons referred to are those in section 1 of the Income Tax Act, which sets out the criteria for how different persons can be a connected person to a company While

a particular person might not individually hold an interest in a VCC that would result in them alone regarded as a connected person, it is that person s fellow shareholders that may potentially result in a combined shareholding which breaches the relevant thresholds

So, for example, a natural person and a trust of which that person is a beneficiary will have to combine their shareholding to test whether either of them is potentially connected to the VCC When shareholders start divesting from the structure through sales or share buybacks, it could result in the VCC breaching the prevalent thresholds

Another potential issue is the limitation that no person may hold more than 20% of the issued shares of a specific class in a VCC Again, divestment through either

sale or repurchase of shares, a remaining shareholder could breach the 20% limit

In both scenarios, the potential tax consequences fall to the VCC It faces a potential revocation of its status as a VCC, resulting in an inclusion of 125% of the deduction previously allowed to any shareholders

While the shareholders may not be directly prejudiced from a tax perspective, they will economically be punished for the VCC s sins, given that their investments economic

value will be reduced with the tax burden of the VCC

It is so that Sars will generally allow the VCC a time within which corrective steps can be taken These corrective measures can, however, trigger a series of unintended tax and commercial consequences

The boards of VCCs are advised to carefully consider changes in their shareholding structure They must ensure they are notified of any potential share transactions prior to those being executed

A transaction on the shareholder level (of which they are not even a part) could severely impact the board

● Pieter Janse van Rensburg is a director at AJM Tax He also serves as a nonexecutive director on the board of the South African Institute of Taxation

THE BOARDS OF VCCS ARE ADVISED TO CAREFULLY CONSIDER CHANGES IN THEIR SHAREHOLDING STRUCTURE

Darryl Bernstein, Deep Ramjee & Cameron Jeffrey Baker McKenzie

• Judgment by Supreme Court of Appeal will impact litigants’ right of access to courts

THE IA ACT WAS ENACTED IN SA WITH THE SPECIFIC PURPOSE OF DOMESTICATING THE UNCITRAL MODEL LAW

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AfCFTA is a game changer

PUTTING AFRICA ON THE MAP

Yael Shafrir Webber Wentzel

The forward momentum of environmental, social and governance (ESG) principles, which permeate every aspect of global economic activity, is also evident in the first strides the African Continental Free Trade Agreement (AfCFTA) has taken

The AfCFTA’ s adoption of ESG principles in a way that is relevant to Africa will enable it to attract capital and achieve its objective of promoting trade and free movement of goods, services and people across the continent

AfCFTA is a game changer for the continent if implemented right There is an entire ecosystem of national, regional and international governmental and economic organisations rallying behind its success as it gains momentum

For the AfCFTA to be a true game changer, it needs to not only achieve its trade and investment objectives but also create a truly transformative impact in governance, climate change and in the social and community sphere

There have been several recent developments in putting the AfCFTA into action The Southern African Customs Union (Sacu) has formally presented its tariff offer, under the Agreement on Trade in Goods, to the AfCFTA Secretariat for review to ensure it accords with the modalities

Once it is approved and accepted, it will be incorporated into South African law

Significant progress has also been made on the Agreement on Trade in Services; the Investment Protocol and Dispute Resolution mechanism; the Competition Protocol; and the Intellectual Property and E-commerce Protocols

Most significantly, the Rules of Origin, which will determine whether a product is “made in Africa” , have largely been agreed Only those rules relating to automotive and textiles require finalisation There is visible progress on payment systems (under the Pan-African Payment and Settlement System (Paps) launched by Afreximbank) and transport and logistics, through the Programme for Infrastruc-

Africa, a single economic community allowing the free movement of goods, services and people

Congruent with AfCFTA developments, Webber Wentzel’ s Competition, Trade & Investment (CTI) practice launched early last year and is also growing

THE INTERSECTION OF ESG AND THE AFCFTA ESG is becoming increasingly important in global investment practices and trends It requires the deployment of capital to projects and activities that achieve the UN Sustainable Development Goals (SDGs) and by doing so it also attracts capital As the AfCFTA charts its own path for Africa, it can also take leadership on ESG issues

The synergies between ESG and the AfCFTA are already evident in three key respects

ture Development in Africa (Pida)

Just as Africa’ s mobile telephony and fintech sectors have leapfrogged their more gradual evolution in other continents, the AfCFTA is evolving faster than similar economic communities did elsewhere, such as the EU and North American Free Trade Agreement (Nafta)

Since the AfCFTA is a free trade agreement, not a customs union, it does not have a common external tariff

Its ultimate end point aligns with Agenda 2063 for

● Governance: The AfCFTA’ s key short-term gain will be to encourage foreign direct investment (FDI) into the continent The AfCFTA will ultimately provide a comprehensive governance framework, with dispute resolution mechanisms (at state level) and investor protection mechanisms across its membership (currently 46 African countries) This provides additional comfort for investors With this governance framework in place, more investment is expected to flow into the continent, including in manufacturing facilities

● Environmental: One of the most active, and now prioritised sectors under the AfCFTA, which is seeing significant momentum, is automo-

tive There is already an Automotive Task Force and Automotive Strategy for the AfCFTA Transport and logistics have also been prioritised as a sector under the AfCFTA or, more broadly, the area of mobility is gaining attention across the continent Electric vehicles (EVs) are increasingly important globally In Africa, there is generally broad acceptance that we are likely to see EVs led by public transport and two/ three-wheel wheelers ahead of automobiles The sector is mobilising regional value chains (RVCs) and a “hub and spoke” model built on complementarity and specialisation Finally, we are also likely to see developments in countries such as Zambia and the Democratic Republic of Congo in relation to sourcing rare earth metals for the manufacture of electric batteries

Various countries and regional economic communities (RECs), such as Ecowas (including Afreximbank at

continental level), have automotive programmes in place, including an EV strategy

Some countries (such as Rwanda) have introduced investment and other incentives to encourage EV manufacture, others special economic zones (SEZs) and import incentives for automotive manufacturers SEZs are recognised as a key tool for boosting investment and trade, and we are likely to see more developments in this space

● Social: The AfCFTA emphasises the importance of creating entrepreneurial opportunities for women and youth A Committee on

THE AFCFTA EMPHASISES THE IMPORTANCE OF CREATING ENTREPRENEURIAL OPPORTUNITIES FOR WOMEN AND YOUTH

Women and Youth has been established and work is ongoing towards a protocol on Women and Youth in Trade This is a key pillar of the AfCFTA and aims to deal with the challenges that women and children face daily across the continent

Most significantly the AfCFTA by definition aims to create not only economic but social benefits by boosting trade and attracting FDI and participation in global value chains to ultimately reduce poverty and increase shared prosperity

The AfCFTA is unique when compared to free trade areas and customs union that we have seen before

Most significantly the agreement establishing the AfCFTA recognises in its preamble that the importance of “clear, transparent, predictable, and mutually advantageous rules to govern trade in goods and services, competition and intellectual property and recognises the importance of international security, democracy, human rights, general equality and the rule of law for the development of international trade and economic cooperation ”

The agreement also stresses “the rights of state parties to regulate within their territories and achieve legitimate policy objectives in areas including public health, safety, environment, public morals and the promotion and protection of cultural diversity”

There is much opportunity for the continent under the AfCFTA to shape itself to meet our evolving environmental, social and governance challenges and to harness our innovation, youth and natural resources under a new rule-based continental governance framework

• The African Continental Free Trade Agreement can help meet ESG challenges if implemented right

THE AFCFTA’S KEY SHORT-TERM GAIN WILL BE TO ENCOURAGE FOREIGN DIRECT INVESTMENT INTO THE CONTINENT