Business Law & Tax (July 2022)

BUSINESS LAW &TAX

JULY 2022 WWW.BUSINESSLIVE.CO.ZA

A REVIEW OF DEVELOPMENTS IN CORPORATE AND TAX LAW

Plan to unlock tax benefits of green energy production

FIT FOR PURPOSE

To take advantage of the attractive allowances, •mining companies need careful tax planning Ntebaleng Sekabate, Kristel van Rensburg & Olivia Bernstein ENSafrica

T

he 2022 Junior Mining Indaba focused on, among others, the revival of mining exploration in SA. This was after the department of mineral resources & energy published the Exploration Strategy for the Mining Industry of SA on April 14 2022, which set out the steps to be taken by the government, together with relevant social partners, to increase SA’s share in global exploration spend to at least 5%.

A key weakness identified in the document is energy instability, and the department indicated the need to

increase energy generation, with a focus on clean energy sources in SA’s transition to a low carbon economy.

The issue of increasing energy generation has been topical for a number of years, and in 2021 President Cyril Ramaphosa announced the government’s intention to increase the threshold for embedded self-generation of electricity from 1MW to 100MW. This was a surprising

SELF-GENERATION, IF IMPLEMENTED, WOULD ASSIST MINING COMPANIES TO REDUCE THEIR TOTAL GREENHOUSE GAS EMISSIONS

development, but a welcome one. The announcement was followed by the amendment of Schedule 2 of the Electricity Regulation Act, 2006, unlocking significant opportunities in the private sector to introduce additional capacity for the generation of renewable energy.

This is of particular significance in the mining industry.

Mining entities are now allowed to equip themselves to meet pressing energy needs in an environment of erratic supply, and to obtain certainty on price increases in the long term.

This newfound energy freedom will unlock significant new investment in the mining space. The Minerals Council SA expects this development to lead to additional short- and medium-

/123RF — PARILOVV term investment of about R27bn. Furthermore, a constant power supply will enable mining companies to continue with their operations uninterrupted, reducing lost production time and saving millions as a result.

In addition, it was announced during the 2022 budget speech that the carbon tax would be used as a compliance mechanism for the carbon budget regime (introduced by the Climate Change Bill).

Self-generation, if implemented, would assist mining companies to reduce their total greenhouse gas emissions by introducing renewable energy sources, thereby moving closer to net-zero

emissions and avoiding a hefty carbon tax bill in the long run.

The cost savings presented by a steady energy supply, as well as a decreased carbon tax liability, are complemented by the provisions of the Income Tax Act no 58 of 1962 (ITA) that may allow mining companies to deduct many of the capital costs involved to produce renewable energy.

Though the ITA contains various capital allowances that may be used, these provisions are niche and complex. To take advantage of the attractive tax allowances, careful tax planning and a consideration of the relevant requirements must coincide

ENSafrica | data privacy

keep the data breach at bay With POPIA in full swing, don’t miss out on securing your business

discover more

strong expertise in data privacy Chambers Global Guide

with the planning of any power generation plant.

An example of such a consideration is whether the project’s financing will be through local or foreign funding. This may affect where the assets are best placed within the group, and whether the interest limitation or transfer pricing rules might come into play. These rules may prevent the mining company from deducting its interest expenses.

Another key consideration is the composition of the group structure. In this regard, questions such as whether the plant is best held in a special purpose vehicle, CONTINUED ON PAGE 2

2

BusinessDay www.businessday.co.za July 2022

BUSINESS LAW & TAX LATERAL THINKING

Conscience for corporates

Business Law & Tax editor Evan Pickworth talks to Lerisha (Lee) Naidu, who has been appointed as •managing partner of Baker McKenzie in Johannesburg, effective from July 1 this year

E

P: Before we discuss your new role, could you tell us a little about how it all

started?

LN: I started out my career wanting to become a human rights lawyer and an advocate for change, but I soon came to understand that the transformative project is not confined to NGOs and civil society groups. My parents always encouraged awareness, discourse and frank debate. They invested in our education and travel locally and abroad, even if that meant debt and struggle. I have had the benefit of support and mentorship throughout my career from inspirational leaders in the industry who shaped my approach to legal work and my view of the world. Where I am today has been the product of a group effort.

One of my first legal roles was as a legal researcher for deputy chief justice Dikgang Moseneke of the Constitutional Court. He told me that businesses needed a social conscience to drive SA’s transformation, and I made the decision to join the corporate world to do just that. I had always been insistent I would pursue a career in human rights work in the fullness of time, but had wanted to get a corporate gig under my belt.

EP: What area of law did you choose to practise in?

LN: I soon found that competition law was a very good fit for me. As a lawyer in a democratic dispensation that is comparatively young, practising in this area allows me to engage in cases that were and are pioneering and precedent-setting. This is particularly the case for competition law, where the layers of jurisprudence are still forming. Competition law is at the forefront of national transformation as it is core to

the health of the economy and to everyday consumers, whose socioeconomic rights are of paramount importance in a deeply unequal society.

I am now the head of the antitrust & competition practice at Baker McKenzie in Johannesburg. I am exceptionally proud of my team, comprising a group of impressive lawyers who have, together and individually, made notable strides in the market in our representa-

tion of clients on pioneering and precedent-setting cases.

EP: What is your vision for the firm as you take up this role?

LN: As a foremost thought leader on leadership discourse, Simon Sinek has made the point that “[t]here are leaders and there are those who lead. Leaders hold a position of influence. Those who lead inspire us”.

It is therefore not necessarily my vision for the firm that counts but rather my ability to inspire a compelling shared vision that is embraced by our clients and our people alike. I therefore reference our vision with conscious purpose.

Our vision is to build a foundation of shared values that are not just espoused but lived and that underpin everything we do — from collaborating with our clients and partners, building highperformance teams, encouraging social impact, maximising learning and devel-

opment and fostering innovation and thinking outside of the box to engendering spaces of excellence, underpinned by inclusion, diversity, collaboration, friendship, genuine belonging and fun!

Our vision is to find commonalities in the visions of our clients so we journey with them not just as a service provider but as a true and trusted partner.

Our vision is to have meaningful relevance, both

locally and regionally, including on important macro issues such as sustainability, youth empowerment, innovation, social justice, equality and transformation.

And it is therefore, in this context, that the hymn sheet version of our shared vision should be situated. With all this being said, we will collectively strive to be the global law firm of choice in subSaharan Africa, bringing value to our clients and people, to the country and to the region.

EP: What values will you espouse in your managing partner role?

LN: Respect, transparency and accountability, integrity and honesty, compassion and empathy, client and peoplecentricity, passion, collaboration and teamwork, social responsibility and conscience, authenticity, friendship, inclusion and belonging, innovation, drive, ownership and agency, global citizenship, empowering others and

humility. It is not a closed list but it is an indispensable one — our most optimal form of success depends on it.

EP: What do you want to achieve as managing partner?

LN: I am eager to work towards actualising a space that I had hoped for at the very beginning — one that embraces and encourages our truest and best selves, creating an environment out of which we will deliver teams of world-class lawyers to our clients and conscious contributors to our society.

Growing in a law firm requires grit and resilience but holding on until now will allow some space to influence and direct its continued course, employing new and different strategies that are people-centric in the first instance.

EP: Tell us about who you are when you are not at work.

LN: I am a proud South African and African, believing passionately in the uniqueness and magic of this continent and its people. Making a difference, both within and outside of work, brings me personal fulfilment. In a society that is divided and deeply fractured by a legacy of entrenched oppression, it is often the incremental gains that are a more realistic measure of progress.

For me, the headspace that keeps me going is my natural optimism that every day takes us marginally forward and my deep desire to be part of the progress. I experience great fulfilment in connecting with others, inspiring action and contributing to the change through discourse, service and collaboration.

And, of course, I am deeply passionate about submerging myself in good music, arts and culture and the scenic beauty and majesty of Africa.

Plan to unlock tax benefits of green energy production CONTINUED FROM PAGE 1 as opposed to within the mining company itself, must be analysed.

For example, the ITA provides capital allowances for companies whose trade is the generation of electricity. This may not be available where

the plant is housed in the mining company.

It is also incumbent on the mining company to consider each component of the power plant in a granular manner. Different sections in the ITA target different facets of a renewable energy structure and have similar but

slightly varying requirements. These provisions are not straightforward.

For example, section 12B, which allows deductions for equipment used in the creation of solar energy, requires that the asset must be owned by the taxpayer. But, of course, in some projects

expenditure must be incurred in respect of assets not owned by the taxpayer, for example, upgrades to Eskom’s substations.

Evidently, the president’s announcement in 2021 is a significant development in the mining economy. It will ensure a consistent power

supply, lower the carbon tax liability and attract new investment. These benefits are augmented by the ITA, the provisions of which — if considered at the outset and in sufficient detail — potentially provide mining companies with immense financial relief as regards the construction of

new renewable energy generation projects or the improvement of existing plants.

To this end, all taxpayers must ensure the correct tax allowances are used, ensuring tax efficiency and avoiding potential penalties for getting it wrong.

ENSafrica | data privacy

keep the data breach at bay With POPIA in full swing, don’t miss out on securing your business

strong expertise in data privacy Chambers Global Guide

discover more

4

BusinessDay www.businessday.co.za July 2022

BUSINESS LAW & TAX

Keep alert to Fica changes

There is a danger that an •accountable institution asks for

TOO MUCH INFORMATION?

too much when verifying clients

Aslam Moosajee , Era Gunning , Jessica Blumenthal & Shenaaz Munga ENSafrica

T

he recent case of Nedbank Limited v Houtbosplaas (Pty) Ltd and Another raises interesting considerations for accountable institutions aiming to comply with their obligations under the Financial Intelligence Centre Act, 2001 (Fica).

Fica is aimed at the identification of the proceeds of unlawful activities, combating money laundering and combating the financing of terrorist and related activities.

To give effect to these objectives, Fica creates a legal framework for the effective identification and verification of clients. Regulations issued under Fica set out a number of procedural elements that financial institutions ought to give effect to in order to implement Fica.

The high court in Pretoria in Houtbosplaas (Pty) Limited and another v Nedbank held that customers of banks are under no statutory obligation under Fica to provide documents to a bank for verification purposes, upon request from a bank. Nedbank applied for leave to appeal but this was dismissed. Nedbank subsequently applied for leave to appeal to the Supreme Court of Appeal (SCA), which was granted.

The dispute at the heart of this case arose as a result of Nedbank refusing to close the bank accounts of Houtbosplaas and TBS Alpha (the companies) pursuant to their written instructions. Houtbosplaas and TBS Alpha had a longstanding relationship with Nedbank. Four trusts each held one preference share and ordinary shares in the companies.

In 2016, Nedbank requested certain information from the companies pursuant to the provisions of Fica. Some of the information was provided, but the companies contended that the request constituted an unjustifiable intrusion into the trusts’ right to privacy.

A dispute arose between Nedbank and the companies’ representative in respect of the request for information, which ultimately led to the companies giving written notice to Nedbank in January 2017 to close their accounts and transfer the credit balances of those accounts to Absa Bank.

Nedbank refused to close

the accounts on the basis that the companies failed to comply with Nedbank’s request and, consequently, the accounts were restricted based on Fica.

In July 2017 the accounts were closed after Nedbank received the outstanding information it requested from Houtbosplaas and TBS Alpha.

The companies viewed Nedbank’s conduct as unjustifiable and unlawful and instituted proceedings to claim damages in the amount of R181,103.31, together with interest and costs.

In determining the question of whether Nedbank was

THE COMPANIES VIEWED NEDBANK’S CONDUCT AS UNJUSTIFIABLE AND UNLAWFUL AND INSTITUTED PROCEEDINGS entitled to the requested documents, specifically the trust deeds, the SCA had regard to various provisions in Fica.

Section 21(2) of Fica, prior to its amendment, read as follows: “If an accountable institution had established a business relationship with a client before this act took effect, the accountable institution may not conclude a transaction in the course of that business relationship, unless the accountable institution has taken the prescribed steps – (b) to establish and verify the identity of the client”.

The SCA held that section 21(2) of Fica applied to existing clients of an accountable institution who had already established a business relationship before Fica took effect. At the inception of Fica, Nedbank was required to comply with the prescripts and, once this had occurred, it was not necessary for Nedbank to verify the companies in respect of each and every transaction concluded during the relationship, provided there is an ongoing obligation to ensure the verification information is up to date.

Similarly, the SCA found that regulation 7, which at the relevant time required financial institutions to obtain various particulars of trusts holding 25% or more of the voting rights at a general meeting of a company, only applies when an accountable institution is establishing a business relationship or con-

/123RF — DROZDIRINA cluding a single transaction.

The SCA held that the preference shareholders had untrammelled voting rights and consequently would have every right to vote at general meetings of the companies. Consequently, each trust that held shares in the companies held less than 25% of the voting rights.

The SCA dismissed Nedbank’s appeal and held that there was no basis for Nedbank concluding that it was justified in refusing to give effect to the companies’ instructions to close the bank accounts, given that in accordance with the law at the time, Nedbank was not required to verify the identity of the trusts as they did not hold more than 25% of the voting rights.

The SCA concluded that the refusal by Nedbank to give effect to the instructions to close the bank accounts shortly after receiving the instruction from the companies constituted Nedbank breaching its obligations to

THE SUPREME COURT OF APPEAL HELD THAT THE PREFERENCE SHAREHOLDERS HAD UNTRAMMELLED VOTING RIGHTS

act in accordance with instructions from its customer. Consequently, the SCA held that the Pretoria high court was correct in also awarding mora interest in favour of the companies from January 20 2017 (being the date of demand) to July 10 2017 (being the date on which Nedbank closed the accounts of the companies and transferred the funds in the accounts to Absa).

The Pretoria high court’s statement that customers of a bank are not obliged under Fica to provide the bank, upon request, with documents to verify their identity is surprising, but must be considered in light of regulation 7. Regulation 7 (prior to it being repealed) referred to a 25% threshold for triggering identification and verification.

On application of this rule, Nedbank was not obliged to request documents from the trusts and the trusts were within their rights to refuse providing the information.

However, in our view, this should not be read as suggesting that in terms of current legislation an accountable institution would be precluded from, in terms of its risk management and compliance programme (RMCP), noting a customer as high-risk or noncompliant if that customer refused to provide information which had

been requested by the bank in accordance with its RMCP, whether that information was requested in establishing a relationship, or pursuant to that institution’s ongoing due diligence obligations.

We do not believe a customer would be entitled to

FINANCIAL SECTOR LAWS ARE RAPIDLY EVOLVING AS REGULATORS SEEK TO ENSURE FAIR OUTCOMES FOR CUSTOMERS raise as a defence that the information could be obtained from a third party and an accountable institution would be permitted to initiate its high-risk policy if a customer refuses to provide requested information.

This judgment does, however, highlight the importance of an accountable institution only requesting information that it is entitled to under Fica and its RMCP. Bearing in mind the principle of minimality, as set out in section 10 of the Protection of Personal Information Act (Popia), an accountable institution may only request (and subsequently process) information if it is adequate, rele-

vant and not excessive. Asking for too much information, or information not required in terms of Fica or the RMCP, creates a risk because failure to provide information not strictly required does not found a basis for refusing to act on the instruction of a customer.

Failure to act in accordance with the terms and conditions applicable to a particular customer, such as refusing to implement an instruction when not strictly entitled to do so, could expose a financial institution to a claim for interest, or possibly an offence under the Financial Institutions (Protection of Funds) Act. Bearing the provisions of Popia in mind, a bank may also expose itself to proceedings that arise as a result of a breach of Popia.

Financial sector laws are rapidly evolving as regulators seek to ensure fair outcomes for customers while ensuring financial stability and the integrity of the SA financial markets. It can be difficult for financial institutions to ensure their operations remain compliant.

Case law such as this demonstrates this difficulty, and also serves as a caution to financial institutions to continuously review and reconsider their procedures and policies with their advisers in light of developments.

5

BusinessDay www.businessday.co.za July 2022

BUSINESS LAW & TAX

Vaccine firms not keen to share patents

SECRET INGREDIENTS

• Taxpayer money involved in development Dr Joanne van Harmelen ENSafrica

K

now-how is something that falls squarely within the domain of intellectual property (IP) law because know-how is often protected by patents.

On April 29 2022, the BBC published an article headed “Investors lose vote to share Covid vaccine know-how”.

The subheading fills in the gaps: “Three of the world’s biggest Covid vaccine makers have seen off attempts to make them share the knowhow to make their jabs.”

Moderna, Pfizer and Johnson & Johnson are three of the pharmaceutical giants that make Covid-19 vaccines.

Investors in these companies proposed a vaccine knowhow share with companies in developing countries to ensure people in the developing world also get vacci-

nated. In each case, the proposal was rejected. The argument advanced for a knowhow share was simple: it will speed up the vaccine rollout.

The argument against a know-how share seemed to be something along these lines — we are making vaccines faster than they can be used, so there is no need for us to share our IP. World Health Organisation director-general Tedros Ghebreyesus addressed the Moderna annual general meeting earlier this year. He made the point that more than 11.4-billion doses of the Covid-19 vaccine had been distributed worldwide, yet one-third of the world’s population had not received a single dose. This came on the back of a public statement by Médecins Sans Frontières (MSF), in which it called on Moderna to make its Covid19 vaccine technology available to manufacturers in the developing world.

MSF

reminded Moderna that it received about $10bn in public funding to develop the vaccine.

Yet only 24% of Moderna’s shareholders backed the proposal that there should be an IP and technical know-how transfer to manufacturers in low and middle-income countries. One small victory was a concession by Moderna to link executive bonuses with meeting demand for vaccines in poorer countries.

The shareholders of Pfizer also rejected the idea of a know-how share by a remarkably similar margin, with only 23.7% in favour.

Johnson & Johnson did not provide figures.

Moderna’s reasoning is along the lines of “we’re doing what we can in the context of the constraints facing vaccine delivery in developing countries”. In 2021, the company delivered 807-million doses of vaccine, making a profit of $12.2bn. Of these 807-million

/123RF — KOVTYNFOTO doses, Moderna claims that more than 25% went to low or middle-income countries.

The company further claims that share could have been higher if it hadn’t been for issues such as a lack of refrigeration capacity, limited availability of health workers and vaccine hesitancy. Moderna says it is looking at increasing its manufacturing capacity in Kenya.

COMPLEX

Pfizer defends its refusal to transfer IP on the basis that vaccine production is “extraordinarily complex,” involving as it does “280 ingredients from 86 suppliers in 19 countries”. Given this complexity, the concern is that a transfer of IP without proper technical implementation may well result in risks to patients. The company claims it is expanding production to

4-billion doses this year, with a quarter going to “less welloff” countries, while those with the “lowest incomes” are to get vaccines at cost price.

Johnson & Johnson, which has also received millions of dollars from US taxpayers, has indicated that it has provided 900-million doses at not-for-profit prices, and says it is working on a licencing deal with an African country.

Oxfam USA has shares in all three companies, and in the case of each company, it was Oxfam that submitted the proposal for a know-how share. Oxfam rejects the arguments advanced by the companies for refusing the proposal, claiming vaccine hesitancy has been exaggerated. It says that “what the donation-based status quo has achieved is 74% vaccina-

tion rates in rich countries and 12% vaccination rates in poor countries”. It goes on to say that “lower income countries are saying give us the tools that we need to manufacture our own doses for our own citizens, and that locally based manufacturing will solve many problems”.

There has been a great deal of talk about an IP waiver, ever since the issue was raised in discussions involving the EU, US, India and SA. But there has been little real progress. On May 6, Politico reported that the issue of a waiver had been discussed at the World Trade Organisation, and that following this meeting, the US announced it was still engaged in domestic discussions, while China described the latest text as one that was no more than a basis for further discussions.

As has been pointed out before, there may be more pertinent issues stalling access to Covid-19 vaccines in developing countries, such as the cost and availability of raw materials, the capacity and number of vaccine manufacturing facilities capable of producing the quantities of quality vaccine required for the global population, and the logistical complexities of providing vaccines to remote or rural locations, particularly where the vaccine requires a cold chain to remain viable.

Until all of these issues can be dealt with, it seems there will be slow progress for vaccine manufacturing on the African continent, regardless of the willingness of big pharma to share their knowhow.

CONSUMER BILLS

Bill of rights gives equal protection to everyone

A

s we come out of Pride Month and Youth Month, it is worth reflecting that when the bill of rights uses the word “everyone” in the equality clause it means just that. It gives equal protection and benefits of the law to everyone.

The ink was hardly dry on the constitution in 1995 when the Constitutional Court declared the death penalty unconstitutional and explained the values that have protected all of us ever since. While public opinion may have some value, it is no substitute for upholding the values in the bill of rights, if necessary by recourse to the courts, without fear or favour.

If public opinion were decisive, there would be no reason for the Constitutional Court because parliament has a mandate from the majority of the public. That argument was relied on by the apartheid regime.

The very reason for the establishment of the new

PATRICK BRACHER legal order is to protect the rights of minorities and every individual. Someone convicted of murder has the same rights to equal protection as the president.

As the recent Constitutional Court judgment shows, even smokers have rights.

This has been starkly illustrated recently in relation to the theft of money from the farm of the president. We have heard hundreds of times from the media and the public that “he owes us an explanation”. Any lawyer will advise you that if a charge is laid against you there is a right to remain silent. Like most principles in law, the Romans had a phrase for it: nemo tenetur se ipsum accusare (“no person is

bound to accuse themselves”). That right to silence, which can be exercised by everyone even when accused of a misdemeanour, is one of the many rights that must be respected.

Pride Month reminds us that no-one may unfairly discriminate against others on any of many systemic grounds mentioned in the bill of rights. Gender, sex and sexual orientation are only a few of the prohibited grounds. But this does not mean people with a different gender or sexual orientation from you or me are in any sense different from anyone else in relation to basic human rights.

It is not a question of being fair to people who, say, fall within LBGTQI+ gender or orientation. That label is not necessary because there is a separate LGBTQI+ “community”. Labels become necessary because people unfairly discriminate against others, even against those in the majority, as in the case of

the universal discrimination against women. That differentiates us from, for instance, the US constitution, where politicians can load the courts with judges holding a specific view and override years of entrenched and established basic rights.

In SA the core value of our constitution is human dignity. The courts have recognised many times that the right to employment is an essential part of that obligation. That right begins with every child being entitled to basic nutrition and basic education, accessible through reasonable measures by the state.

These are not rights invented for our constitution.

You don’t need international conventions nor bills of rights to recognise how important it is that we embrace these rights practically and not just conceptually. It starts from the recognition that “everyone” means everyone.

This brings me back to the point that the bill of rights protects what the

Constitutional Court, in the death penalty case, called the social outcasts and marginalised people of our society. People are not marginalised because of anything they have done.

They are marginalised because other people impose self-created values that discriminate unfairly.

Take a simple example.

Sex work in SA is criminalised. The law assumes that sex workers are deliberately embarking on criminal acts. In a country with the levels of unemployment and poverty SA has, this is inexcusable. If a country such New Zealand can decriminalise sex work, what possible basis can there be for not doing so in our

LABELS BECOME NECESSARY BECAUSE PEOPLE UNFAIRLY DISCRIMINATE AGAINST OTHERS

constitutional democracy where most of those involved in sex work are involved because of necessity not choice?

And even it that were not the case, there is no reason and no constitutional basis for sex workers to be marginalised and criminalised.

Pride Month and Youth Month are just examples of the bigger picture. We recognise the basic rights of people in all kinds of ways.

There is some right or other being celebrated on virtually every day of the calendar.

These are not rights of separate classes of persons we have to give special attention to. We are all equal individuals. Every case is an example of why “everyone” not only has equal rights but that everyone has an obligation not to judge unfairly whether any other individual has equal rights. ● Patrick Bracher (@PBracher1) is a director at Norton Rose Fulbright.

6

BusinessDay www.businessday.co.za July 2022

BUSINESS LAW & TAX

Keeping tabs on work jabs

ON THE RECORD

Just because the state of disaster has been lifted •doesn ’t mean you can relax vaccination policies Lauren Salt & Jessie Gertzen ENSafrica

W

ith the end of the national state of disaster, some employers have become complacent about determining their employees’ vaccination status or keeping this information up to date.

Many employers rely on outdated vaccination status surveys or operate under the misapprehension that their workforce’s vaccination status is of no consequence to their current operations.

This can’t be further from the truth. Below, we discuss the importance of employers taking steps to determine employees’ vaccination status, and the impact of failing

to do so.

First, in terms of the Code of Practice on managing exposure to Covid-19 in the workplace (New Code), issued by the department of employment & labour on March 15 2022, every employer must take measures to determine the vaccination status of its employees. With the advent of booster shots, an employee’s vaccination status can be a moving target. The New Code recognises this and has

EVERY EMPLOYER MUST TAKE MEASURES TO DETERMINE THE VACCINATION STATUS OF ITS EMPLOYEES

expanded the definition of vaccinated to include booster shots. A consequence of this new obligation under the New Code means that employers who have not collected their employees’ vaccination status ought to collect this information, which in turn ought to include information regarding employees’ booster shots.

The question then arises: is it a “must” to keep these records up to date?

The Protection of Personal Information Act, 2013 (Popia) provides that a responsible party (the employer in this instance) must take reasonably practicable steps to ensure the personal information of its employees is complete, accurate, not misleading and updated, where necessary. This means an employer must verify

If a risk assessment has not been updated since employees have become eligible for boosters, and employers do not know the current vaccination status of their employees, the risk assessment may not reflect the true risk in the workplace and the workplace may not be as healthy and safe as the employer believes.

The risk assessment that employers are required to conduct should be a living document and updated regularly. It needs to be informed by not just vaccination rates but developments in the Covid-19 landscape.

BOTTOM LINE

/123RF — SUBFOCUS93 (through obtaining employees’ vaccination certificates) that the employees are, in fact, vaccinated and what the status is in respect of booster shots. This is particularly the case if employers are relying on their employees’ vaccination status when assessing the risk to health and safety in the workplace.

An employer may have, based on a risk assessment, deemed it unnecessary to implement mandatory vaccination because of a high vaccination rate in its workforce.

Similarly, an employer may have implemented a manda-

tory vaccination policy and then ceased to impose mandatory vaccination once a certain percentage of the workforce became vaccinated.

But has this risk assessment been updated? If the risk assessment was undertaken before the introduction of booster doses, an employer’s vaccination rate may have fallen from 90% to 10% in the scenario where employees have failed or refused to receive their booster shot(s) and the efficacy of their initial doses has waned.

The bottom line is that it is important for all employers to know their employees’ vaccination status, especially where there is a vaccination policy in place.

The percentage of a workforce that is vaccinated will directly inform the risk assessment every employer is required to conduct and this information must be updated on a regular basis.

Employers are encouraged to seek legal advice where necessary to ensure their risk assessments and policies are up to date and legally compliant, and that they obtain, maintain and retain their employees’ vaccination status within the bounds of the law.

LEGAL SCOOP

Rights and wrongs of different labour action

L

ock-outs, strikes, picketing, work stoppages … so many terms, but what do they all mean?

It would be understandable for employers to not always know what remedies they can seek after their employees take part in any of these as they all differ despite seeming so similar.

Consulting with your experienced legal adviser is imperative; however, having an understanding of the terms and what you need advice on can make all the difference to finding your workable solution. ● Are they grasshopping, striking or going slow?

Strikes are basically either a refusal to work or can also be “go-slows” or “grasshopper” strikes. Goslows are literally what they are called in that employees work slowly, thereby putting pressure on their employers to meet their demands. A grasshopper strike is when employees do intermittent strikes by coming to work, then striking, returning to work and so on with the aim being to make the employer meet their demands.

Work stoppages by single employees are excluded

LEGAL SCOOP from the definition of “strike”.

Essentially, when two or more employees down tools, their actions would constitute a strike if they act with common purpose.

Usually the difference between a work stoppage and a strike is that in work stoppages, employees simply stop working without placing a demand on their employer whereas in strikes, clear demands are made. This distinction is important because it affects how the employer will and can respond should either occur.

Any group of employees can strike; however, for protected strikes, employees need to comply with the requirements of the Labour Relations Act, No 66 of 1995 (LRA). Employees do not have to be trade union members to participate in a protected strike but, importantly, employers must make note of which employees participate as this

can be vital if the employer approaches the court for remedy in regards to an unprotected strike.

In interdict applications, employers will need to submit as much evidence as possible to establish the link between the employees on strike and the unlawful conduct complained of, whether it be by identifying specific employees in instances of isolated unlawful conduct or offering facts that imply it is more probable that the employees have engaged in unlawful conduct. Sweeping allegations that employees are acting unlawfully will not be sufficient in the absence of proper evidence.

It must also be noted the proper identification of culprits of unlawful conduct will not only satisfy the requirement that there must be a link but will assist employers in successfully disciplining employees who have embarked upon such unlawful conduct.

It is also important to note that employers may not dismiss employees for participating in a protected strike unless their conduct during the strike is unlawful.

Secondary strikes can also ensue and this is when

other employees strike in support of a primary strike held by colleagues. However, secondary strikes are not protected unless they are in support of a protected primary strike. Secondary strikers also need to give employees seven days’ notice and the strike must not disproportionally affect the employer to the primary strike. ● What about salaries and wages during a strike?

Simply put, “no work, no pay” applies during a strike.

This principle became highly topical during this Covid-19 lockdown period, with much confusion around the legalities when it comes to employers having to continue to pay, or not pay, their employees. However, employers have to make payments in kind for food, accommodation and other benefits such as pension, medical aid and so on. ● Strike ultimatums: An employer may issue a warning to striking employees that they could be dismissed if they do not return to work. This is to allow the employee to reconsider their participation in the strike and enough time should be given for them to do so.

● Defensive and offensive lock-outs and picketing: A lock-out enables an employer to prevent certain employees from coming to work in order to encourage them to accept a demand made by the employer. There are two distinguishing types of lock-outs, the first being a defensive lock-out and the second an offensive lock-out.

An offensive lock-out is initiated by an employer without a strike having been called and does not allow employees to be replaced by another workforce during the lock-out. A defensive lock-out is in response to a strike and allows the employer to employ replacement labour for the duration of the strike.

Lock-outs can also be protected subject to certain requirements and it is important to consult with your employment attorney to establish what rights you have as an employer or employee.

WORK STOPPAGES

BY SINGLE EMPLOYEES ARE EXCLUDED FROM THE DEFINITION OF ‘STRIKE’

Picketing in support of any protected strike or in opposition to any lock-out endeavours to be nonviolent and must take place subject to established picketing rules.

Both the LRA and the Picketing Regulations that came into effect on January 1 2019 must be taken into account. The picket may only be held in a public place outside the employer’s premises or, with the permission of the employer, inside its premises.

Employers may not take disciplinary action against an employee for participating in a lawful picket.

FINDING THE RIGHT SOLUTION

From grasshopping to picketing, there are fundamental rules in place for employers to adhere to, and while these descriptions serve to clarify some of the terms, employers should familiarise themselves with, an experienced labour attorney or legal team is undoubtedly the perfect partner when navigating what can ultimately make or break your business. ● Bronwyn Marques & Lisa-Anne Schäfer-King are Directors at Fluxmans.

7

BusinessDay www.businessday.co.za July 2022

BUSINESS LAW & TAX

Sasol wins in case on BEE compliance

FAIR IS FAIR

Judgment reinforces requirement for investigative •proceedings to be fair and lawful ENSafrica

A

recent high ourt judgment has yet again set aside findings made by the Broad-Based Black Economic Empowerment (BBBEE) Commission.

The high court, in Sasol Oil Limited versus The B-BBEE Commission and others on June 14 2022, reviewed, declared invalid and set aside a decision made by the commission against Sasol Oil Limited for not complying with the provisions of the Broad-Based Black Economic Empowerment Act 2003.

In 2006, Sasol Limited and Sasol Oil entered into an empowerment deal with Tshwarisano LFB Investment Pty Ltd pursuant to which Tshwarisano acquired 25% of the shareholding of Sasol Oil for the benefit of various historically disadvantaged groups. One of the historically disadvantaged groups identified to participate in the Tshwarisano transaction was Awevest Investment Ltd. Awevest held (and continues to hold) a minority equity stake in Tshwarisano via a special purpose vehicle.

Notably, Awevest funded the acquisition of its equity stake through third-party preference share funding.

In 2015, nearly nine years after the conclusion of the Tshwarisano transaction, a shareholder of Awevest complained to Sasol Limited

that the terms of the preference share agreement entered into between Awevest and the funders unfairly favoured the funders and in the process undermined the purpose of the Tshwarisano transaction.

Accordingly, Sasol Limited facilitated a settlement negotiation between Awevest and the funders, which resulted in the conclusion of a settlement agreement.

In 2017, Sasol Oil was

SASOL OIL WAS UNDER THE …

IMPRESSION THAT THE DISPUTE BETWEEN AWEVEST AND THE FUNDERS WAS RESOLVED notified the commission was investigating a complaint received against it, the essence of which was that Sasol Oil was responsible for the unfair terms in the preference share agreement and, consequently, Sasol Oil knowingly engaged in and perpetuated a fronting practice by claiming black ownership points, which flowed from Awevest’s participation in the Tshwarisano transaction.

Even though Sasol Oil made comprehensive submissions to the commission, in 2019 the commission issued adverse findings

against it, with certain remedial recommendations nearly two years after the investigation commenced. Sasol Oil approached the high court to review and set aside the findings and remedial recommendations made by the commission.

GROUNDS OF REVIEW

Sasol Oil based its review application on the provisions of the Promotion of Administrative Justice Act 2000, alternatively on the principle of legality. The primary grounds of review were: ● Sasol Oil had no knowledge of the preference share agreement; ● Sasol Oil was under the reasonable impression that the dispute between Awevest and the funders was resolved after the resolution facilitated

by Sasol Limited; ● Awevest’s B-BBEE credentials (whether included or excluded) had no impact on Tshwarisano’s B-BBEE ownership and, consequently, had no impact on Sasol Oil’s BBBEE ownership and level ratings; ● Sasol Oil was not afforded a fair hearing; ● The commission abused its remedial powers; and ● The commission’s findings were time-barred.

PRIMARY ISSUES

The issues that had to be determined by the high court included: ● Whether the decision by the commission constituted

/123RF SKYCINEMA procedurally unfair and unlawful administrative action in terms of the Promotion of Administrative Justice Act; ● Whether the decision by the commission was invalid and unlawful with regard to the principles of legality; and ● Whether the commission should be interdicted from making unlawful demands of Sasol Oil and threatening to invoke its powers against Sasol Oil if it later does not comply with its demands.

HIGH COURT JUDGMENT

The high court found that the commission’s final findings and remedial recommendations were reviewable under the Promotion of Administrative Justice Act, and the findings were declared to be invalid and set aside. In essence, the court held that: ● The commission’s decision to issue its final findings constituted administrative action and was to be dealt with in terms of the Promotion of Administrative Justice Act, but the findings were also subject to scrutiny under the principle of legality. Notably, this judgment departed from the decision in CRRC E-Loco Supply (Pty) Ltd versus BBBEE Commission and Others, where the court held that the commission’s investigative powers as provided for in section 13J of the B-BBEE Act

did not constitute administrative action as contemplated in the Promotion of Administrative Justice Act; ● The commission’s decision was based on incorrect facts and not on admissible evidence. It took irrelevant considerations into account and relevant considerations were not taken into account. A similar decision was handed down in Cargo Carriers Proprietary Limited versus BBBEE Commission and Others, where the court held that “not a single jurisdictional fact for fronting was established” by the commission; ● The findings were made arbitrarily or capriciously within the meaning of section 6(2)(e) of the Promotion of Administrative Justice Act and were irrational within the meaning of section 6(2)(f)(ii); ● The commission’s findings were unreasonable within the meaning of section (6)(2)(h) of the act; ● To ascribe a fronting intent to Sasol Oil through an agree-

THE PROCESS FOLLOWED BY THE COMMISSION WAS UNFAIR IN THAT IT DID NOT COMPLY WITH THE PROVISIONS OF THE ACT

ment to which it was not a party and that was concluded by independent parties was irrational; ● The process followed by the commission was unfair in that it did not comply with the provisions of the act and the B-BBEE regulations — the commission only paid lip service to giving Sasol Oil a fair hearing; ● The commission’s recommendations were reviewable in that it was not authorised to make the recommendations (the B-BBEE Act and the B-BBEE regulations set the parameters within which the commission is expected to operate); ● The reasoning of the commission was demonstrably flawed and the commission exercised its powers for an ulterior purpose; ● The commission misdirected itself by concluding that Sasol Oil had misrepresented its B-BBEE status; and ● The final findings contravened regulation 15(4) of the B-BBEE regulations which prescribe that the commission must issue its findings within one year of the complaint.

The high court’s order included an interdict against the commission from making unlawful demands of Sasol Oil and threatening to invoke powers against Sasol Oil, if it did not comply with the commission’s unlawful demands.

Corporates will be encouraged by this judgment which reinforces the requirement that the commission must conduct its investigative proceedings in a manner that is fair and lawful, including giving due and proper consideration to all facts and evidence presented. The judgment also clarifies that the commission does not have the power to issue final findings more than one year after it has received a complaint if it is not an investigation in terms of regulation 15(8).

The commission will need to ensure that it issues final findings within one year of receiving a complaint in the future. ● ENSafrica acted for Sasol Limited and Sasol Oil in this matter.

Mentorship helps to close gender gaps in the legal sector Lerisha Naidu Baker McKenzie The legal sector is characterised by gender gaps with regard to leadership positions, career progression and remuneration.

Of course, these challenges should not be overcome by tokenising female staff without ensuring genuinely inclusive cultures that encourage retention, including access to opportunities, fair measurement of performance and internal policy

reform that enable women to combine family and work.

Real inclusion helps to overcome both the measurable and the less tangible challenges women face in the legal sector. It is also important to take an intersectional approach to the inclusion project, factoring in all important aspects of identity, as well as socioeconomic factors, in developing inclusion strategies.

As part of the Baker McKenzie’s Diversity & Inclusion initiative, the firm

has set aspirational, measurable targets for gender that focus on increasing female representation in partner and leadership roles. The firm announced in 2019 it had set new global aspirational targets at 40:40:20 gender diversity, to represent 40% women, 40% men and 20% flexible (women, men or nonbinary persons). These targets apply to partners, senior business professionals, firm committee leadership and candidate pools for recruitment.

Globally, nearly 40% of the firm’s 3,800 lawyers are women. In SA, about 61% of the firm’s staff are female. To empower female leaders, the firm also has an intensive mentorship programme to support and help female lawyers rise through the ranks, so they can take up leadership positions in the future.

Turning attention to the dynamic needs of clients, it is also important to understand what they want from their lawyers in this current challenging environment.

We have to accept that what our clients need from their legal teams is changing.

Faced with disruption and heightened market complexity, businesses are looking for legal teams who can leverage the law faster, more accurately and with greater cost certainty. Clients require a true legal “partner” who understands their business, debunking tech myths and bringing the best in design thinking and solutions where they truly add value.

Clients want holistic

answers to business problems, with insight and foresight on the legal issues that could propel or derail their business. Postpandemic, with the increased emphasis on digitisation, clients expect us to apply an innovative mindset and embed innovation in our strategy and services. We must implement ideas that add value to our clients’ operations, aid them in pushing forward their own innovation agendas and help them to identify new opportunities for growth in Africa.

8

BusinessDay www.businessday.co.za July 2022

BUSINESS LAW & TAX VIEWPOINT AFRICA

From LLCs to LLPs in Rwanda

Tax considerations when private •limited liability company becomes

MAKING SENSE OF IT ALL

a limited liability partnership Dieudonné Nzafashwanayo ENSafrica

I

n February 2021, for the first time in its history, Rwanda enacted a law governing partnerships (law no. 0082021 of 16/02/2021) aimed at providing more structuring options for investors that intend to use Rwanda as a holding jurisdiction within the ambit of the larger Kigali International Financial Centre project.

The law governing partnerships provides for the possibility of converting a private limited liability company (LLC) into a limited liability partnership (LLP) and, recently, the registrar general issued the requirements to effect these conversations.

This means companies can now start converting to LLPs. This option will be useful for various market players, including small and medium companies, professional service firms run as companies, and companies that hold investments. LLPs offer the limited liability protection in the same way that companies do but, unlike companies, LLPs may be subject to less stringent compliance requirements, are free from the economic double taxation risk — because LLPs’ income accrues directly to their partners, at least in terms of the changes proposed to the law no 016/2018 of 13/04/2018 establishing taxes on income (Income Tax Law) — and there is potentially no capital gains tax in case of the disposal of interest in the LLP. But what are the key tax considerations that should be borne in mind when converting an LLC into an LLP? To begin with, and as a legal consequence of converting an LLC into an LLP, article 110 of the law governing partnership provides that “[a]ll movable and immovable property vested in an [LLC], all assets, interests, rights, privileges and liabilities and the whole of the undertaking are entrusted with the [LLP], and the [LLC] is considered as dissolved”.

The reading of this provision clearly suggests the conversion of an LLC into an LLP may be construed either as liquidation of the LLC and distribution of assets to the shareholders as the assets of the LLP are from a tax standpoint the assets of the part-

ners, or transfer of the LLC business as a going concern to the LLP. Where the conversion is construed as a sale/transfer of the converted LLC business to the LLP as a going concern, a valuation would have to be performed and the deemed proceeds from the transfer of the LLC assets would be taken into consideration in computing the LLC corporate income tax liability for its last tax year as per article 19 of the Income Tax Law, which provides that “business profit also includes proceeds of sale of any business asset …”

Such construction would also have VAT implications because, unlike many jurisdictions, there is no exemption from VAT on slump sale transactions in Rwanda, and the conversion would be potentially taxed as a sale of business assets under article 4 of law no. 37/2012 of 09/11/2012 establishing the value-added tax as amended (VAT Law) which provides that “[t]he sale of any asset used by a person in the business is considered as a taxable action”.

Where the transaction is treated as a liquidation followed by distribution of

ANOTHER TAX CONSIDERATION RELEVANT TO THE CONVERSION OF AN LLC INTO AN LLP IS THE RIGHT TO CARRY FORWARD LOSSES assets to the shareholders (who would become the LLP partners), deemed proceeds from the transfer would, after deducting the value of the liabilities and the shareholders’ equity, be taxed as a dividend as per article 55 of the Income Tax Law. The VAT Law is not prescriptive on the tax implications of the distribution of assets in specie to the shareholders at the time of liquidation, but this may also potentially have VAT implications by being treated as a deemed sale on the basis of article 4 of the VAT Law. However, if the proposed amendments to the Income Tax Law are enacted into law, the conversion of LLCs into LLPs will not have income tax implications considered

/123RF — RADIANTSKIES above, because part of those amendments is the modification of the definition of taxfree restructurings for it to apply to other entities than companies as this currently is the case under the Income Tax Law. For instance, in terms of the proposed amendments, business restructuring includes the acquisition or transfer of the entire entity’s shares, assets or liabilities so that its existence is replaced by the purchasing or receiving entity, and this fully depicts the conversion of an LLC into an LLP. Under article 54 of the Income Tax Law, the transferring company is exempt from tax in respect of capital gains and losses realised on restructuring in case of a qualifying business restructuring.

Another tax consideration that is relevant to the conversion of an LLC into an LLP is the right to carry forward losses. The provision of the

law governing partnership that “all rights and privileges are entrusted with the LLP” would suggest that these rights include tax losses and, therefore, the LLP should be able to carry forward the losses of the converted LLC. However, this not being a provision in tax legislation, the tax administration should provide guidance regarding the tax implication, if any, of the conversion of an LLC into an LLP on the right of the converted LLC to carry forward losses.

The Income Tax Law is equally reticent on the cost basis for depreciation of assets transferred once on the LLP’s balance sheet — ie whether they should be depreciated at their book value (as if the conversion did not take place) or there should be an adjustment of the cost basis of the transferred assets to their fair market value. This would, however, become irrelevant

once the proposed amendments to the Income Tax Law are enacted into law as the conversion of an LLC into an LLP would constitute a qualifying business restructuring.

Under article 54 of the Income Tax Law, the receiving entity would have to value the assets and liabilities involved at their book value in the hands of the transferring entity at the time of restructuring and depreciate the business assets according to the rules that would have applied to the transferring entity as if the restructuring did not take place.

The conversion of an LLC

THE CONVERSION OF AN LLC INTO AN LLP MAY BE ATTRACTIVE, BUT THERE ARE TAX ASPECTS TO CONSIDER

into an LLP may be attractive, but there are a number of tax aspects to consider, all of which remain unclear. Specialist tax advice should be obtained before proceeding.

The tax administration should also consider issuing guidance on the aspects discussed above, and particularly consider whether article 54 of the Income Tax Law can (pending the enactment of the proposed amendments) potentially be extensively applied to conversions of LLCs into LLPs given that the status quo is that partnerships are treated in the same way as companies for income tax purposes.

Tax policymakers should also consider reviving the exemption of sale of a business as going concern from VAT, which was provided for under the 2001 VAT Law. ● Nzafashwanayo is a partner at ENSafrica Rwanda.

9

BusinessDay www.businessday.co.za July 2022

BUSINESS LAW & TAX VIEWPOINT AFRICA

Use law to help build Africa

continent’s resources must •beTheprotected from the gross

LAND OF RICHES

exploitation that marked its past Mirelle Vallie & Guy-Fabrice Holo Asafo & Co

D

uring the history of the African continent much of its natural resources were removed by exploitation.

African countries have also played a part in mismanaging the processing and manufacturing of natural resources leading the continent to be the poorest, richest continent in the world.

Investors from all over the world recently descended on Cape Town for the Mining Indaba and it is worth cautioning that African countries, although independent from each other and having their own laws, have not developed any guidelines to protect natural resources in law against abuse from foreign investors.

Natural resources belong to the African states and, in terms of governing law, these countries have the power needed to step in and develop legislation which protects natural resources so that they have the requisite status to enrich the continent. Resources should be extracted with proper compensation to enable the continent to continue to develop according to government mandates and to build proper infrastructure.

In the past we have witnessed a few errors on the continent with regard to giving up certain rights which would have benefited the greater mass and vision of an African united pool of resources. Although it is correct that Africa requires foreign investment to facilitate the processes involved in producing and exporting natural resources, it must look into new, innovative ways to use such investments to build a better Africa.

For this transition to be effective, it is important that this undertaking is accompanied by a profound transformation of legislation for protection of strategic sectors.

President Cyril Ramaphosa in a recent speech in Ghana echoed these sentiments. “Our endowment of raw materials positions us perfectly, especially for the manufacture of electric vehicles,” he said. This places Africa in a strategic position to interrogate previous laws and implement new innova-

tive laws to allow African countries to build a fruitful economy.

A few African countries have adopted general legislation for strategic sectors.

Guinea, for example, has initiated protection in legislation related to investment promotion. The Investment Code establishes a category of “reserved sectors of activity” in which foreign individuals or legal entities may not hold, directly or through companies under Guinean law, more than 40% of the shares of companies engaged in press or media activities in Guinea.

Similar provisions exist in other investment laws. However, as a general rule the definition of strategic or reserved sectors has only a limited effect on investment projects.

The decisions taken in investment law differ by country. The Investment Code in the Democratic Republic of Congo excludes several sectors from the benefits of the code, such as mining and hydrocarbons. Senegal’s Investment Code guarantees free access to raw or semiprocessed raw materials produced throughout the national territory. This paradox is only one of the many pitfalls of protecting strategic sectors in Africa: the difficulty of defining them in a harmonised manner.

THE AU’S AGENDA 2063 FORESEES AS ITS FIRST ASPIRATION A PROSPEROUS AFRICA BASED ON INCLUSIVE GROWTH One could consider that the difference in approach is explained by the degree of importance of mining assets in the economy of the two countries. The Mining Code in the Democratic Republic of Congo allows for the declaration of a “reserved” or “strategic” substance, with regard to the economic or international situation, and subjects access, research, exploitation and marketing of these substances (cobalt, geranium and coltan) to a special regime.

The declared willingness of the presidents of the Democratic Republic of Con-

go and Burundi to review the contracts concluded with foreign mining companies is only the latest illustration of the idea to change the paradigm that makes Africa a hub of raw materials.

This initiative should be supported and extended to other countries on the continent. Indeed, in view of the upcoming energy transition, African countries must work together to secure their strategic minerals. African countries should begin to create their own processing plants on the continent as opposed to processing strategic minerals on other continents, which is not beneficial for Africa.

The partnership between African countries and investors should be balanced, in that part of the processing should be operated on the continent or, at least a share of the revenues derived from the processing abroad of the raw materials should be returned to the place of origin.

The multiplication of articles and studies on the strategic character of cobalt or

lithium for the greening of industries, such as the automotive industry, should accelerate this awareness and encourage the adoption of adequate regulations.

African countries should pay particular attention to sectors of strategic interest, given their importance for the development of their economies and for their use in large-scale industrial projects.

DIVERSITY

However, and this is one of the difficulties to overcome, the diversity of sectors that could be declared strategic is matched by the variety of foreign interventions, since they are not always the result of direct investment.

AFRICAN COUNTRIES SHOULD PAY PARTICULAR ATTENTION TO SECTORS OF STRATEGIC INTEREST

The mining sector in Ivory Coast, following the example of other countries, has provided in law the possibility for the minister in charge of mines to make an operating permit conditional on the contributory participation of Ivorian private individuals in the share capital of the operating companies.

One solution could be to provide that any investment in the so-called protected or reserved sectors should provide for an interest of the state, in the form of a royalty or a nondilutable shareholding in the project company that will carry out the investments. Drawing on foreign examples, a fund could be set up to receive all the profits linked to the pursuit of activities in strategic sectors.

The sovereign wealth fund of Djibouti, intended to collect and invest the profits of all public establishments that will generate them, is the latest development.

The AU’s Agenda 2063 foresees as its first aspiration a prosperous Africa based on inclusive growth and sus-

IN VIEW OF THE UPCOMING ENERGY TRANSITION, COUNTRIES MUST WORK TOGETHER TO SECURE THEIR STRATEGIC MINERALS tainable development, and in particular through Africa’s ability to adopt long-term sustainable management of its resources. The union therefore has every right to take up this issue.

The implementation of the African Continental Free Trade Area illustrates that the ability to move towards a common project is as important as that of free movement.

The protection of the continent’s resources should be the next project. ● Vallie is a Partner at Asafo & Co South Africa, an international law firm dedicated to Africa. Holo is an Associate at Asafo & Co Paris.

10

BusinessDay www.businessday.co.za July 2022

BUSINESS LAW & TAX

Sneaky rugby match ends in dismissal

TAKE NOTE

Abusing sick leave — even if you’re honest •about where you went — is not going to end well Jonathan Goldberg & Grant Wilkinson Global Business Solutions

W

hen employees have exhausted their quota of annual leave, instead of applying for unpaid leave some might be tempted to use their sick leave quota.

This was the case in Woolworths (Pty) Ltd V CCMA and 2 Others [2021] PA12/2020 ZALAC. The employee advised one of the managers that he had taken ill and would not be attending work on that day.

When the employee returned to work for his next shift, his manager inquired as to where he had been on the previous day.

The employee informed his manager that though he was not well he had returned to work, and on the previous day (June 9) he had attended a rugby match.

The employer investigated the circumstances of the employee’s absence from work and instituted a disciplinary inquiry against him on a charge of gross misconduct. The employee was found guilty of the charge and dismissed.

The dismissed employee then referred an unfair dismissal dispute to the Com-

mission for Conciliation, Mediation and Arbitration (CCMA).

The commissioner found the employee had not sought to hide the fact he had attended a rugby match, and there was no evidence he had previously been given a written or final warning. Further, the employer had not charged him for dishonesty, and thus, according to the commissioner, the employment relationship had not yet broken down. The commissioner found the employee did not act dishonestly.

The commissioner considered the employer’s evidence that the employee should have gone to work

THE EMPLOYEE HAD BEEN DISCIPLINED ON PREVIOUS OCCASIONS FOR BEING ABSENT AS WELL AS FOR COMING LATE when he felt better instead of attending a rugby match, but he rejected it on the grounds that the employer submitted no clear policy or guideline of what an employee who had been booked medically unfit to work was not entitled to do when not at work.

The commissioner concluded the dismissal was unfair and ordered the employer to reinstate the employee with retrospective effect.

The employer applied to set aside this award on review before the labour court (LC). The LC held that the finding could not be set aside because the employer had not proved the commissioner’s decision was unreasonable. The LC did, however, hold that the commissioner had erred in finding the dismissal procedurally unfair and found the dismissal was substantively unfair.

The employer then approached the Labour Appeal Court (LAC) on appeal against the order. The LAC found it was important to emphasise that the charge brought by the employer against the employee was on the basis of gross misconduct in that he had “breached company policies and procedures when he abused authorised leave in the form of sick leave”.

The LAC found the employee’s actions were dishonest and that his behaviour could not be regarded as setting a good example for his subordinates. The LAC noted that the employee acted dishonestly in absenting himself from work on the basis that

/123RF — TUPUNGATO he was too ill to perform his duties but then travelled for at least an hour to support his local rugby team, knowing full well he would be paid for the day.

The finding of the commissioner that there had been no act of dishonesty was subject to review.

The LAC found the commissioner erred in his reasoning that it was “apparent the conduct and behaviour displayed by the employee was not such, as to make a continued employment relationship at the employer impossible or untenable”. The LAC stated that the lenient approach to dishonesty cannot be permitted.

The LAC noted the employee held a relatively senior position, and he was clearly dishonest, even on his own version. He expected to get away with the enjoyment of attendance at a rugby match on the basis of claiming sick leave and then enjoying the benefits (payment for the day) thereof. This was

dishonest conduct of a kind that clearly negatively impairs upon a relationship of trust between an employer and an employee.

The LAC further noted that the employee had been disciplined on previous occasions for being absent as well as for coming late. The court found that for the employer to adopt

THE LAC FOUND THAT HIS BEHAVIOUR COULD NOT BE REGARDED AS SETTING A GOOD EXAMPLE FOR HIS SUBORDINATES the approach that the employee was required to act with integrity and abide by the employer’s policies, procedures and codes was manifestly justifiable.

The LAC found that it was clear the relationship of trust as a result of his initial unreli-

ability and now dishonest conduct had broken down.

Viewed from the record of this employee, dismissal was the appropriate sanction.

This may be the kind of case envisaged by the Constitutional Court in Union for Police Security and Correctional Organisation v South African Custodial Management (Pty) Ltd and others 2021 (11) BCLR 1249 (CC) where costs should be awarded against the losing party as a result of egregious conduct. However, given that the employee would have lost his job and been an individual applicant involved in litigation with a large firm, there was no order as to costs.

The employee’s dismissal was found to be both substantively and procedurally fair. This is a binding LAC decision which sets the benchmark for employees abusing sick leave. The cost issue has to be a focus for the current Labour Relations Act amendments.

Clear distinctions in interest deductibility Benjamin Mbana Allen & Overy In Taxpayer H v Commissioner of the South African Revenue Service (IT 14213) (February 9 2022) the court highlighted that one of the most important — and sometimes overriding — factors in determining whether expenditure is incurred in the production of income is the purpose for which the expenditure was incurred.

In this regard, the court was obliged to consider the closeness of the connection between the expenditure and the income-earning opera-

tions of the taxpayer.

The taxpayer submitted that the “in production of income” requirements of section 24J(2) had been met on that basis that (i) the mere fact that interest earned on the loans made to its subsidiaries in 2011 did not exceed the interest incurred does not mean that the interest was not incurred in the production of income, and (ii) that the interest it earned from its subsidiaries constituted income as none of it was exempt.

Sars, on the other hand, argued that the purpose of the borrowing was to provide the

taxpayer’s subsidiaries with advantageous loans to benefit the group by increasing their earning capacity.

The court found on the facts that it was apparent from the manner in which the taxpayer structured the loans to the subsidiaries that the taxpayer’s purpose was not to generate income from the loans, nor could it be shown the taxpayer had a profit-making purpose in advancing the loans.

Though the matter of interest deductibility has been considered in numerous cases, this judgment is a reminder that clear distinc-

tions can be made between a moneylender and an investor and that these differences lie primarily in the structure and terms associated with the loans. In particular, in determining whether interest incurred by a taxpayer is incurred in the production of income and therefore deductible for tax purposes, a

THIS IS A REMINDER THAT CLEAR DISTINCTIONS CAN BE MADE BETWEEN A MONEYLENDER AND AN INVESTOR

distinction may have to be drawn between a taxpayer who borrows a specific sum of money and applies it to an identifiable purpose (as in the instance of Taxpayer H) and a taxpayer who borrows money generally and on a large scale to raise floating capital for use in its business.

In the former, the purpose of the expenditure (being interest) and what it actually effects can readily be determined and identified, and where there is a direct link between the money borrowed by a taxpayer and the money lent to its subsidiaries the taxpayer will be pre-

cluded from relying on income received from other sources to prove that the taxpayer’s intention is one of profit-making (as in the instance of Taxpayer H).

Had the taxpayer, instead, applied the approach of placing all borrowed funds into a common pool which constitutes a general fund used for all purposes, the taxpayer may have been able to argue the general sense of its expenditure (being interest) was incurred to provide the taxpayer with funds to raise floating capital for use in its business and thus incurred in the production of income.

11

BusinessDay www.businessday.co.za July 2022

BUSINESS LAW & TAX

A lean, smart and modern tax machine

AN EYE ON THE FUTURE

Sars Vision 2024 aims for greater efficiency and •simplicity in collections, but questions remain Joon Chong Webber Wentzel

T

he SA Revenue Service (Sars) announced in February 2020 that it was taking the first steps towards becoming a future revenue authority informed by datadriven insights, self-learning computers, artificial intelligence and interconnectivity between people and devices.

The Sars “Vision 2024” is to be a smart and modern organisation “with unquestionable integrity, trusted by government, the public and our international peers”, commissioner Edward Kieswetter said at the time.

According to a recent Sait/Sage payroll tax update webinar, Vision 2024 aims to, among others: ● Enable accurate and timely withholding of taxes from employees and their payments to Sars; ● Reduce the payroll administration for employers, payroll administrators and Sars; ● Enable employees to

monitor their tax obligations during the tax year; the annual ● Simplify returns process for employers; and ● Relieve, in the long term, the necessity for most salaried employees to file annual tax returns.

In a recent meeting with tax practitioners, Sars out-

IN A RECENT MEETING, SARS OUTLINED ITS VISION 2024 TO DO AWAY WITH ‘FILING SEASON’ IN THE 2025 YEAR lined its Vision 2024 to do away with “filing season” in the 2025 year. (Our sense is that this will be for the 2024/2025 year of assessment.)

Vision 2024 anticipates using third-party data from third-party returns to prepopulate an “assessment” for the individual through a Sars

app where near real-time tax liabilities will be shown.

There will be enough information on the “assessment” in the app to constitute a valid assessment in terms of the Tax Administration Act. Currently, banks, financial institutions (such as longterm insurers, retirement funds and collective investment schemes), medical schemes, attorneys, estate agents, and issuers of bonds, debentures and financial products are required to file third-party returns to Sars.

These third-party returns are filed with Sars once a year after the end of the year of assessment and contain information on interest, dividends or capital gains on disposals in the year of assessment which accrued to a taxpayer in that year. (For example, the third-party data annual submissions for the year of assessment ending February 28 2022 will be open from April 1 2022 to May 31 2022.)

These third-party returns, together with the IRP5 certificates issued to employees

/123RF — GMAST3R and EMP 501 returns filed with Sars by employers, are currently used to prepopulate the ITR12 annual tax returns for individuals.

Vision 2024 envisages a data analytics environment where third-party data will be provided to Sars on a realtime monthly basis, which will then be used to generate an “assessment” on a Sars app. It appears that the thirdparty data could be used by Sars to generate an “effective tax rate” for each taxpayer.

Through a “push directive” or the IRP3e directives issued by Sars to “employers”, Sars can then require employers to withhold employees’ tax (PAYE) using the higher effective tax rate rather than the lower calculated rate based on the actual remuneration paid by the employer.

This process is already in effect for annuitants who receive income from more than one stream of annuities.

Annuitants can elect to have their PAYE withheld at the lower calculated rate rather

than the rate in the IRP3e directives.

Trust distributions and section 18A donations are not currently reported through third-party data reporting to Sars. It appears Vision 2024 may also require third-party data on these transactions.

What about the business income of sole proprietors, rental income and capital gains which are not subject to third-party data reporting?

How will Sars collect the tax due on these amounts?

There is no information on this yet. It appears these taxpayers will need to update the app with these amounts and monitor and pay their monthly tax liabilities on the app as they arise. The example used by Sars in the recent discussion with practitioners was that if tax is triggered in March and paid only in January, interest will be payable for the 10-month delay between the due date and payment date.

We anticipate that the Tax Administration Act and

various other tax statutes will need to be amended to accommodate the implementation of Vision 2024.

We also note the budget 2022 contains a proposal that the provisional tax system would be reviewed given changing circumstances and international developments and that there would be a discussion document published for comment in due course.

It appears the timing of this review would coincide with the implementation of Vision 2024.

Sars will be circulating information on Vision 2024, especially on the implications for employers and employees, and on all those required to file third-party data with Sars. The IRP3e regime to implement the paragraph 2(2B) directive process for annuitants has faced a few practical issues in implementation. We hope the solutions developed through this process will pave the way for a smoother implementation process for Vision 2024.

LABOUR PAINS

There is a high bar to prove constructive dismissal

S

ection 186(1)(e) of the Labour Relations Act defines constructive dismissal to be circumstances in which “an employee terminated employment with or without notice because the employer made continued employment intolerable for the employee”.

Put differently, the employee resigns and claims that they were, in effect, unfairly dismissed, as they would not have resigned had it not been for the alleged intolerable employment circumstances created by the employer.

One of the interesting facets of such disputes is that, unlike all other alleged unfair dismissal disputes, the starting point is the rebuttable presumption that the employer did not, in fact, fashion an intolerable

TONY HEALY employment relationship and for this reason the employee, not the employer, has the burden of proof.

Let’s not forget that in the case of all other species of alleged unfair dismissal disputes, the rebuttable presumption at the outset is that the dismissal was unfair, until the employer proves, if it can, that the dismissal was fair, both procedurally and substantively.

Employees frequently underestimate how exacting the test is in constructive dismissal cases. The CCMA,

bargaining councils and our labour courts are not easily swayed by claims of constructive dismissal, with the statistics on the outcome of such disputes confirming this. Employees more often than not are unsuccessful when it comes to claims of constructive dismissal.

The recent labour court case in Shoprite Checkers (Pty) Ltd v Prince Nkosi & others [Case no. JR625/20] emphasised just how high the bar is when it comes to proving constructive dismissal, when it concluded that “by parity of reasoning, intolerability should not be easily reached in a case of constructive dismissal”.

In short, the employee resigned and claimed constructive dismissal in a dispute referred to the CCMA. The commissioner found that the employee had

successfully proved that he was constructively dismissed. The employer reviewed the arbitration award in favour of the employee on grounds that the commissioner had erred as his conclusions were not supported by the evidence on record.

HIGH THRESHOLD

Without going into the nitty gritty of this labour court review case, the judge, quoted, among other things, the labour court judgment in Gold One Limited v Madalani & others [2021] 2 BLLR 198 (LC) which “sanctioned a well-established principle that “intolerability is a high threshold, far more than just a difficult, unpleasant or stressful working environment or employment conditions, or for that matter an obnoxious, rude and

uncompromising superior who may treat employees badly. Put otherwise, intolerability entails an unendurable or agonising circumstance marked by the conduct of the employer that must have brought the employee’s tolerance to breaking point.”

This emphasis on the weight of proof required to prove constructive dismissal as similarly addressed in the Constitutional Court judgment handed down earlier this year in Booi v Amathole District

EMPLOYEES …

UNDERESTIMATE HOW EXACTING THE TEST IS IN CONSTRUCTIVE DISMISSAL CASES

Municipality & others (2022) 43 ILJ 91 (CC): “It is accordingly no surprise that the language, context and purpose of section 193(2)(b) dictate that the bar of intolerability is a high one.

The term ‘intolerable’ implies a level of inbearability, and must surely require more than the suggestion that the relationship is difficult, fraught or even sour … the conclusion of intolerability should not easily be reached.”

The labour court judgment in Shoprite summed this up by stating that “by parity of reasoning, intolerability should not be easily reached in a case of constructive dismissal”. ● Tony Healy is CEO of employer labour consultancy Tony Healy & Associates — www.tonyhealy.co.za

12

BusinessDay www.businessday.co.za July 2022

BUSINESS LAW & TAX

Bones of intragroup loans

Passing them off as a money-lending exercise and •seeking a tax deduction on the interest won’t stick Benjamin Mbana Allen & Overy

I

n many groups of companies, intragroup loans make sense as a way of funding the operations of the group.

If the funds are sourced from outside the group by a borrower entity and then onlent to other companies within the same group as the borrower, the question is whether the interest incurred by the borrower entity is deductible in terms of section 24J(2) of the Income Tax Act No 58 of 1962 (tax act). This question was once again considered in Taxpayer H v Commissioner of the SA Revenue Service (IT 14213) (February 9 2022).

The taxpayer was a private investment holding company whose assets comprised, in the main, shares in unlisted subsidiary entities, loans advanced to those subsidiaries and cash.

The taxpayer contended that during its 2011 year of assessment, in addition to being an investment holding company, it undertook a trade in money lending with the specific purpose of making a profit from on-lending borrowed funds to its subsidiaries. It therefore sought to claim a deduction for interest incurred on borrowed funds in the amount of R68,133,602.

The SA Revenue Service (Sars) saw things differently.

Sars was of the view that interest was not incurred by the taxpayer while carrying on a trade, nor was it incurred in the production of income, therefore the requirements of section

24J(2) of the tax act had not been met. Sars therefore disallowed the deduction of the full interest amount. However, owing to a practice adopted by Sars (set out in Practice Note 31 read with section 51 of the Tax Administration Act 28 of 2011), it allowed a partial deduction of the interest expenditure limited to the amount of interest income of R34,936,000 received by the taxpayer.

Sars disallowed the full interest deduction for the following reasons: ● The taxpayer borrowed at interest rate of 8.29% per annum, yet it extended loans to its subsidiaries at interest rates ranging between 0%,

THE COURT FIRST CONSIDERED WHETHER THE TAXPAYER WAS CARRYING ON TRADE AS A MONEYLENDER 5.29%, 6.22% and, at times, 8.29% per annum. ● The interest rates imposed by the taxpayer demonstrated the taxpayer’s intention as nothing more than furthering the group’s interests, by enhancing the earning capacity of the subsidiaries. ● The transactions related to the funding of unproductive loans, in that the taxpayer’s borrowings were less than its receivables and the taxpayer’s lending transactions extended only to its subsidiaries. ● The taxpayer had struc-

tured its lending transactions so it could earn neither income nor profit.

Sars also imposed a 10% understatements penalty in accordance with section 223 of the Tax Administration Act No 28 of 2011.

The taxpayer disputed Sars’ conclusion on the basis that (i) it was carrying on money lending trade and (ii) it incurred the interest expense in the production of income as required under section 24J(2).

This article considers only the court’s findings in relation to the deductibility of the interest incurred by the taxpayer in terms of section 24J of the tax act.

The court first considered whether the taxpayer was carrying on trade as a moneylender in its 2011 year of assessment. In this regard, the court referred to guidelines set out in Solaglass Finance Co (Pty) Ltd v Commissioner for Inland Revenue [1991] 257 (A). The court highlighted the following findings from this case: ● The lending had to be done pursuant to a system or plan that disclosed a degree of continuity in laying out, and getting back the capital for further use and which involved a frequent turnover of the capital. ● The obtaining of security was a usual, though not essential, feature of a loan made in the course of a money-lending business. ● The fact that money had on several occasions been lent at remunerative rates of interest was not enough to show the business of money lending was being carried on. There had to be a certain degree of

PUT A STAMP ON IT

/123RF — OLIVIER26 continuity about the transactions. ● As to the proportion of the income from loans to the total income, the smallness of the proportion could not necessarily be decisive if the other essential elements of a money-lending business existed.

The court also referred to ITC 1771 66 SATC 205 and ITC 812 20 SATC 469 in which the following was stated: “A long-term loan without any repayment terms, in my view, lacks the essential characteristics of floating capital which, if it becomes irrecoverable, constitutes a loss of a capital nature”; and “The main difference between an investor and a money lender appears to consist in the fact that the latter aims at the frequency of the turnover of his money and for that purpose usually requires borrowers to make regular payments on account of the principal. This has been described as a system or plan in laying out and getting in his

money…”

The court noted that throughout the taxpayer’s correspondence with Sars it argued that the interest expense was deductible in full because it was incurred while carrying on a trade in money lending with the purpose of producing income, specifically from interest generated from its on-lending activities.

However, when faced with the reality it would fall short in meeting the tests outlined in the case law, the taxpayer discontinued this argument, arguing instead that its trade activities consisted of “interest earning and interest earning activities”.

The court found that the taxpayer could not justify its claims it was engaged in the trade of money lending, which was further apparent from the fact that the taxpayer had declared, in its 2011 tax return, it had not concluded any transaction in terms of section 24J. In considering whether a

ENSafrica | data privacy

keep the data breach at bay With POPIA in full swing, don’t miss out on securing your business

discover more

strong expertise in data privacy Chambers Global Guide

taxpayer has a profit-making motive, the court stated that: ● Money lenders demonstrate their profit-making purpose by charging remunerative interest rates and fixing terms when lending. ● Money lenders use a plan or system of laying out and getting back their capital to demonstrate continuity. For this reason, they usually require the borrower to make periodic repayments. ● Money lenders do not borrow at high interest rates and lend at either nil or substantially low interest rates or at the very same interest they incurred, and look to the fiscus to finance the growth of the borrower and enhance its profitability, in the comfort they will reap lofty dividends.

The court found that the taxpayer’s lending transactions were not concluded with the intention of making a profit, instead they were about funding unproductive loans for the taxpayer to reap exempt income.