Business Law & Tax (BD, March 2022)

BUSINESS LAW &TAX

MARCH 2022 WWW.BUSINESSLIVE.CO.ZA

A REVIEW OF DEVELOPMENTS IN CORPORATE AND TAX LAW

Shrinking corporate tax base a cause for concern

EASING THE PRESSURE

tax and VAT are bigger revenue sources, •butPersonal relief from Enoch Godongwana is welcome Dr Albertus Marais AJM

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A’s 2022 budget may have provided much-needed relief for cashstrapped consumers, but significant structural threats and a dwindling corporate tax base remain key risks.

It is important to commend finance minister Enoch Godongwana (pictured) on a well-balanced, pro-growth budget, which puts fiscal consolidation on track and provides much-needed relief.

The focus on the employment tax incentive through better policing and heavier penalties is one example of the focus on jobs and growth which is sorely needed.

SA’s youth unemploy-

ment rate is unacceptably high and so this incentive for businesses to hire younger workers is now increased a full 50%. There is obviously a concerted drive to address youth unemployment.

However, there are also major threats to the outlook, including the ever-expanding expenditure and debt burden.

It is actually scary that we are paying 57% of tax revenues to service debt and to pay government employees, leaving

THE CORPORATE TAX BASE NOW ONLY CONTRIBUTES 18% OF TOTAL TAX REVENUES AND HAS BEEN DECLINING FOR SEVERAL YEARS

just 43% for everything else, such as building infrastructure, paying social grants, improving existing infrastructure and paying municipalities for services.

The three big structural threats to the economy include state-owned entities defaulting on their debt, a higher-than-expected settlement on the public sector wage bill and ballooning debt costs.

Each has the potential to throw us over the fiscal cliff.

While the reduction in corporate taxes to 27% for tax years ending on or after March 31 2023 is welcome, my big worry is that the corporate tax base seems to be shrinking. It now contributes only 18% of total tax revenues and has been declining for several years. The highest tax take is for personal income

/JEFFREY ABRAHAMS — GALLO IMAGES tax, then VAT and only then corporate. This steady decline has been worrying me for quite a while as it means we are really seeing a shrinking of employers, which does not bode well.

Lowering the corporate tax rate was needed as SA’s existing 28% rate was high compared with the OECD international average of 23%.

It is also not costly, because of total tax revenues of R1.6-trillion, the reduction of corporate taxes results in a fiscal loss of only R2.6bn.

So it is small relative to tax revenue. They also make up for this through restricting the use of assessed losses and limiting interest deductions.

Another key feature of the budget was a focus on

rebuilding the SA Revenue Service (Sars), with more money thrown at improving capacity. Sars has employed close to 500 new employees over the past year and spent almost R500m on improving and renewing infrastructure, notably IT.

COMPLIANCE

Compliance is a bigger focus, and rightly so. The focus should not be on going after existing taxpayers but looking out for and investigating those who have not been paying in the past when they should. My advice is for taxpayers to ensure they keep their affairs in order.

While the Treasury is still discussing a “two pot” proposition so that some retire-

ment savings could be accessed prior to retiring, this is perhaps not a step in the right direction. They seem to have changed their tone a little on this and mentioned it will require trustee approval, for instance.

Details are limited, but on the whole I am not sure if this reform is good for SA at the moment. It would have been better served to apply as limited relief during Covid-19 for those who lost their jobs but had big retirement pots that could have put food on the table.

To bring this in as a permanent arrangement, however, seems to cut against the urgent need to encourage saving, rather than dissaving, in SA.

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BusinessDay www.businessday.co.za March 2022

BUSINESS LAW & TAX CORPORATE TAX AND TRADE: SA AND AFRICA

Finding ways to galvanise trade in Africa

DRIVING DEVELOPMENT

The AfDB and Afrexim are at the forefront of •finding solutions to decrease the finance gap Lodewyk Meyer & Lucy Stratton Baker McKenzie

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s stated by the president of the African Development Bank (AfDB), Akinwumi A Adesina, “trade finance is an important instrument for influencing Africa’s long-term economic development and structural transformation”.

According to a report by the AfDB and the African Export-Import Bank (Afrexim), “Trade Finance in Africa: Trends Over the Past Decade and Opportunities Ahead”, the region was one of the most integrated with the rest of the world in 2011.

However, in the past decade Africa’s trade growth has been one of the worst among the major regions of the world. This is as a result of a number of factors including falling commodity prices, competition, inadequate foreign exchange liquidity, regulatory challenges and access to trade finance, as banks have gradually been scaling back activities from riskier markets.

The study showed that although trade finance remains a popular activity among banks in Africa, the

participation rates continue to decrease, falling by 16% between 2013 and 2019. As a result, the trade finance gap in Africa averaged $91bn between 2011 and 2019.

Furthermore, the trade uncertainty in Africa was exacerbated by the impact of the Covid-19 pandemic, which resulted in a twin supply-demand shock across the continent. Supply was affected by mass production shutdowns and supply chain blockages, and demand for products from Africa decreased globally.

Despite the persistently large trade finance gap, trade remains a key driver of Africa’s social and economic development. As a result, banks such as the AfDB and Afrexim have sought to stay on top of market developments and provide solutions to boost intra-Africa trade.

On January 1 2021, significant progress was made with the commencement of free

IF SUCCESSFUL, AFCFTA WILL PROVIDE THE OPPORTUNITY FOR AFRICAN COUNTRIES TO DIVERSIFY THEIR ECONOMIES

trade under the African Continental Free Trade Area (AfCFTA) for African countries that had ratified the agreement and submitted their tariff offers, an initiative that had been in pipeline since 2012.

According to Baker McKenzie’s research with Oxford Economics titled “AfCFTA: a $3-trillion Opportunity”, there are now unprecedented opportunities for Africa and its trading partners to reap economic benefits on the back of the possible improvements in transport infrastructure, reduction of red tape for cross-border dealings, renewed funding and improved liquidity.

If successful, AfCFTA will provide the opportunity for African countries to diversify their economies, scale production capacity and widen the range of products made in Africa, in particular boosting the production of manufactured goods (and the potential for multinational companies to set up manufacturing plants in the continent).

Closer integration of neighbouring economies is a potential avenue for creating scale and competitiveness through domestic market enlargement, thereby promoting development and boosting foreign investment

/123RF — _FLA through greater efficiency.

In addition to AfCFTA, the AfDB has been at the forefront of finding solutions to decrease the trade finance gap through its “High 5” strategic priorities to: (1) Power and light up Africa (2) Feed Africa, (3) Industrialise Africa (4) Integrate Africa and (5) Improve the quality of life of the people of Africa.

In July 2021 the AfDB, through its Financial Sector Development’s trade finance operations, launched the transaction guarantee instrument as a means to increase trade finance on the continent. The AfDB recently noted that the new instrument would enable local financial institutions to build relationships with international banks, thereby increasing their network of global trade finance partners. It would also improve access to finance for African small and medium enterprises, for example.

According to the AfDB, the instrument will provide regional and international banks with up to 100% nonpayment risk coverage for trade transactions that are initiated by local banks in Africa. The guarantee will cover trade finance instruments such as confirmed

letters of credit, trade loans, irrevocable reimbursement undertakings, avalised bills and promissory notes.

In a recent a presentation given by the AfDB, it was noted that the transactional guarantee would assist in lowering the trade finance gap in Africa for the following reasons: ● It will help to attract correspondent banks to the region and increase headroom for African issuing banks; ● It will support transactions for underserved groups and subregions with higher than usual rejection rates; and ● It will assist local issuing banks that are finding it challenging to compete due to lack of correspondent relationships, as well as provide opportunities for capacity building.

Efforts to increase intraAfrican trade received another boost on February 9 2022 when AfCFTA and Afrexim signed an agreement relating to the management of the Base Fund of the AfCFTA Adjustment Fund.

It is reported that the fund will support African countries and the private sector to effectively participate in the new trading environment established under the AfCFTA.

The funds consists of the following: ● Base Fund: consisting of contributions from state parties, grants and technical assistance funds to address tariff revenue losses as tariffs are progressively eliminated; ● General Fund: to mobilise concessional funding; and ● Credit Fund: to mobilise commercial funding to support both the public and private sectors.

The Base Fund has been launched to address the urgent needs of countries relating to tariff revenue losses and the transposition costs to enable them to implement the AfCFTA agreement. The general and credit funds will be launched in the coming months to address the needs of the private sector, including small and medium enterprises, women and youth, according to Prof Benedict Oramah, president and chair of the board of Afrexim.

The Adjustment Fund follows the Pan African Payment and Settlement System (PAPSS), which was launched on January 13 2022 in Accra, Ghana. PAPSS is a centralised payment and settlement system for intra-African trade and commerce payments.

Wamkele Mene, secretary general of AfCFTA, said PAPSS is critical to the promotion of intra-African trade, as African countries would no longer need to use thirdparty currencies during trade transactions among themselves.

Since the establishment of AfCFTA, there have been significant developments for intra-African trade with the launch of Transaction Guarantee instrument, PAPSS and the Base Fund of the AfCFTA Adjustment Fund. As a result, Africa is slowly starting to show signs of revival.

Increased investment, both within Africa and internationally, will ensure a continued decrease in the trade finance gap and a consistent boost to social and economic growth in Africa.

Some relief as minister walks financial tightrope John Manyike Old Mutual Finance minister Enoch Godongwana effectively walked a financial tightrope with his budget and in the process, except for the rise in sin taxes, has given stressed South Africans much-needed breathing space.

Small business plays a pivotal role in growing our economy and creating employment opportunities. It was, therefore, gratifying to see that the government has committed itself to the tune of

R20bn this year to support small business.

Vitally and long-awaited is the commitment by the government that it will underwrite the first 20% of losses for banks and other eligible small and mediumsized loan providers to small businesses.

This is a significant move that will encourage banks and other loan providers to adopt a less conservative approach to financing small businesses. It will help meet the oft-aired criticism that banks and lenders have been

far too conservative when assessing loans. This move will also encourage new companies that have yet to prove themselves to more readily approach institutions for financial support.

EXTRA MONEY

The introduction of an equitylinked loan guaranteed support mechanism, details of which will be announced later, will also be welcomed.

The employment tax incentive, which will be increased by 50% to R1,500 a month, will provide an added

incentive for SMEs to create work opportunities. Many SMEs operate and draw their labour from nearby communities, so the extra money could flow into needy areas of the country.

By opting to keep money in the pockets of South Africans and leave tax rates unaltered and adjust brackets and rebates by 4.5% (the inflation rate), Godongwana has given taxpayers more breathing space.

However, this joy will be short-lived as inflationary pressures are caused by the

continuing high cost of fuel and expected increases in interest rates.

The rise in interest rates is inevitable because the Reserve Bank lowered rates during the Covid pandemic.

South Africans who continued paying at the “old rates” on which loans were written will have made savings during the past year and should, therefore, not be affected too harshly by rising rates.

Godongwana confounded predictions by announcing there would be no levies added to the petrol and diesel

prices, or the Road Accident Fund contribution, providing tax relief of R3.5bn.

OIL PRICE

However, this welcome news is being overshadowed by developments between Russia and Ukraine, which have seen the costs of Brent crude oil already exceed $99 a barrel.

South Africans will inevitably have to pay this cost if prices continue to rise.

At least, however, additional local taxes will not increase this burden.

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BusinessDay www.businessday.co.za March 2022

BUSINESS LAW & TAX CORPORATE TAX AND TRADE: SA AND AFRICA

Ignore M&A noise and just carry on • The best thing to do now is to temper optimism and pessimism alike Dave Pinnock Cliffe Dekker Hofmeyr

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hen a new year comes around, M&A practitioners are often asked to discuss trends in the market. Nowadays, this is coupled with a request for a fresh view on what the pandemic has meant and will mean for deal making. In my experience, the starting point for identifying trends is contextualisation.

So, let’s consider the context: using the DealMakers public deal flow measures, as you might expect, M&A activity improved in 2021 from 2020. Some caution is warranted in that DealMakers only reliably measures the overall market in public deals and there are many nonpublic deals DealMakers is not told about. However, it still remains the best, although incomplete, proxy we have for the total M&A market volume in SA. The 2020 calendar year (393 deals) is a shockingly low base though, given the effects of the first unprecedented worldwide lockdowns and the associated economic consequences.

However, when we consider pre-Covid: in 2019 there were 488 deals, in 2018, 525 deals and in 2017, 548 deals.

So, one overall trend is that

/123RF — ANABARAULIA the South African M&A market was suffering a nasty downturn before Covid-19 even swaggered up to bully the global economy out of its lunch money. In that sense, 2021 might start to feel like the start of a recovery.

That’s one trend contextualised but is it the whole view? Of course not.

Perspective tends to shift if the camera draws back a bit further. The 2021 year was one for the record books for M&A globally; not just a record gain from 2020, but a record year all by itself.

The M&A market worldwide has been booming to new heights despite the pandemic. In that context, as might be expected given the general state of its economy and political stagnation, SA is lagging. There is always an

argument to be made that corporate activity movements in Europe and the US (and increasingly other parts of the globe) arrive in SA with a bit of a time lag.

The thinking goes something like this: capital is deployed in those markets and as it chases returns it pushes up asset prices until the returns are not as easy to come by; the capital then overflows into other markets where the asset prices have not yet reached the same heights. Thus, a protracted M&A boom in bigger jurisdictions should overflow into markets such as SA. It should logically follow that those trends in those other markets should be broadly reflected here when the overflow reaches us.

Anyone fancy a SPAC for a fintech play?

Does all of this mean the boom times are just around the corner? The anecdotal evidence could easily lead a glass-half-full observer to reach quite a cheerful conclusion. Some of this is no doubt new year hopefulness as SA bobs up from under a nasty Covid wave and people start to trickle back into their eerily quiet offices a few days a week. But there does seem to be a real feeling of (admittedly still cautious) optimism around.

Life in the pandemic has taught us some valuable lessons if we take heed:

● Dealmaking continues through the most challenging of circumstances, ● We are more resilient than we realised; and ● The world continues to turn.

Also, and perhaps the most important context of all, we are not great at identifying the fabled trends we keep looking for. During the scary days of the first lockdown, it was widely thought there would be many more distressed sales than actually happened. We expected transaction flow would be more depressed than it turned out to be. We thought there would be more foreclosures, more emergency equity capital raises, more equity holders sitting tight to wait out the Covid storm.

All those things happened, but not to the extent predicted and often much later than we anticipated. Our predictions were affected by that most human of things: the emotions of the moment.

So perhaps the best thing to do is to temper optimism and pessimism, acknowledge that we work in an environment noisy with views, pushed and pulled by a multiplicity of variables.

And, in the words of the meme, just keep calm and carry on.

Or perhaps just give in and choose to ride the positivity wave. Personally, I think it’ll be a great year.

/123RF — NARUEDOM

Court rules on copyrighted software taxation Celia Becker ENSafrica In a judgment delivered on December 10 2021, the Kenyan high court ruled that the distribution and sale of copyrighted material is not subject to withholding tax.

The court found that a distinction should be made between the sale of copyrighted material and the use or exploitation of a copyright.

Arrangements between a software copyright holder and a distribution intermediary grants to the distribution intermediary the right to transactions, and the rights acquired in relation to the copyright are limited to those

IN SUCH TRANSACTIONS, DISTRIBUTORS ARE PAYING ONLY FOR THE ACQUISITION OF THE SOFTWARE COPIES

necessary for the intermediary to distribute copies of the software program. In such transactions, distributors are paying only for the acquisition of the software copies and not to exploit any right in the software copyrights.

Accordingly, where a distributor makes payments to acquire and distribute software copies (without the right to reproduce the software), the rights in relation to these acts of distribution should be disregarded in analysing the character of the transaction for tax purposes.

Payments in these types of transactions would be considered as business profits and not royalties subject to withholding tax, irrespective of whether the copies being distributed are delivered on tangible media or are distributed electronically (without the distributor having the right to reproduce the software), or whether the software is subject to minor customisation for the purposes of its installation.

Rwandan double tax treaty in the spotlight Dieudonné Nzafashwanayo ENSafrica On February 14 2022, the Rwandan commercial high court handed down its decision on the appeal lodged by the Rwanda Revenue Authority (RRA) in its dispute with a Mauritian resident company over the taxation of business profits under the double tax treaty (DTT) between Rwanda and Mauritius.

The defendant supplied medical and lab equipment and consumables to various governmental institutions (Rwandan purchasers).

When paying the defendant’s invoices, the Rwandan pur-

chasers withheld 15% of the invoiced amount, and remitted the amount withheld (that is, $188,948.46 and €106,735.92) as withholding tax to the RRA. The defendant relied on article 7 of the DTT, which provides that business profits of an enterprise of a contracting state shall be only taxable in that contracting state, unless such an enterprise has a permanent establishment (PE) in the other contracting state (absence of which in this case was not disputed), and requested the RRA to refund the tax amount as it did not have a PE in Rwanda.

The RRA refused to make

the refund requested by the defendant, which pushed the latter to refer the matter to the commercial court. The court decided in favour of the defendant and ordered the RRA to refund the tax.

TWO ARGUMENTS

The RRA was not content with the decision and appealed against the findings before the commercial high court, advancing two main arguments.

The first was that the defendant did not use the mutual agreement procedure (MAP) before referring the matter to Rwandan courts, and therefore its claim should

not have been admitted. The second argument was that the defendant did not prove it declared and/or paid taxes (in Mauritius) on the income/business profits taxed in Rwanda.

On the first issue, the commercial high court held that article 24 of the DTT does not oblige the defendant to use MAP but instead (by using the expression “that person may”) provided them with leeway to choose between MAP and domestic law remedies, and therefore rejected the objection raised by the RRA. On the second issue, the commercial high court also

dismissed the argument of the tax administration. In his judgment, Mutajiri MJ stated that according to article 7 of the DTT it was only Mauritius that had the right to tax the defendant’s business profits considering that the latter did not have a PE in Rwanda.

Mutajiri MJ further stated that the defendant does not have the obligation to prove it paid taxes in Mauritius, and in case it did not comply, that should be a concern of the Mauritian tax administration, especially because Rwanda does not have the power to charge or collect taxes for and on behalf of Mauritius.

While the decision of the

commercial high court is what would have been expected (considering the principles underlying international taxation), the application of DTTs is rarely litigated before Rwandan courts, and unless successfully appealed against by the tax administration before the court of appeal, this case would be a precedent on the right to tax business profits and interaction between MAP and domestic law remedies under various DTTs signed and ratified by Rwanda.

The defendant was represented by ENSafrica.

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BusinessDay www.businessday.co.za March 2022

BUSINESS LAW & TAX CORPORATE TAX AND TRADE: SA AND AFRICA

Deep dive into corporate tax after budget

BOOST FOR BUSINESSES

Taxpayers may be relieved about a neutral or even •slightly positive budget from Enoch Godongwana ENSafrica Tax Team

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inance minister Enoch Godongwana was able to avoid tax rate increases and even make a positive contribution to reducing the deficit, as a result of better than expected tax revenues.

Godongwana referred to reducing the corporate tax rate in future, and the disbenefits of further rate increases generally.

He also cautioned that unless GDP and tax revenue increased, there is no capacity for increased permanent state expenditure.

He warned about risks to the fiscal outlook both in the global and the domestic environment, including increased borrowing costs, the state wage bill and the poor condition of certain state-owned enterprises.

In the circumstances, taxpayers may be relieved about a neutral or even slightly positive budget from a tax perspective.

Key corporate tax proposals include that the corporate income tax rate is proposed to reduce by one percentage point to 27% for tax years ending on or after March 31 2023, which is linked to other initiatives to broaden the tax base, including the limitation of loss set-off, which was put on ice last year.

Mention was made of the negatives of a comparatively

high corporate tax rate in SA as well as aligning interest deduction limitation rules with international guidance.

A restriction on the amount of set-off assessed losses to 80% of taxable income is proposed to be implemented for tax years ending on or after March 31 2023. Changes are necessary regarding the impact on mining companies.

There will be a reduction and phasing out of certain existing tax incentives, but the R&D allowance is to be extended.

The effective date for the proposed amendments to the collateral arrangement and

ALL DEBT SECURITIES REFERENCING FOREIGN ASSETS LISTED ON SA STOCK EXCHANGES WILL REMAIN CLASSIFIED AS FOREIGN contributed tax capital definitions has been postponed to January 1 2023.

The government proposes broadening the instances in which the “nil base cost” rule will apply through further refinements of the intragroup transaction rules in the corporate reorganisation provisions.

Clarification of the recoupment triggered under

the debt forgiveness rules where an asset is disposed of during a year of assessment and the debt used to fund the acquisition of that asset is forgiven in a subsequent year of assessment.

EXCHANGE CONTROL

Key changes include: portfolio ● Offshore allowances for all institutional investors to be harmonised at 45%, inclusive of the 10% African allowance. ● Foreign direct investment allowance to be increased to R5bn. ● Permitted transfers to domestic treasury management companies for capital transactions to be increased to R5bn (listed entities) and R3bn (unlisted entities). ● After consideration, it has been decided that all debt securities referencing foreign assets listed on SA stock exchanges will remain classified as foreign.

CROSS BORDER

It is proposed that the SA domestic legal framework, particularly the Tax Administration Act, 2011, be amended to make provision for the full use of joint audits with other tax administrations to improve the effective exchange of information under international tax agreements.

The following amendments, which the Treasury views as clarifications, are proposed to the controlled

/123RF — FUNTAP foreign company (CFC) rules: ● In calculating the net income of a CFC, the CFC must be deemed to be a resident in respect of the receipt of royalties from an SA source; and ● Certain intra-CFC dividends deemed to be income in terms of the hybrid equity instrument rules are excluded from net income, along with interest, royalties, rental, insurance premiums or income of a similar nature where the two CFCs are part of the same group of companies.

Updating the CFC rules to align with terms relating to the Insurance Act Certain exclusions to the CFC rules exist where participation rights are held in the policyholder funds of an insurer.

It is proposed that the CFC rules be amended to align their wording with that of the Insurance Act, which came into effect on July 1 2018.

Clarification on exclusions of participatory interests in foreign collective investment schemes from the definition of foreign dividend.

The redemption of participatory interests in foreign collective investment

schemes is specifically excluded from the definition of a foreign dividend in section 1 of the act. The proposed amendment seeks to clarify that similar forms of disposal are also excluded from the definition.

MINING

Interaction between the application of the assessed loss restriction rules and capital expenditure regime.

In terms of section 36(7E) of the Income Tax Act, taxable income in respect of which capital expenditure may be redeemed must be determined after the set-off of any balance of assessed loss. The proposed amendment would clarify that the set-off of the assessed loss and the corresponding limitation must be determined before the deduction of capital expenditure. Of course, the limitation

OFFSHORE PORTFOLIO ALLOWANCES FOR ALL INSTITUTIONAL INVESTORS ARE TO BE HARMONISED AT 45%

of assessed losses in itself is quite unwelcome, but the amendment appears to be for purposes of clarification and is therefore neutral.

Interaction between the application of the interest limitation rules and capital expenditure regime for mining operations.

This is a positive development as the interest limitation provisions will not apply to interest that forms part of capital expenditure.

GOVERNMENT GRANT

The limitation on the claiming of allowances on assets received in respect of which no expenditure was incurred seems fair.

INSURANCE

The implementation of IFRS17 insurance contracts (effective for reporting periods starting on or after January 1 2023), which replace IFRS4 insurance contracts, may have a material impact on the valuation method for insurance contract liabilities and insurers’ cash flow and profit profiles. Government thus proposes that legislative changes be made to income tax provisions dealing with the taxation of insurers.

Resolving mining’s assessed loss anomaly Dries Hoek & Tsanga Mukumba Cliffe Dekker Hofmeyr In 2021 amendments were proposed relating to section 20 of the Income Tax Act 58 of 1962 to limit corporate taxpayers’ ability to use assessed losses carried forward to 80% of the value of such assessed losses in a given year of assessment. The

remainder of the assessed loss would roll over for use in the next year of assessment.

The capital deductions regime for miners is contained in section 15(a) of the act, read with section 36(7C).

Section 15 provides that a deduction shall be allowed as per section 36, in lieu of an ordinary deduction under section 11. Section 36 provides for a deduction of any

capital expenditure to be allowed from income derived from working any producing mine.

The mining industry is thus entitled, subject to certain limitations, to claim the capital expenditure incurred as an income tax deduction against mining income in the year in which such expenditure is incurred. This is an exception to the general tax

rule that one cannot deduct capital expenditure against income as it recognises the substantial upfront capital that is required to commence mining operations.

Section 36(7E) provides a cap on the amount of capital expenditure that can be deducted under the mining capital expenditure regime. It limits the amount of the section 36(7C) deduction to

taxable income regarding a mine or mines — to be determined before applying the section 15(a) deductions, but after the set-off of any balance of assessed loss incurred by the taxpayer in relation to such mine or mines in any previous year which has been carried forward from the preceding year of assessment.

The anomaly identified in

the 2022 budget speech appears to lie in the disjunction between allowing the full amount of an assessed loss to be applied for the purposes of section 36(7E) and the restrictions imposed on the utilisation of assessed losses under section 20. It is notable that the Treasury proposes publishing draft legislation that will clarify the interaction between the provisions.

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BusinessDay www.businessday.co.za March 2022

BUSINESS LAW & TAX

Source code case tackles digital divide

HARD TRUTHS ABOUT SOFTWARE

Vizio uses open-source software yet •failsTVtomaker make code for repairs available to customers Leanne Mostert & Cindy Leibowitz Webber Wentzel

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US body has launched a legal challenge against Vizio, a TV manufacturer, for failing to provide the source code for the software in its smart TV, which may have implications for other software developers Have you ever purchased an electrical appliance or device, only to discover shortly afterwards that the model is obsolete? A US nonprofit organisation that supports free software (the Software Freedom Conservancy) has launched legal proceedings against a US-based television manufacturer (Vizio) for failing to provide consumers with the source code for the software used in the Vizio smart television.

The Software Freedom Conservancy alleges that these smart televisions use open-source software licensed under GPLv2 and LGPLv2.1 licences. These

licences both contain “copyleft” provisions that require the licensee to distribute all modified versions of the licensed open-source software. According to the Software Freedom Conservancy, Vizio failed to do so sufficiently.

The Software Freedom Conservancy’s argument is that, without the source code, consumers cannot modify or repair their televisions and

CONNECTIVITY AND ACCESS TO DATA ARE SERIOUS CONCERNS IN TACKLING AND CLOSING THE DIGITAL DIVIDE therefore cannot preserve useful but obsolete software in the device. This is a novel matter, as it is the first one to deal with the rights of consumers as third-party beneficiaries under a copyleft licence, as opposed to the

matter being brought by a copyright holder as a copyright infringement claim.

The Software Freedom Conservancy argues that Vizio should have provided customers with the source code for its products, and that Vizio should have informed customers about their rights, such as their right of repair.

The matter is likely to have some significant ESG (environmental, social and gender, consumer law and IP implications, from a global and local SA perspective.

Connectivity and access to data are increasingly serious concerns in tackling and closing the digital divide.

The pandemic has caused increased demand for electronic devices such as laptops, smartphones and home entertainment gadgets. This demand has put huge pressure on global supply chains, particularly the supply of chips (semiconductors), which are needed for electronics to function.

If consumers can repair technology products independently of their suppliers,

/123RF — BAGIUIANI this could prolong the usage of devices and reduce the demand on suppliers to source chips and deliver new stock to retailers.

In addition, enabling customers to repair their devices will lead to prolonged usage and equate to reduced electronic waste (e-waste). Ewaste is toxic to the environment and is becoming more prevalent due to the surge in demand for technology since the onset of the pandemic.

These developments will foster greater accountability by businesses to the social and environmental considerations of supplying technology products to consumers, which ultimately demonstrates good corporate governance.

CONSUMER LAW

Legislators across the globe are taking great strides in enhancing consumer-centric laws. In SA, the Consumer Protection Act 2008 provides consumers with the right to safe, good quality goods. The

act states that this right includes receiving goods that will be usable and durable for a reasonable period, having regard to their use and circumstances of their supply.

Vizio’s failure to provide the Software Freedom Conservancy with the source code for the software used in its smart television could contravene the act. Arguably, this failure results in the television ceasing to be usable if the software becomes redundant shortly after the television has been purchased, which contravenes the right to receive usable and durable goods.

Interestingly, the act’s definition of “consumer” includes a user of goods or beneficiary of services, irrespective of whether that user or beneficiary was a party to the transaction.

If the matter was being decided in an SA court, this definition would enable the Software Freedom Conservancy to argue that consumers have rights as third

party beneficiaries under a copyright licence.

IP LAW

The outcome of this case may open a can of worms, allowing consumers to assert their rights over devices that use open-source software. There would be many commercial and IP issues for software developers and contracting parties to consider in developing and licensing proprietary software, which frequently incorporates opensource software.

In particular, software developers will need to consider whether to make some source code freely availablec.

This will naturally have commercial and financial implications, for example the pricing of products.

Licence agreements will need to be carefully constructed to ensure compliance with open-source licences, while also that the copyright holder does not abandon any of its rights in and to the proprietary software.

Concourt may decide on mandatory jabs Anastasia Vatalidis & Kerry Fredericks Werksmans On January 21 2022, the Commission for Conciliation, Mediation and Arbitration (CCMA) delivered a first pronouncement on the fairness of a dismissal following an employee’s refusal to receive the Covid-19 vaccination.

The publication on June 11 2021 of the latest iteration of the Consolidated Directions on Occupational Health and Safety Measures in Certain Workplaces under the Disaster Management Act No .57 of 2002 (directions) sparked much controversy when the directions affirmed the right of employers to adopt mandatory vaccination policies subject to certain restrictions.

Before adopting a mandatory vaccination policy an employer must undertake a

risk assessment to identify those employees who should be subject to such mandatory vaccination policy on the basis of either the risk of transmission of Covid-19 through the specific work performed by the employee or the risk of severe Covid-19 disease or death that is due to the comorbidities of the employee.

The directions require any employer adopting a mandatory vaccination policy to notify employees identified for mandatory vaccinations of their rights to refuse the Covid-19 vaccine either on constitutional grounds (the right to bodily integrity, the right to freedom of religion, belief and opinion) or on medical grounds.

Employers are obliged to, where possible, reasonably accommodate employees refusing the Covid-19 vaccine. Following the publica-

tion of the directions, the burning question has been whether an employer may dismiss an employee, subject to its mandatory vaccination policy, for refusing the Covid19 vaccine. In the case of Theresa Mulderij v Goldrush Group (GAJB 24054-21), the CCMA was called to answer this very question.

In this case, the Goldrush Group (Goldrush) adopted a mandatory vaccination policy in compliance with the directions in terms of which Theresa Mulderij (Ms M) was required to receive the Covid-19 vaccine. In terms of the policy Ms M was entitled to apply for exemption from the policy, which she duly did. Ms M cited constitutional grounds, specifically her right to bodily integrity as her reason for refusing the Covid-19 vaccine.

Ms M also alleged that she had followed Covid-19 safety

protocols strictly, and that the Covid-19 vaccine did not stop the spread of the virus but minimised the risk of the severity of Covid-19 symptoms.

After considering her application for exemption, Goldrush declined her application on the basis that Ms M was required to engage with external clients and internal colleagues by virtue of her position. Ms M was dismissed for incapacity as she could not be accommodated anywhere in the business.

From a reading of the award it is not clear whether the CCMA, in coming to its decision, gave sufficient consideration to whether Goldrush’s decision to adopt the mandatory vaccination policy was supported by credible medical evidence.

The CCMA nevertheless accepted Goldrush’s decision to implement a mandatory

vaccination policy, and found that Goldrush had complied with the directions when implementing its mandatory vaccination policy.

The CCMA eventually held that Ms M’s dismissal was substantively fair, reasoning that Ms M was permanently incapacitated on the basis of her decision not to receive the Covid-19 vaccine.

WALKING A FINE LINE

Although this case is arguably an important decision, it is unlikely to be the final pronouncement on this issue.

A few cases in various fora, including the Labour Court and the High Court, are pending pronouncement in relation to this question.

It is expected these cases will shed more light on whether employers may adopt mandatory vaccination policies, whether employees

may be dismissed for refusing the Covid-19 vaccine and, if so, the process that an employer should follow to give effect to such dismissal.

Considering the right to refuse the Covid-19 vaccine on Constitutional grounds, it is inevitable that these issues will finally be determined by the Constitutional Court.

Employers adopting mandatory vaccination policies walk a fine line between ensuring a safe working environment in compliance with its occupational health and safety obligations, and possibly infringing on employees’ constitutional rights unduly.

Consequently, notwithstanding the CCMA’s award in Ms M’s case, employers should proceed with caution when implementing mandatory vaccination policies in respect of specific positions or the entire workforce.

7

BusinessDay www.businessday.co.za March 2022

BUSINESS LAW & TAX

NFTs: fair use or flagrant abuse of IP?

TOKEN OF PAYMENT

Hermès and Miramax pitted against creatives who •want to push the boundaries of intellectual property Tevin Jones ENSafrica

I

t wasn’t that long ago that we first wrote about nonfungible tokens (NFTs). Now, barely a day goes by without a report on the intellectual property (IP) implications of these weird creations.

An NFT can be described as a unique digital asset authenticated using blockchain technology. NFTs might comprise digital artwork, photos, videos, GIFs, music and so on and are sold on blockchain-backed marketplaces such as OpenSea and Nifty Gateway. People buy NFTs for a variety of reasons (one of which is that they are seen by some as a good investment).

HERMÈS V ROTHSCHILD: BIRKIN Birkin and MetaBirkins

An interesting article in Business of Fashion reports that fashion house Hermès is suing Mason Rothschild in a New York court for trademark infringement and dilution. The case relates to Hermès’ Birkin trademark and, more particularly, the fact that Rothschild is marketing digital assets under the name MetaBirkins. According to the article, the case “raises questions about how trademark protections for real-world items will be enforced in the digital realm as commercial activity heats up in the metaverse”. In recent months, NFTs depicting fashion items have sold for millions.

Dilution The article says OpenSea removed MetaBirkins after Hermès issued a cease and desist letter, yet Rothschild continues to market them. In its court papers, Hermès says that “Rothschild simply rips

off Hermès’ famous Birkin trademark by adding the generic prefix ‘meta’ … there can be no doubt that this success arises from his continuing and dilutive use of Hermès’s famous trademarks”.

Just a bit of fun Rothschild, unsurprisingly, sees it differently. He refers to his work as “a playful abstraction of an exciting fashion-culture landmark”.

Rothschild says he is “not creating or selling fake Birkin bags … I’ve made artworks that depict imaginary, furcovered Birkin bags”.

THESE NFTS WILL APPARENTLY INCLUDE EXCERPTS FROM THE ORIGINAL HANDWRITTEN SCRIPT

/123RF — JEANNIERV Parallels Rothschild’s reference to “playful abstraction” raises interesting parallels with the use of well-known trademarks on clothing, an issue that South Africans know well through the famous Constitutional Court decision in the Laugh it Off case.

This response from Hermès is particularly interesting: “Although a digital image connected to an NFT may reflect some artistic creativity — just as a T-shirt or a greeting card may reflect some artistic activity — the title of ‘artist’ does not confer a licence to use an equivalent to the famous Birkin trademark in a manner calculated to mislead consumers and undermine the ability of the mark to identify Hermès as the unique source of goods sold under the Birkin mark.”

Serious harm Hermès argues that unless the court intervenes, it could suffer real harm. It claims MetaBirkins could “ultimately pre-empt Hermès’ ability to offer products and services in virtual marketplaces that are uniquely associated with Hermès and meet Hermès’ quality standards”.

We await further developments with interest.

MIRAMAX V QUENTIN TARANTINO: PULP FICTION

Unseen clips In another interesting development, Miramax (the studio behind Pulp Fiction, one of the most influential films of the past 30 years) is suing Quintin Tarantino (the director of the film starring John Travolta and Samuel L Jackson) for planning to sell seven NFTs of previously unseen clips/scenes from the film.

These NFTs will apparently include excerpts from the original handwritten script and exclusive commentary from the writer/director.

According to Miramax, the problem with the above is that it owns “the majority of the rights to the film”. Equally vague, Miramax claims that Tarantino assigned “nearly all of his rights to Pulp Fiction” to Miramax in 1993.

Miramax argues that “left unchecked, Tarantino’s conduct could mislead others into believing Miramax is involved in his venture”. It further argues that “this oneoff effort devalues the NFT rights to Pulp Fiction, which Miramax intends to maximise through a strategic, comprehensive approach”.

ON A HAPPIER NOTE

There is some good news involving NFTs. The British Museum has seemingly embraced them by launching its second NFT art sale (featuring the works of Turner — the rationale is seemingly to recoup some of the revenue it would have made had there not been a pandemic).

Meanwhile, a worldfamous sportsman who we have discussed before, Giannis Antetokounmpo (aka the Greek Freak), is also getting involved with NFTs, evidencing that he is as business and marketing adept as he is at shooting hoops.

No doubt we’ll be discussing NFTs for the foreseeable future.

Reviewed by Gaelyn Scott, head of ENSafrica’s IP department.

CONSUMER BILLS

Health insurance needs working infrastructure

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here is a wonderful story about a wellknown Cape Town art dealer who, when his desk got too full of unattended documents, bought a door to place on top of the neglected papers and started again.

The National Health Insurance Bill is being used in the same way to cover over the failing public health system.

There is not enough room in this entire publication to summarise all the reports on how the underfunded public health system is failing South Africans. Look no further than the Charlotte Maxeke Hospital in Johannesburg which will not fully reopen until 2023 with the delays attributed in the media to “corruption involving senior government officials”.

This is a hospital where at the time of the fire it reportedly had 2,300 patients waiting for cataract operations and a waiting list of 1,000 cancer patients needing radiation. All of this has happened despite

PATRICK BRACHER spending more than 8% of our national budget on health care, which is a large percentage by world standards.

The National Health Insurance bill is going through the parliamentary process. The parliamentary committee received nearly 340,000 public submissions and 135 stakeholders indicated they wanted to make oral submissions to the committee. These public hearings of the committee have passed their 25th day.

We are a participatory democracy and that consultative process is necessary; but it should be aimed at reaching a sensible outcome. Time after time

people who appear in good faith with good arguments in front of the committee are accused, unfairly, of not being in favour of universal health care and social solidarity.

The major themes of those making submissions are, firstly, that you cannot build a national health insurance system on top of failing infrastructure. Second, placing hundreds of billions of rand under the control of a minister and a board appointed by the minister is bad governance (“governance” is a euphemism for corruption prevention). Third, no-one has demonstrated where the funds will come from to support the financial requirements of the bill.

The committee looking at the problem is the portfolio committee on health. It is not the portfolio committee on the National Health Insurance bill. While time and energy are spent on an unworkable health insurance bill, there are no public

hearings on the question why the public health system is failing despite spending more than 8% of the national budget on it.

In the meantime, after five years of worthwhile effort by the competition authorities, the comprehensive report of the health market inquiry offering solutions shows no sign that the committee will recommend implementing its recommendations nor even integrate them into the debate.

There is no need to expand on the governance issue. The Covid-19 era has demonstrated that concern for the lives and health of patients is not immune from widespread corruption. The entire bill is about procurement, which is the one area where governance is most needed and is dealt with inadequately in the bill.

When the financing issues are raised, the answer is that the bill is not a money bill and this is a problem for the Treasury. No-one has explained where the money

comes from if more than 8% of the national budget is not enough to deal with the basic infrastructure. Nor is there any explanation of how much tax revenue will be needed to prop up the aims of the bill at the expense of many other demands on the Treasury.

The more than 25 days of public hearings in parliament, which started in May 2021, are comprehensively minuted by the committee. If you read the response to public submissions from the majority members of the committee, you will detect a refusal, and often an aggressive refusal, to tackle the above issues or even recognise that they are issues

IF WE PRODUCE SOMETHING THAT DOES NOT WORK, UNIVERSAL HEALTH CARE WILL BE SET BACK FOR YEARS

at all. With a few exceptions, everyone who has made submissions to the committee is in favour of universal health coverage and is looking for a constructive path to achieve that outcome.

What is happening at the moment does not seem to be doing anything of the sort. If we produce something that does not work, universal health care will be set back for years and the legislature’s promises at public hearings to bring it about will not be kept. We can only hope that, despite all indications to the contrary so far, when the committee debates the bill clause by clause in the light of the submissions and the state of public health care, a real solution to universal coverage will be sought.

By that time we will have lost many more years and many more untreated patients. ● Patrick Bracher (@PBracher1) is a director at Norton Rose Fulbright.

8

BusinessDay www.businessday.co.za March 2022

BUSINESS LAW & TAX

SA watchdogs team up to sharpen bite

CAUSE FOR CO-OPERATION

MOU will enhance co-operation between •Competition Commission and information regulator Ahmore Burger-Smidt Werksmans

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t is a well-established practice for regulators across various jurisdictions to establish memoranda of understanding (MOUs) or memoranda of agreement (MOAs) with each other. Such agreements generally aim to establish a mutual approach in dealing with matters giving rise to an overlap of the regulators’ respective responsibilities.

That is what the MOA between the Competition Commission of SA (commission) and the Information Regulator of SA (information regulator) seeks to achieve.

The MOA will govern the information exchange between the two regulators as well as facilitate further interactions and co-operation between them in matters that give rise to overlaps in competition law, data privacy and access to information. This allows both regulators to, inter alia: ● Effectively co-ordinate the exercise of jurisdictional powers when taking decisions. ● Apply a consistent interpretation and application of the principles of competition law and privacy law when exercising their powers and functions in terms of their respective enabling legislation.

● Promote co-operation, including in respect of setting standards or conditions that affect matters of common interest, any joint investigations, market inquiries and/or research studies that the regulators may agree to undertake. ● Consult and timeously provide each other with necessary information in respect of the investigation of anticompetitive practices, regulation of mergers and acquisitions, as well as investiga-

THE MEMORANDA OF UNDERSTANDING WILL GOVERN THE INFORMATION EXCHANGE BETWEEN THE TWO REGULATORS tion of noncompliance with the provisions of the Protection of Personal Information Act, 4 of 2013 (Popia) and Promotion of Access to Information Act, 2 of 2000 (Paia).

The MOA does not, however, seek to compel either regulator to obtain approval from the other to carry out its statutory powers and functions even if those powers and functions overlap with those of the other. Moreover, neither regulator can exercise powers or perform func-

tions under the other’s governing legislation.

However, to ensure a more aligned system of regulation as well as limit regulatory uncertainty facing businesses, the MOA deems it essential that the information regulator and the commission co-operate with and consult each other on a regular basis in the exercise of their powers in matters that affect the mandate and functions of the other.

What is interesting to note is the extent of influence that the information regulator may have in competition matters as a result of the MOA. Though the MOA states that the commission and the information regulator shall make independent determinations on the basis of the criteria and mandates of their respective legislative and regulatory frameworks, it also states that in arriving at their determinations they may consult each other in as far as competition matters are concerned.

Though the extent of this influence is yet to be seen, it will be interesting to see how the commission approaches competition matters such as merger reviews where personal information may be significantly impacted.

The MOA also creates a duty for each regulator to notify the other in instances where a complaint is lodged

/123RF — BAKHTIARZEIN regarding a practice or conduct over which both regulators may have concurrent jurisdiction.

This enables consultations to take place between the two and may extend as far as having members from the one regulator participate in the processes of the other through, inter alia, attending meetings and providing inputs or making representations on the investigation and determination of a matter.

A joint working committee constituted by representatives of both regulators is to be established pursuant to the MOA and shall function on an ongoing basis.

The committee will facilitate and manage co-operation and consultation in respect of matters dealt with by each regulator in terms of the MOA. It will also propose, when necessary, any amendment or supplementation to the MOA. The committee will also have the important role of advising the management of both regulators on issues

relating to competition law, data privacy and access to information. In that regard, the committee will make recommendations on: ● The types of conduct or transactions affected by the abovementioned areas of law in which concurrent jurisdiction is to be exercised by the two regulators. ● International approaches

A JOINT WORKING COMMITTEE CONSTITUTED BY REPRESENTATIVES OF BOTH REGULATORS IS TO BE ESTABLISHED to issues of overlap concerning jurisdiction between a competition authority and the information regulator. ● Amendments to the relevant statutes. ● Any other related matter.

Consequently, the committee serves as the link

between the information regulator and the commission, making it an important body for the effective implementation of this collaboration arrangement.

Notwithstanding the above, the regulator remains the custodian of Popia. It is the subject matter expert on privacy law and sits in pole position to bring its focused knowledge and experience to guide the commission on the proper application of privacy principles.

The MOA reflects a global trend in jurisdictions that have both competition and privacy regulators working hand-in-hand to co-ordinate efforts in regulating competition and privacy issues.

It is the first of its kind in SA between the commission and the information regulator and reinforces the relevance of privacy issues in competition matters. This will in no doubt lead to an increased demand on the regulator’s resources given the number of competition matters that give rise to privacy concerns.

Continent is in step over school uniforms Lerisha Naidu & Jarryd Hartley Baker McKenzie African antitrust authorities have demonstrated unity of focus in their domestic investigations and prosecution of arrangements relating to the supply of school uniforms.

The investigations have been directed at two core issues: the pricing behaviour of suppliers; and the existence and effect of exclusive supply arrangements between school uniform suppliers and schools.

While these investigations,

in and of themselves, are interesting, it is unsurprising that pricing behaviour and exclusivity arrangements have come under the scrutiny of antitrust authorities.

What is perhaps most distinct about these investigations is the parallel nature of the enforcement action on the continent, in relation to a key sector that underpins most national development plans and policies. The following bears mentioning: In SA and after a number of competition complaints, the authorities initiated an investigation giving rise to the

conclusion of settlements with suppliers. On January 10 2022, the authorities proceeded to issue guidelines relevant to the school uniform investigation.

The Egyptian competition authority also issued a decision impugning an exclusivity arrangement between a school and uniform supplier.

Similarly, Malawi’s Competition and Fair Trading Commission issued a warning, threatening enforcement action against institutions engaging in exclusive supply agreements in this sector.

Zimbabwe’s Competition

and Tariff Commission blocked an agreement between a school and two uniform and stationery suppliers after a complaint was lodged and a consequent investigation had been conducted.

The Eswatini Competition Commission also investigat-

IT IS UNSURPRISING PRICING BEHAVIOUR AND EXCLUSIVITY ARRANGEMENTS HAVE COME UNDER SCRUTINY

ed exclusive supply agreements for the supply of school uniforms and found these agreements to be a violation of local legislation, declaring such agreements to be unlawful and invalid.

The Namibian Competition Commission issued an advisory notice, cautioning market players on the potentially anticompetitive nature of exclusive arrangements, advising schools to refrain from these agreements or risk investigation.

What is clear about these developments is the multijurisdictional and parallel

focus of competition law authorities on the continent.

Not only are regulators robustly ramping up on enforcement activity but are, without question, targeting similar sectors and antitrust issues.

Companies that have a pervasive physical presence in Africa should ensure rigorous antitrust enforcement in all jurisdictions to avoid coming under the spotlight, not just once, but seemingly across jurisdictions where authorities are demonstrating a unity of focus, enforcing local laws with equal vigour.

9

BusinessDay www.businessday.co.za March 2022

BUSINESS LAW & TAX

How rules for retrenchment can improve

ON THE MOVE

A pre-approval system and carving out space for •informal businesses may enhance the legal regime Fritz Malan & Jan Norval ENSafrica

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t is in our view of paramount importance that the retrenchment process should, in the first instance, be clear and capable of execution by lay people. Although it is not viable to redesign our retrenchment law in this article alone, we offer the following broad suggestions for consideration and debate.

One possible approach could involve moving to a pre-approval system for retrenchments to provide legal certainty before a retrenchment exercise is concluded.

Pre-approval could also be offered as an alternative available to employers, with the current system remaining as an option for employers who prefer to retrench without initial oversight and deal with legal consequences (if any) at a later stage.

The practicalities of a preapproval approach would have to be carefully worked out to provide for the differing scale and complexity of different retrenchment exer-

cises and to ensure tight timelines for the completion of the process. There should be the right to challenge the decision of the approval body; however, this should be limited to either a review or appeal, on an urgent basis.

Such an approach could avoid the spectre of years of ongoing legal uncertainty.

It is suggested that this of type approach could, potentially, maintain a degree of protection against unfair dismissal while largely avoiding

IN AUSTRALIA, FIRMS WITH LESS THAN 15 EMPLOYEES HAVE SPECIAL RULES APPLICABLE TO THE ENDING OF EMPLOYMENT procedural disputes.

It would, in the view of the authors, promote legal certainty if the courts (and any specialised pre-approval body) are specifically restricted from delving deeply into commercial and operational merits of employer retrench-

ment decisions, which parties other than the employer are ill equipped to do.

Another alternative, but much more limited, reform approach could be to leave the existing legal structure in relation to retrenchment intact but to provide employers with the choice to avoid legal challenge to the retrenchment process by offering a specified enhanced severance payment. Many employers may choose to pay enhanced severance pay to obtain legal certainty.

The department of small business development drafted a policy plan entitled the National Informal Business Upliftment Strategy (Nibus), which was launched in 2014.

Nibus was the first national policy document focused directly on informal businesses and aims to “create an enabling regulatory environment and thriving informal sector”.

The regulatory environment relating to retrenchments for informal small businesses, which house about 3-million jobs, is the same as for formal mediumsized businesses. The limited ability of informal small busi-

/123RF — CUNAPLUS nesses to comply with existing retrenchment requirements does not create an enabling regulatory environment as envisaged by Nibus.

The retrenchment process for small business could be simplified. In Australia, for instance, businesses with less than 15 employees have special rules applicable to the ending of employment. Small businesses do not have to pay statutory severance pay and the process is based on vetting of a standard form. Such a regime would naturally be attractive to small businesses and could, in our view, stand constitutional muster.

One possible criticism of all the alternative retrenchment law reform approaches referred to above is they may not provide sufficient protection against the use of retrenchment as a pretext for other dismissal motivations.

Our law requires that employers must consult on potential preference to be given to retrenched employ-

ees in regard to suitable vacancies that may arise with the retrenching employer at a time after the retrenchment takes place.

Providing retrenched employees with a vested right, as opposed to only a right to be consulted, in relation to preferential appointment to suitable vacancies that may become available with the retrenching employer for a specific period after retrenchment may address this issue.

For SA labour lawyers the idea of dismissal protection and procedural and substantive fairness requirements as an extension of the constitutional right to fair labour practices is fundamental. Any labour law reform approach would have to take cognisance of not only the constitutional right to fair labour practices but also the right of access to the courts. Reasonable limitation of these rights may be justifiable to give effect to broader socio-

economic rights which are severely impaired by rampant unemployment.

Even if none of the suggestions and thoughts presented in this article finds favour with readers in the form presented above, the article would have achieved its purpose if it ignites debate on how retrenchment law reform may contribute to addressing stubbornly high unemployment.

Arriving at appropriate legal reforms will, however, require recognition on the part of all stakeholders in the economy that current regulatory approaches have failed to reduce unemployment.

Given SA’s dire unemployment crisis and ongoing economic woes, to simply continue with our retrenchment law in its present form would, however, seem less than logical.

This is the final part of a series of articles into labour reform by the authors.

Treasury makes strides in replacing Jibar Khurshid Fazel Webber Wentzel Details of a new wholesale overnight lending rate, Zaronia, will be published this year, with the aim of providing a more reliable rate to replace Johannesburg interbank average rate (Jibar).

The speed of National Treasury’s progress in the complex issue of establishing a new reference rate to replace Jibar has been commendable.

This represents a fundamental shift in the market, which will require an industry-wide adjustment to systems and processes and will have a far-reaching impact on secondary markets.

The global shift away from traditional benchmarks such as the London interbank

offered rate (Libor) began after the 2007-2008 crisis, when there were allegations that Libor had been manipulated by participants for several preceding years.

Fines were imposed by the regulators, and financial markets lost confidence in the reliability of Libor.

Although SA was less affected by reference rate manipulation, it has also been seeking a more reliable rate.

The main problems with Jibar are that it is not representative of the cost of funding for banks, as deposits now constitute the largest source of wholesale funding; Jibar is not transactionbased; there is a mismatch between the underlying universe for Jibar and the total book of financial assets and liabilities that reset against the

rate; and Jibar may also be prone to manipulation.

In August 2018, the SA Reserve Bank published the “Consultation Paper on Selected Interest Rate Benchmarks in SA”.

The paper made key recommendations, including establishing a market practitioners group (MPG).

Since then, the MPG committee has been analysing options for moving from Jibar, which is the overnight wholesale rate for rand transactions at which banks lend to each other, to a different “risk-free or near riskfree rate”. Jibar, Libor and other rates were based on discussions between leading banks on what they expected to charge each other for interbank lending — in other words these were forward-

looking rates. The new riskfree rate (RFR) will be based on actual transactions — in other words it will be backward-looking and therefore more objective.

ROBUST RATE

The MPG committee has collected five years’ worth of data from SA’s top four commercial banks and the JSE. It has devised an RFR which it considers to be robust and will meet international standards. It has now invited industry stakeholders, including legal firms, to attend its meetings so they can be apprised of progress.

The proposed overnight RFR is called Zaronia (SA rand overnight index average). It will respond to policy rate changes and is expected to be more resilient than

Jibar, partly because of the depth and liquidity of the markets that underpin it.

The Treasury’s timeline for introducing Zaronia is to publish it this year, start adopting it in 2023 and gradually phase out Jibar from end-2023. The transition will take about three years, which is faster than other international RFRs have achieved.

Some of the issues around introducing the new RFR are how existing agreements and

IT WILL BE NECESSARY FOR SA’S FINANCIAL SERVICES INDUSTRY TO AGREE ON A STANDARD WORDING FOR AGREEMENTS

very long-dated loans based on Jibar will have to be amended. SA banks have known for several years that Libor and Jibar are going to be phased out and have already begun building new rates into loan agreements.

However, it will be necessary for SA’s financial services industry to agree on a standard wording for agreements. Unless there is standardisation, it will be difficult to syndicate loans, transfer debt or include several lenders in a complex loan agreement.

A good way to approach the problem would be to approach industry bodies in the UK to learn from their experience. This work needs to begin soon, given the MPG’s commitment to introduce Zaronia next year.

10

BusinessDay www.businessday.co.za March 2022

BUSINESS LAW & TAX

Focus on intra-group loans

Revenue Service releases •newSAdraft note for comment Carryn Alexander Webber Wentzel

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he SA Revenue Service (Sars) has released a new draft interpretation note that will help to clarify issues around intragroup loans, but several key issues still need to be addressed.

Debt is an important source of financing for investment. However, intragroup financial assistance can create opportunities for base erosion and profit shifting. Base erosion profit shifting (Beps) refers to tax planning strategies used by multinational enterprises to “shift” profits from a higher-tax to a lower-tax jurisdiction, which results in loss for the tax base of the higher-tax jurisdiction.

This can be achieved by, inter alia: ● Multinationals placing higher levels of third-party debt in high tax jurisdictions. ● Multinationals using related party financing to fund the generation of taxexempt interest income. ● Multinationals using related party loans to generate interest deductions in excess of the multinational’s third-party interest expense.

Beps has been a key area of interest for the Treasury and Sars, more so in recent years due to SA’s slow economic growth and poor tax revenue collections. Before 2012, it was addressed through the thin capitalsation rules in section 31(3) of the Income Tax Act. In terms of these rules, an SA resident company in receipt of debt financing from a connected person would not be thinly capitalised, pro-

IN FINER DETAIL

vided the total amount of connected party interestbearing debt per investor did not exceed three times the level of fixed capital pertaining to that investor.

In addition, the interest rate applied would not contravene the transfer pricing rules if the effective rate (after eliminating any excess loan funding) did not exceed the rates provided in Practice Note 2.

From April 1 2012, section 31 was overhauled, resulting in section 31(3) and Practice Note 2 (that is, the previous SA thin capitalisation provisions) being repealed. Under the new rules, any debt financing received by an SA

TREASURY RECOGNISED SA HAS A HIGH CORPORATE INCOME TAX RATE COMPARED TO THE GLOBAL AVERAGE resident taxpayer from a foreign connected party constitutes a transaction that is subject to the general transfer pricing rules.

This involves a two-step analysis of the funding transaction concerned: first, that the quantum of the debt should adhere to the arm’s length principle; and second, that the interest rate applied should also adhere to the arm’s length principle.

In 2013, a draft interpretation note was released by Sars providing guidance on how it would expect an SA taxpayer to confirm the arm’s length nature of an intra-

/123RF — STUDIOM1 group financial transaction. In testing the arm’s length nature of the debt and the interest rate, the 2013 draft interpretation note advocated a debt-to-ebitda ratio of 3:1 and a risk harbour rate not exceeding Jibar plus 2% for rand-denominated debt, or for foreign debt, the weighted average of the base rate of the country of denomination plus 2%, respectively.

Sars advised that its guidance on the application of the transfer pricing rules to inbound debt would not be finalised until the Organisation for Economic Cooperation and Development’s (OECD’s) working group on the transfer pricing of financial transactions was released.

The resulting uncertainty placed an undue compliance burden on taxpayers.

The OECD released its

transfer pricing guidance on financial transactions in 2020 and incorporated them in its Transfer Pricing Guidelines for Multinational Enterprises and Tax Administration in January 2022 (the OECD guidelines).

The Treasury released its discussion paper entitled “Reviewing the Tax Treatment of Excessive Debt Financing, Interest Deductions and Other Financial Payments” on February 26 2020.

In this paper, it recognised SA has a high corporate income tax rate in comparison to the global average and that taxpayers may engage in schemes or arrangements that will minimise their tax liabilities by placing most of their debt funding in high-tax jurisdictions (such as SA) to get the interest deduction.

Consequently, after receiving

comments on the Treasury’s paper, the government proposes to expand the scope of the current interest limitation rules and to limit the net interest expense deductions to 30% of earnings in respect of intragroup debt.

Considering this, on February 11 2022 Sars

THE NOTE DISCUSSES THE APPLICATION OF THE TRANSFER PRICING RULES TO A RANGE OF FUNDING ARRANGEMENTS released for comment its new Draft Interpretation Note on the Determination of the Taxable Income of Certain Person from International Trans-

actions: Intra-Group Loans.

In terms of the new draft interpretation note, Sars has confirmed that the pricing of an intra-group loan will be considered arm’s length if it adheres to the arm’s length principle in the OECD guidelines.

The OECD guidelines requires a comparison of the conditions in a controlled transaction with the conditions that would have been laid down if the parties had been independent and had undertaken a comparable transaction under comparable circumstances from both a lender's and borrower’s perspective.

It also clarifies that the impact of the section 23M and section 23N limitations on the deductibility of interest may only be considered after the transfer pricing rules have been applied in testing the arm’s length nature of the intragroup transaction.

The note also, among others, discusses the application of the transfer pricing rules to a broad range of both direct and indirect funding arrangements, including back-toback financial arrangements with banks and other financial institutions and guarantees.

It also gives alternatives on how to apply the arm’s length principle in the absence of comparable uncontrolled transactions.

Sars is, furthermore, considering the use of advance pricing agreements on intragroup cross-border debt.

Most notable is that the 2022 draft interpretation note has removed all safe harbour and risk harbour provisions and has, instead, placed the main burden on proving that the arrangement is arm’s length.

Comments on the new draft interpretation note are due by April 29 2022.

New draft guidelines for classification of films Carla Collett & Peter Grealy Webber Wentzel The Film and Publication Board has published new draft guidelines for comment on the classification of films, games and some publications, with potentially farreaching implications The rapid uptick in the use of varied information-sharing channels has resulted in adults and children accessing large quantities of data, often from unreliable and, in some instances, dangerous sources. Lawmakers across the globe have been introducing

/123RF — HUGOLACASSE laws to protect the public against these harms.

The EU’s proposed Digital Services Act and the UK’s proposed Online Safety Bill

are both examples of laws intended to regulate online harms.

Recent changes in SA include the commencement

of the Protection of Personal Information Act 2013 to protect people’s privacy rights.

Parts of the Cybercrimes Act 2020 have also become effective, criminalising among other things the unlawful and intentional disclosure of harmful data messages such as intimate images of another person without their consent.

The Film and Publication Board has now published draft guidelines for public comment on the classification of films, games and certain publications. These guidelines will amend the existing classification guide-

lines. Some of the changes proposed in the draft guidelines have far-reaching implications, which are beyond the scope of those anticipated in the offshore legislation mentioned above.

Some of the proposals in the draft guidelines: ● Various changes to the definitions of key terms, including aligning definitions with those in the Criminal Law (Sexual Offences and Related Matters) Amendment Act, 2007 and the Films and Publications Amendment Act, 2019; and ● Distributors of a film, game, publication or online

content will explicitly include persons that stream content through the internet, social media or other electronic media. This would seem to include an individual posting a personal video on social media for noncommercial purposes.

Stricter measures are envisioned for classifying content. For example, the proposals aim to enhance the decision-making capabilities of adults — for monitoring themselves and their children — when consuming content by providing them with the tools to make an informed choice.

11

BusinessDay www.businessday.co.za March 2022

BUSINESS LAW & TAX

Perils of false racism claims

Unfounded accusations against a colleague or •employer could end up in you losing your job Jacques van Wyk & Andre van Heerden Werksmans

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he alleged unfair dismissal of the employee for reasons of misconduct was the issue considered by the Commission for Conciliation, Mediation and Arbitration (CCMA) in the case of Lefydi/Bader South Africa (2022) 1 BALR 71 (CCMA).

This case related to the alleged unfair dismissal of the employee for reasons of misconduct. The employee commenced employment at the respondent as a supervisor.

He was dismissed on September 29 2020 after a disciplinary hearing was convened and he was found guilty of misconduct.

The employee thereafter referred a dispute to the CCMA. It was the employer’s case that the employee had accused Mokhadi Elizabeth Mafoko, a security supervisor stationed at the employer’s premises, of racism.

Mafoko testified that the employee had informed her that he had bought off-cut leather bags from the employer and that they were too heavy to carry to his car.

She then suggested he bring his car inside the employer’s premises. She noted that his car would be searched upon entering and leaving the premises.

Before the employee brought his car onto the respondent’s premises, Mafoko had received a tip-off that he had loaded a full hide in his car. It was for this reason that Mafoko approached the employee’s car when he arrived on the premises and began conducting a search.

At the time, two other security officers had already begun searching the employee’s car. Mafoko asked the security officers to remove the off-cut leather bags from the car so she could conduct a thorough search. The employee became angry and accused Mafoko of engaging

EMPLOYEES WHO ENGAGE IN INTIMIDATION AND/ OR USE ABUSIVE LANGUAGE MAY BE DISMISSED IN APPROPRIATE CIRCUMSTANCES in a search of his motor car because he was black. The employee then informed Mafoko that he “was going to deal with her”. He said he would find out whether Mafoko treated a white lady in the same manner as that which she had treated him.

The employer had a zero tolerance policy for racism.

Daniel Modipane, the chair of

the disciplinary hearing, testified at the CCMA. He noted the employee had failed to raise a grievance through proper channels in respect of the way in which his car was searched and that “the most aggravating factors against the applicant were that his actions were directed against a female employee, and that he did not show remorse for his conduct”.

The employee acknowledged he was aware of the respondent’s search procedures but took issue with the fact that Mafoko wanted to search his car after it had already been searched. The employee explained that he felt as if he was being treated like a criminal, which provoked him, but denied he made any racial insults towards Mafoko.

LEGAL PROVISIONS CONSIDERED

In considering the substantive and procedural fairness of the employee’s dismissal, the CCMA commissioner considered the Constitution of the Republic of South Africa, 1996 (Constitution), the Labour Relations Act 66 of 1995 (LRA), Schedule 8 of the Code of Good Practice: Dismissal (code) as well as various case authority.

The relevant legal authority was in support of the finding that employees who falsely accuse other employees of racism assault such

CODES OF CONDUCT

/123RF — KUPREVICH employees’ dignity.

This may result in the dismissal of the employee making such a false allegation. For instance, in the decision of Legal Aid South Africa v Mayisela and others (2019) 5 BLLR 421 (LAC), the court dismissed an employee who had made false accusations of racism against his employer and held that false accusations are demeaning, insulting and an attack on one’s dignity, and the dismissal of the employee was therefore upheld.

The authority also supported a finding that employees who engage in intimidation and/or use abusive language may be dismissed in

appropriate circumstances.

CCMA’S FINDINGS

The employee did not present any evidence challenging the procedural fairness of his dismissal. In regard to substantive fairness, it was held that the employer had proved on a balance of probabilities that the employee had committed the offences of racism and intimidation.

Furthermore, the commissioner noted that throughout the proceedings the employee failed to acknowledge the wrongfulness of his conduct and continued to make unfounded allegations of racism.

In light of the employee’s

lack of remorse, it was held that the dismissal of the employee was substantively and procedurally fair.

IMPORTANCE OF THE CASE

Employees who make unfounded allegations of racism against their employer or colleagues commit serious misconduct that may result in their dismissal.

THE EMPLOYEE EXPLAINED THAT HE FELT AS IF HE WAS BEING TREATED LIKE A CRIMINAL, WHICH PROVOKED HIM

Many themes as green financing evolves Khurshid Fazel & Garyn Rapson Webber Wentzel Green financing is likely to evolve over the next few years, with financial institutions increasingly requiring more accurate measurement of borrowers’ achievements against targets Although the focus in Africa’s growing sustainability linked finance sector is very much on the “E” component of environmental, social and governance (ESG) principles, the “S” and “G” aspects are expected to become more prominent over time as the sector matures.

It is evident SA corporates are showing a real interest in improving ESG standards.

Environmental aspects are receiving most of the attention at present, partly because of the amount of research and discussion

/123RF — STYLEPHOTOGRAPHS around climate change and partly because social impact is harder to measure, but the Covid-19 pandemic has really balanced the scales.

Currently, domestic banks are still grappling with ways to roll out sustainabilitylinked finance and green bonds to their clients. Most

domestic banks are engineering sustainability loans off traditional funding and adding sustainability-linked clauses that are appropriate to the agreement.

We expect the following themes to evolve over the next few years: The need for green

finance is not limited to capital projects but is also in demand to help with clients’ “just transition” plans, to help companies to transform the way they operate to become more environmentally friendly.

Companies are making progress on sourcing more

renewable energy, managing waste on site and being more efficient in their use of water and energy.

We see ESG compliance increasingly becoming a requirement for insurance companies which, in the international market, are starting to engage lawyers or auditors to audit performance against a set of standards to test performance. Companies may, in future, struggle to access certain insurance products if they have poor ESG performance.

Reporting standards are becoming more complex and there is widespread concern about “greenwashing”. Banks will be held responsible for doing insufficient due diligence into potential clients before lending them sustainability/green finance.

The necessity for due diligence extends beyond the client’s project to the client’s

supply chains, for example if a borrower is seeking a loan for a solar photovoltaic project, the bank has to look as far as the source of the solar panels to ensure they are not made in a factory that uses child labour.

Traditional banks have historically lacked the internal expertise to measure and monitor clients’ compliance with ESG. This is changing and we are seeing banks recruiting carbon and other ESG experts as monitoring and tracking of performance is becoming more important.

Over time, we expect step changes will occur in climate and other green tech solutions which are likely to be funded by sustainabilitylinked finance solutions.

Similarly, internal ESG tracking, and governance solutions are emerging in a fast-changing technological advancement space.

12

BusinessDay www.businessday.co.za March 2022

BUSINESS LAW & TAX

Back to future for damaged supply chains

SUPPLY AND DEMAND

SUSTAINABILITY

After Covid-19 identifying risks of disruption and •integrating them in management are necessities Virusha Subban Baker McKenzie

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he pandemic did enormous damage to global supply chains, with challenges including route congestion and blockages, manufacturing shutdowns, a deficit of skilled labour, a global shortage of key logistics components such as shipping containers, lack of space in warehouses, a spike in transportation costs and substantially increased demand for goods around the world, post lockdown.

The World Trade Organisation recently noted that these global supply chain challenges will last longer than originally thought, possibly into next year, and that developing economies will be persistently marginalised by weak links in global supply chains.

As a result, businesses have been looking at ways to best protect their supply chains from future disruption. Measures to heal and strengthen ailing chains include digitising parts of the supply chain, increasing manufacturing capacity in low-cost markets, reducing reliance on single-source suppliers, improving supply chain infrastructure through

public and private funding, integrating sustainable practices into supply chain management and carefully monitoring changes in government policy across multiple jurisdictions.

DIGITALISATION

According to Baker McKenzie’s recent report, “Supply Chains Reimagined”, digitalisation will affect how firms facilitate and manage supplier relationships as well as logistics and shipping processes, across all sectors. The report outlines how automa-

ADEQUATE SUPPLIES OF WATER AND ELECTRICITY ARE NEEDED ACROSS AFRICA TO INCREASE PRODUCTION CAPACITY tion and the internet of things are now playing an important part in supply chain shockproofing against future disruption. Companies are increasingly combining datadriven solutions with artificial intelligence (AI) to identify potential risks, bottlenecks and underperformance in their supply chains.

The report details how Covid-19 has accelerated the adoption of 3D design technologies, as teams were forced to collaborate remotely and share digital assets with manufacturers. Though such technologies are not new, their use in digital trade is rising rapidly.

The report also details how, in the longer term, businesses are expected to begin integrating pre-emptive risk management and geospatial analytics into their supply chains. For example, the report reveals how the ability to fully map their supply chain, in order to understand the geographic location of suppliers and feed the maps with alternative data, can help firms to implement in-built defences against large shocks to supply ecosystems.

Companies may also look at where they are reliant on a single supplier in a high-risk location (for example, areas prone to natural disasters) or on a cluster of suppliers all located in the same concentrated area.

A greater focus on the localisation of supply chains may also spur smart manufacturing, which uses data analytics to manage inventories and distribution, or the use of AI for quality control during production.

/123RF — SMALLSMILES Private companies are expected to invest in their own facilities to build more robust supply chains, securing funding via capital raising, hybrid debt issuances, joint ventures, investment by sovereign wealth funds and pension funds, and mergers & acquisitions, for example.

However, this is expected to take time to materialise, given the economic climate.

Many African governments have begun looking at ways to improve their manufacturing capacity so that they can produce local components that do not need to be imported and that can be traded within the continent — simplifying supply chains dramatically. Going forward, it is expected that manufacturing capacity, including access to land, labour and good logistics, will determine an area’s potential growth as a supply chain hub.

Further, reliable transport and utility infrastructure are vital in terms of the ability of a business to scale up production for regional export and to develop its manufacturing bases. For this, adequate supplies of water and electricity are needed across the conti-

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would encourage companies to enter new markets.

Further, lowering the cost of access and usage of communication and fortifying network security will encourage businesses to set up or ramp up operations on the continent.

nent, to increase production capacity and incentivise foreign companies to set up facilities in African countries.

Domestic and regional policy changes that deal with these issues are therefore playing a crucial role in disruption-proofing Africa’s supply chains.

GOVERNMENT POLICIES

The report also shows how the resumption of industrial activity and the corresponding increasing pressure on supply chains will lead businesses to assess whether they should reshore, shorten or diversify their chains as protection against future disruptions in a cost-effective and efficient way. Businesses should be closely monitoring government policies, such as government funding, incentive schemes and import and export restrictions, for example, in every jurisdiction in which they operate.

Easing restrictions on foreign government policy across the continent will increase the flow of trade between countries.

For example, allowing more access to information and telecommunications systems

The report further outlines the role of sustainability in shaping future supply chains.

Covid-19 effects have led to a heightened focus on sustainability, with more attention being given to environmental, social and governance (ESG) issues in trade transactions, with such standards now demanded by customers and investors.

ESG demands and standards (such as the UN Sustainable Development Goals) and the challenges of climate change increase over time, which means manufacturers will move their supply chains away from locations where the implementation of higher standards is delayed. Opportunities in supply chain forward-planning and collaboration also exist between different industries.

For example, some businesses are engaging in corporate power purchase agreements for clean energy products, because as sustainability affects how supply chains work, companies are looking to power their global operations entirely by renewable energy sources.

ESG policies are expected to provide an additional healthy shot in the arm for Africa’s supply chains, paving the way for a more integrated, sustainable, collaborative approach to trade, and encouraging ESG-focused foreign investors to take advantage of Africa’s new continental free trade area.

While supply chains in Africa may be drastically weakened after the global pandemic, many effective treatments for their repair and strengthening are already under way.