Business Day Business Law & Tax, February 2021

BUSINESS LAW & TAX

FEBRUARY 2021 WWW.BUSINESSLIVE.CO.ZA

A REVIEW OF DEVELOPMENTS IN CORPORATE AND TAX LAW

Wealth tax to plug the gaps not the right answer

COUNTING THE COST

is already stretched and overburdened •andTaxpayer will be too little to close the gap, say experts Evan Pickworth BD Law & Tax Editor

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his time last year the economy was expected to eke out a paltry 0.9% growth amid rising levels of debt and ever higher spending. Then things got a lot worse, fast.

The dreaded Covid-19 struck and, from a fiscal perspective, precipitated an emergency budget on June 24 2020 to replan the rest of the 2020/2021 financial year.

The timing could not have been worse as rising debt, runaway spending and worsening economic conditions, amid a corruption plague, required greater fiscal sustainability, brave policy decisions and fortitude by the long-suffering public.

SA was truly staring down

the barrel when it became apparent that losses of as much as R300bn in tax revenue would need to be factored in due to the suffering caused to businesses alone.

An estimated R26bn in direct relief would need to be added, with a further R44bn in the form of interest cost linked to the deferral of certain taxes.

And now a one-off solidarity tax, or surcharge, may be needed to fund the crucial vaccine rollout. The room to manoeuvre — especially in

YOU CAN’T WAVE A MAGIC WAND AT THIS AND SEE IT DISAPPEAR. IT IS UNFORTUNATELY A STRUCTURAL PROBLEM

the form of tax increases — is getting smaller by the day, leaving finance minister Tito Mboweni with a decidedly treacherous tightrope to walk. However, rushing through burdensome tax increases at this time could do more damage than good, according to many experts.

Director at AJM Tax, Dr Albertus Marais, does not see a wealth tax or extensive tax increases on the cards as the taxpayer is already stretched and overburdened. He points out that while both the supplementary budget and the medium-term budget policy statement of October 28 2020 proposed tax hikes, these were actually quite limited when compared to the rising tax gap. These include an additional R5bn in tax revenue for the 2022 financial year, R10bn in each of the

ENSafrica covers the full spectrum of mining-related work with continued prominence in mining law, regulatory, employment and M&A engagements.

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/123RF — SASIRIN PAMAI 2023 and 2024 financial years and R15bn in the 2025 financial, compared to budgeted expenditure of more than R1.5-trillion annually.

Public wages and payments towards government debt amount to a staggering 80% of the budget’s expenses in 2020, says Marais.

As close to 20% of budgeted expenditure a year will not be received as income, this shortfall will need to be made up over time.

“You can’t wave a magic wand at this and see it disappear. It is unfortunately a structural problem that has to be addressed over time.

“South Africans have become used to the government hiking taxes to close this gap and there is a lot of concern among taxpayers.

However, if you look at the measures by the Treasury,

these are surprisingly small numbers and will not be significant to close this yawning tax gap. It is clear they are looking at expenditure and it will be interesting to see if government can achieve cuts here,” he says.

Head of tax in the Johannesburg office of ENSafrica, Andries Myburgh, agrees with the need for a longerterm, committed approach to achieving fiscal and economic sustainability.

“Policy certainty for the corporate sector and investors is crucial if we are to achieve longer-term sustainability, broaden the tax base and generate jobs and economic opportunities. Looking at the short term only will not solve these challenges.”

He says two areas where certainty is needed on the corporate tax front would be

clarity on the proposal in 2020 to deny contract miners the accelerated capital expenditure deduction and more incentives to encourage greenfield exploration.

“Further consultation between industry and Treasury is needed on the controversial capital expenditure issue, as contract miners are integral to a vibrant and growing sector. Any adverse change in their ability to claim deductions will have dire consequences and so I hope this change is not rushed through in the budget and legislation following the budget.

“What is rather needed is high-level technical input and discussions and clearer policy certainty.

“Meanwhile, I would also like to see advances on the CONTINUED ON PAGE 2

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BusinessDay www.businessday.co.za February 2021

BUSINESS LAW & TAX BUDGET 2021

Miners in the dark on tax

/123RF — MOHD AZRI SURATMIN

on hold to exclude contract miners from Ailing Sars may see existing •theProposal accelerated capital expenditure deduction

tax types as easiest target

Evan Pickworth BD Law & Tax Editor

S

A’s mining industry was dealt a cruel blow last year when an amendment to the Income Tax Act proposed to exclude contract miners from qualifying for the accelerated capital expenditure deduction.

As things stood, this provision would have kicked in in January, placing many companies, not just contract miners, in a dire position. But lobbying by industry has led to a postponement, placing the proposal on the backburner for the time being.

Head of tax in the Johannesburg office of ENSafrica, Andries Myburgh does not expect to see this change being implemented in the legislation immediately after the February budget as further consultation between the industry and Treasury has not yet happened. However, he admits the industry is concerned if it is “pushed through” amid the broader drive for tax revenue.

“Hopefully, that will not happen and that all we see in the budget is an update and mention of details regarding the much-needed consultation with industry,” he says.

Myburgh acted and assisted the Minerals Council SA in its consultation with the Treasury and during the submissions at the parliamentary standing committee on finance last year, which painted a picture of why this change in its proposed form would not be workable.

“The reality is that these miners take on significant upfront risks and would be placed in a parlous position if they cannot qualify for the deduction.

“There are many instances where you legally don’t require a mining right, like the pooling and sharing of resources, or where BEE companies participate directly but are not the holders of the mining right itself.

“Contract mining also comes into play significantly on the cleaning up of tailings on mines, for instance. Their specialist skills are also increasingly being used to assist mining rights holders on excavation and other work,” explains Myburgh.

THE KEY IS TO ENSURE TAX LEGISLATION PROVIDES CERTAINTY AND PREDICTABILITY FOR INVESTORS An important legal precedent at the Supreme Court of Appeal (SCA) has served as a precursor to the proposed amendment.

In Benhaus Mining v CSARS (165/2018) [2019] ZASCA 17 on March 22 2019 the SCA made it clear that a company that excavates ground and digs up mineralbearing ore for a fee on delivery to another entity that processes the ore undertakes mining operations within the

meaning of ss 1 and 15(a) of the Income Tax Act 58 of 1968. It is thus entitled to claim deductions of the full amount of capital expenditure on mining equipment in the tax year in which it is incurred, in terms of s 36(7C) of the act.

An additional remark by one judge, however, was that a change in legislation should rather be looked at if the intention is for a contract miner not to benefit from the deductions.

Myburgh points out that the Davis tax committee had also looked at contract mining amid an overarching recommendation for mining laws to be updated. It recognised the landscape since the turn of century has changed, with there now being a lot of use of contract miners, especially in small-scale and junior mining.

He says the key is to ensure tax legislation provides certainty and predictability for investors and enables the industry to grow.

“Contract miners typically buy yellow equipment like trucks, excavators and other movable mining equipment.

“There is no risk of a double deduction as the party incurring the capital expenditure on the mine equipment, whether the mining company or the contract miner, would claim the deduction.

“Any future changes to the tax legislation applicable to the mining industry therefore needs to be carefully determined and requires further and substantial technical input from industry,” he says.

Joon Chong & Wesley Grimm Webber Wentzel In a pre-Covid-19 context, SA had already suffered from a trifecta of social challenges: inequality, poverty and high levels of unemployment.

This, coupled with the economically crippling and seemingly unending Covid19 regulations, looting of state coffers and bureaucratic paralysis in the SA Revenue Service’s collection function has created a desperate situation for the Treasury.

As marginal income tax rates have not increased for some time (in the government’s view) this is a likely target for tax hikes in the forthcoming budget. Though it is possible that the Treasury could introduce a new, lower tax bracket to widen the tax base, it is more likely that higher income earners will continue to shoulder the burden of increased personal income tax rates.

Taxpayers earning more than R750,000 per annum should brace themselves for 2%-4% increases in their marginal tax rates.

Another possible target is the capital gains tax (CGT) rate. CGT inclusion rates currently are 40% for individuals and special trusts; 80% for companies and 80% for other trusts. These CGT rates were introduced on March 1 2016 and the Treasury may now think it time to tax the full capital gain realised on the disposal of assets in certain

Joon Chong.

Wesley Grimm.

instances.

In recent times, mention has been made of increasing the corporate tax rate, which is contrary to what many countries around the world are doing and will contribute to further divestment and capital flight from SA. Nevertheless, given the dramatic downturn in SA’s economic fortunes since the last budget, it is possible that government may now be looking to raise the corporate tax rate to 30%.

The VAT rate and transfer duty rates have been raised recently and would therefore not be a primary target for further increases in the forthcoming budget.

ment to introduce a wealth or solidarity tax are also likely to be met with strenuous opposition and contribute to higher levels of capital flight, tax avoidance and tax evasion.

It is a fact that economic stimulation and growth are far greater catalysts for increasing tax collections than increasing tax rates and introducing new tax types. In our view, instead of increasing taxes and/or introducing new tax types, the government should consider: ● Bolstering property rights; ● Reducing the bloated public service wage bill; ● Reducing serious crime such as murder, rape and robbery as well as genderbased violence; ● Reducing wasteful expenditure; and ● Halting the widespread abuse and theft of state resources.

Any further attempt by government to tax SA into prosperity will fail as the already highly taxed and narrow tax base has insufficient resources to improve SA’s position.

BURDENSOME

In our view, the government is more likely to target existing tax types as opposed to introducing a wealth tax or solidarity tax. The reason is that introducing new taxes is more expensive and administratively burdensome in an already ailing Sars system than increasing the rates of taxation of existing tax types.

Any attempt by the govern-

Wealth tax to plug the gaps not the right answer CONTINUED FROM PAGE 1 drive to encourage economic activity through the use of incentives for prospecting or exploration, like an incentive to encourage greenfield development by adopting a flowthrough share model, which is adapted to suit SA’s unique circumstances.

“Investors require policy certainty and a short-term approach will not work to solving SA’s economic and budget challenges.”

Joon Chong and Wesley Grimm from Webber Wentzel feel the government is more likely to target existing tax types — like increasing marginal rates for high earners, a 30% corporate tax rate and lifting capital gains tax — as opposed to introducing a wealth tax or solidarity tax.

“The reason being, introducing new taxes is more expensive and administratively burdensome on an already ailing SA Revenue Service system than increas-

ing the rates of taxation of existing taxes. Any attempt by government to introduce a wealth tax or solidarity tax would also likely be met with strenuous opposition and contribute to increased levels of capital flight, tax avoidance and tax evasion.”

Dr Ferdie Schneider, head of StaKonsult and a leading corporate VAT expert, also doubts a VAT increase is on the cards.

“There is almost no space to manoeuvre to increase any

taxes to raise enough revenue. Our economy is so flat and we don’t need a little injection, we need a huge one. Tinkering on corporate tax — which has been stabilised — will not raise substantial money, so that I think is out of the question. Unions and individuals would be up in arms,” he says.

Schneider says revenue has traditionally been raised through increased taxes or debt, so the government “may be forced to go for debt

again”. The other challenge is that foreign direct investment is declining and companies are pulling out or threatening to pull out of the country.

A SHORT-TERM APPROACH WILL NOT WORK TO SOLVING SA’S ECONOMIC AND BUDGET CHALLENGES

“To pull something out of the hat — I can’t see it. I also couldn’t see it last year.

Even cutting expenditure in government salaries is “a very fine line to tread” at the moment due to rising unemployment.

Schneider says the problem with raising debt is “there is not enough floating around in the air” due to poor ratings and higher interest rates. “It is becoming an increasing problem to get people to fund us,” he says.

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BusinessDay www.businessday.co.za February 2021

BUSINESS LAW & TAX SA’s MINING INDUSTRY

Mixed results with charter

CHARTING A WAY FORWARD

Lack of capacity prevents the state from dealing •properly with firms circumventing the mining pact Ntsiki Adonisi-Kgame, Mihlali Sitefane & Zinzi Lawrence ENSafrica

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n May 1 it will be 17 years since the Mineral and Petroleum Resources Development Act 2002 came into force.

One of its objectives is to substantially and meaningfully expand opportunities for historically disadvantaged persons, including women and communities, to enter into and actively participate in the mineral and petroleum industries and to benefit from the exploitation of the nation’s mineral and petroleum resources. In the furtherance of this object, on August 2004 the Broad-Based SocioEconomic Empowerment Charter for the Mining Industry was gazetted.

It is now opportune to reflect on the 17 years of the mining charter to see how the industry has fared.

One of the major wins of the charter is that many leading mining companies have met the empowerment targets, leading to the rise to prominence of black mining enterprises headed by Patrice Motsepe of African Rainbow Minerals, Sipho Nkosi of Exxaro and Daphney MashileNkosi of Kalagadi Manganese.

According to a survey conducted by the Minerals Council SA most member companies involved in the research have largely complied with the mining charter in all its elements.

However, the success stories are doused out by the Mining Charter Impact Assessment Report 2009, which was commissioned by the department of mineral resources & energy to assess the industry’s level of compliance with the charter. The report notes that there was minimal progress in the implementation of the element of ownership. Some of

IF THE GOVERNMENT AND THE INDUSTRY FAIL TO FIND EFFICIENT TOOLS, HISTORY WILL NOT BE KIND IN ITS JUDGMENT the challenges that have contributed to the lack of progress are the lack of access to funding and indebtedness of historically disadvantaged partners; limited flow of dividends to historically disadvantaged persons to service loan agreements, financially cumbersome deal structures

and lack of representation on empowering companies’ boards of historically disadvantaged persons..

Similarly, in instances where employee stock ownership plans (Esops) have been established to benefit host communities and employees, the benefits to the intended beneficiaries are not always evident. This has been exacerbated by Esops in most cases not receiving their shares for free, and a vendor financing structure being used to fund such purchases.

Accordingly, in most instances, a portion of the dividends declared and due to the Esop is used to repay the vendor loan and the balance is paid to the Esops.

These challenges have undermined the government mandate of ensuring that mineral resources entrusted to the custodianship of the government for the benefit of the nation are put to good use.

The state has tried to remedy these challenges by publishing various iterations of the mining charter. However, at a substantive level, the charter fails to distinguish between: ● Entities that have successfully concluded and implemented empowerment transactions where historically disadvantaged persons have been effectively empowered; ● Entities that have con-

/123RF — DMYTRO NIKITIN cluded and implemented empowerment transactions that at face value seem to comply with the letter of the law, but have failed to deliver value for historically disadvantaged persons; and ● Entities that have concluded and implemented transactions aimed at circumventing the mining charter and misleading the department of mineral resources & energy into granting rights when it should not.

Another challenge that undermines the empowerment objective is that the

IT HAS BECOME CLEAR THAT GOVERNMENT AND INDUSTRY HAVE TO ENGAGE IN A DIALOGUE TO FIND A SUITABLE PANACEA

department does not have the capacity to substantially assess empowerment transactions to determine whether they do in fact lead to meaningful economic participation.

This has resulted in the department shifting goal posts and demoralising investors.

SA is a resourceful country and has managed to navigate the most contentious of issues through dialogue.

Now, more than ever, it has become clear that government and industry have to engage in a dialogue to find a suitable panacea that will advance the empowerment objective while also recognising the contributions of mining companies that have successfully empowered. No point can be served by the government shifting goal posts for compliant mining companies while failing to tackle noncompliant ones.

There are many options that can be considered to sharpen the regulatory tools to achieve the empowerment objective. These include a total overhaul of the mining charter that removes all the uncertainties of successful historical transactions while tackling noncompliant companies and future applicants for mining titles.

They also include the jettisoning of the concept of a mining charter and replacing it with a more traditional and recognised legal instrument, such as amendments to legislation. If the government and the industry fail to find efficient tools, history will not be kind in its judgment.

After 17 years and a mixed bag of results, it is time for the mining charter to be put under a microscope to test its continuing utility in the transformation of the mining sector of SA.

ESG funding an option for mines to consider Lloyd Christie & Dalit Anstey ENSafrica The South African Financial Provisioning Regulations, 2015, which will commence on June 19 2021, mean that many mining companies will need to make up for shortfalls created by new calculations for financial provision for the rehabilitation, remediation and closure of mines.

With the compliance deadline closing in, one way that mines could make up for the shortfall is by obtaining sustainable finance and environmental social governance (ESG) investment.

Sustainable finance has been defined by the National

Treasury as comprising “financial models, services, products, markets and ethical practices to deliver resilience and long-term value in each of the economic, environmental and social aspects and thereby contributing to the sustainable development goals and climate resilience”.

The scope for sustainable finance is broad and inclusive, and is becoming ever more important with the need to finance critical green metals to ensure the energy future of the world.

A challenge faced by ESG investment is developing standardised metrics or qualifying criteria for ESG projects. In this regard, a “Green

Finance Taxonomy” has been proposed for SA, which will be an important tool to standardise the activities of ESG qualifying projects.

Though still in working draft form, the Green Finance Taxonomy defines activities, principles, metrics and thresholds for the contribution for climate change mitigation and climate change adaptation. This standardisation will go a long way to reduce disparities in the market and boost ESG investor confidence.

Mine closures and rehabilitation projects, whose financing will be affected by the Financial Provisioning Regulations, could be prime

candidates for ESG funding, as their aims, in line with international best practice, are to minimise environmental risks, ensure sustainable land use and to empower and uplift surrounding host communities at the end of a mine’s life cycle.

In tackling such an event that has impact on the environment, social and economic environment, sustainable finance is essential.

For these reasons, it seems likely that the goals of mine closures would qualify under the working draft of the Green Finance Taxonomy, particularly if the rehabilitation activity involves the introduction of water treat-

ment or bioenergy plants. In fact, the Green Finance Taxonomy specifically lists platinum, gold and coal mining as activities within the “industry” taxonomy sector, and water treatment and land rehabilitation are defined “as any intentional activity that initiates or accelerates the recovery of an ecosystem from a degraded state”. Many mine closure projects could qualify for additional sources of funding and help plug the shortfall created by the Financial Provisioning Regulations, ESG projects often have stringent disclosure and oversight components. However, this should not be problematic as most mining com-

panies are familiar with regular reporting requirements for regulatory authorities. In addition, most mines already have a sustainability manager, who is often responsible for stakeholder management, public participation, environmental compliance and remediation, and could easily provide oversight required by international ESG standards.

With the Financial Provisioning Regulations deadline fast approaching, mining companies will need to consider financing solutions to top up their shortfalls when rehabilitating, remediating and closing a mine. ESG could be a viable solution and should be considered.

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BusinessDay www.businessday.co.za February 2021

BUSINESS LAW & TAX SA’s MINING INDUSTRY

Decision limits diesel refunds

Judgment could have significant implications for •mining operators and their ability to claim from Sars Prenisha Govender Baker McKenzie Johannesburg

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he recent high court judgment Graspan Colliery v The Commissioner for the SA Revenue Service (8420/18) [2020] could have significant implications for mining operators and their ability to claim diesel refunds.

The judgment dealt with the interpretation of Note 6(f)(iii) to Schedule 6 of the Customs and Excise Act, 1964 and the limitations with regard to what activities constitute primary production activities in mining, for the purposes of claiming diesel refunds.

What is included in primary production activities in mining is defined in Note 6(f)(iii)(aa)-(vv) to Schedule 6.

The list of activities included in Note 6(f)(iii) was considered nonexhaustive, following the Glencore Operations SA (Pty) Ltd v The Commissioner for the SA Revenue Service judgment.

In this judgment, the court concluded that the word “include” in Note 6(f)(iii) goes beyond its primary meaning,

and activities that qualify as own primary production activities in Note 6(f)(iii) is nonexhaustive.

In other words, activities may qualify as primary production activities in mining even though they are not specifically included under Note 6(f)(iii) but are operations which the legislature intended to include under primary activities in mining.

However, in the recent case of Graspan Colliery v The Commissioner for the SA Revenue Service, the court

THE JUDGMENT LIMITS PRIMARY PRODUCTION ACTIVITIES IN MINING TO ACTIVITIES LISTED UNDER NOTE 6(F)(III) was called on to determine whether rehabilitation was an activity that constituted primary production activities in mining, prior to May 27 2016. Note 6(f)(iii) to Schedule 6 was amended with effect from May 27 2016, to include

PRODUCTION CHAIN

rehabilitation as an activity under subnote (vv). In determining whether rehabilitation activities constituted mining activities prior to the amendment, the high court dealt with the interpretation of Note 6(f)(iii).

The court held that the use of the word “include” in the phrase “own primary production activities” in Note 6(f)(iii) was to give the phrase a more precise meaning by listing what will encompass own primary production activities in mining. The word “include” is therefore aimed at illustrating that the list is exhaustive of the meaning of primary production activities in mining.

The judgment therefore limits primary production activities in mining to activities listed under Note 6(f)(iii) of the act. Prior to claiming diesel refunds, mining operators should ensure that their activities are specifically listed under Note 6(f)(iii) and qualify as primary production activities in mining. This is in addition to meeting all the other requirements stipulated by the SA Revenue Service, such as detailed record keeping.

/123RF — MICHAEL TURNER

Tax incentives could restore mining’s shine Andries Myburgh ENSafrica SA’s mining sector needs to receive support to become a sunrise, rather than a sunset industry.

If we leave it too late, the sector’s contribution to GDP will continue to dwindle and new business opportunities will fade away.

Harnessing tax incentives to encourage more greenfield development stands out as a potential solution to kickstart growth, investment and jobs.

The stark reality is that a country that does not explore for new minerals runs the risk of being marginalised as a mining jurisdiction and, according to the Minerals Council of SA, SA’s share of global exploration budgets has decreased to about 1%.

The Minerals Council prepared a powerful, comprehensive proposal on how incentives through flowthrough shares could be harnessed to breathe life into the

Andries Myburgh. industry, without eroding the tax base, and I co-presented this to the National Treasury late last year. It can work, the time is right.

The research shows how an incentive tailored to SA’s unique circumstances could create much-needed jobs and then also feed back into the tax loop in other ways, such as employees’ tax, VAT and income tax imposed on service providers to the exploration firms — so the major concern about erosion of the tax base is mitigated.

Socioeconomic benefits

extend to development of entire communities around the operation, with new housing and infrastructure, for example. Anecdotal evidence suggests that for each mine worker employed, 10 people are directly dependent on mining activity. At a time when SA is desperate for investment, it must not be forgotten that mining is also a significant driver of export earnings, bringing in R421.7bn in 2019.

Canada is a good example of how the correct policy

choices can stimulate mining growth. It has been highly successful in developing these specialist junior exploration companies largely by using a flow-through share tax incentive model to attract equity investors into the sector. From 2000 to 2018, Canada attracted on average $2bn a year in exploration expenditure, while SA only attracted $194m annually.

However, the proposal for SA needs to be different as in Canada it works for Canadian tax residents, whereas in

RESEARCH SHOWS HOW AN INCENTIVE TAILORED TO SA’S UNIQUE CIRCUMSTANCES COULD CREATE MUCH-NEEDED JOBS SA the idea is to attract essentially foreign shareholder investment. The proposal therefore includes

IN NEED OF INVESTMENT

/123RF — PETR STUDENT

uniquely SA solutions, such as the exploration firm renouncing a tax benefit of 28% on the expense — which is the same as the corporate income tax rate — in favour of a shareholder who can set it off as a credit against any liability; or can sell that benefit to anyone else who can reap the benefit.

There is no need to re-invent the wheel, as SA already has legislative precedent for this type of offset, where firms have been allowed to convert assessed losses into a credit they could sell to someone else.

In my view this is now the right opportunity to push forward these proposals as, in the long run, it will be quite beneficial for SA. For SA to reach a necessary target of attracting 3%-5% of global exploration dollars, it needs to revise its tax incentive system with respect to exploration, as well as modernise its licensing system to ensure further investment into the mining sector. Time will tell.

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BusinessDay www.businessday.co.za February 2021

BUSINESS LAW & TAX

Beware risks in fixed-term employment

PUT PEN TO PAPER

Contracts that are used improperly can expose •employers to unnecessary risks and liabilities Bradley Workman-Davies Werksmans

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ixed-term contracts of employment are allowable and acceptable in South African employment law, and are used frequently where there is a justifiable usage.

The Labour Relations Act, 66 of 1995 (act) even specifies when there will be a prima facie reasonable usage of a fixed-term contract, such as where the employee is needed for only a limited period, such as to replace an employee who is temporarily absent (for example, while on maternity leave) or where there is a project of limited duration or linked to limited external funding.

Where a fixed-term need exists, a fixed-term contract is appropriate.

It is surprising therefore, that fixed-term contracts are still used improperly in a manner that exposes employers to unnecessary risks and liabilities. A recent case highlights the issues.

Recently, the Commission for Conciliation, Mediation and Arbitration (CCMA) held, in the case of Chetty/Mid-

lands Communication that the parties had concluded the particular fixed-term contract, in terms of which the employee was appointed as a sales agent and which allowed the employer to terminate the contract before the expiry date only in the event of a material breach by the employee.

The employer dismissed the employee for poor work

THE ACT SHOULD BE SEEN AS THE OVERARCHING STATUTE WHICH GOVERNS AN EMPLOYEE’S RIGHTS AND ENTITLEMENTS performance and the CCMA accordingly found that the employee had been unfairly dismissed. However, while the dismissal of the employee was certainly unlawful, it was potentially not unfair merely because of this contractual restriction, and any liabilities could have been avoided by the employer making a simple additional provision in its contract with the employee.

First, the dismissal of the employee could arguably still have been shown to have been fair, in the light of the fact that contracts of employment and the employment relationship in SA do not exist in a legislative vacuum and are not governed only by the contract of employment.

If so, the act would be irrelevant; instead the act should be seen as the overarching statute which governs an employee’s rights and entitlements, as well as those of the employer, and the framework within which the contract between the parties should be viewed.

In this case, the act provides that an employer has the right to dismiss an employee, provided that it is able to demonstrate (if challenged) it had a fair reason to dismiss, and followed a fair procedure in doing so.

The act specifically recognises incapacity (in the form of poor work performance) as grounds for a fair dismissal. As such, even if the contract of employment between the parties specified the employee could be terminated only for material breach, the overarching statute (the act) entitled the

/123RF — POTAPOVA VALERIYA employer to dismiss for poor work performance. In this regard, the employer may have been in breach of the contract and could have been found to have affected an unlawful termination, but not an unfair dismissal.

A finding of unlawful termination would simply recognise the employer had contractually agreed not to dismiss the employee for any reason other than material breach, and in terminating for a reason other than material breach, had breached its own contractual undertakings.

The termination in Chetty was accordingly unlawful,

THERE IS NO REASON WHY A FIXED-TERM CONTRACT HAS TO BE ENTERED INTO WITH A START AND END DATE ONLY

but not necessarily unfair (as defined and regulated by the act, which recognises poor work performance as a ground for dismissal). In this case, since the employer also failed to follow a fair process to dismiss the employee, the dismissal was in fact unfair. It need not have been.

In addition, there is no reason why a fixed-term contract has to be entered into with a start and end date only, and without the employer reserving its right to fairly dismiss the employee before the expiry date is arrived at.

The contract in Chetty tried to achieve this, but erred in providing only that early termination could take place for material breach (which is, in any event, not a recognised ground of dismissal under the act).

The simple fix is for employers to ensure that where they employ any person on a fixed-term basis,

they do so with a simple contractual reservation entitling them to dismiss the employee before the expiry date for any reason recognised in the act and after following a fair process. In this manner, the employer can (i) effect a fair dismissal for the purposes of the act and (ii) affect a lawful termination which they are contractually entitled to implement under the employment agreement.

As is always the case, since the act is the overriding requirement, provided that the dismissal is fair for the purposes of the act, and the contract allows early termination for this reason, any employer engaging an employee on a fixed-term basis should always ensure that, first, the contract is drafted properly when engaging the employee, and, second, that it complies with the statutory fairness requirements when ending the relationship.

FSCA moves to regulate crypto assets Natalie Scott & Kyra South Werksmans On November 20 2020, the Financial Sector Conduct Authority (FSCA) published a draft declaration and a statement in support thereof which sets out its proposal to bring crypto assets within the ambit of the definition of “financial product” in Section 1 of the Financial Advisory and Intermediary Services Act 37 of 2002 (Fais Act).

Crypto assets are not regulated by the FSCA in SA; however, the FSCA has identified a number of crypto asset platforms operating in SA which are “estimated to have 800,000 registered South Africans, control 80%90% of the market and hold R6.5bn assets”.

If one considers the above numbers, it would seem SA investors are investing more frequently or more substantially (or both) into crypto assets and are doing so without the protection typically afforded to investors in SA. This has prompted the FSCA (through the Draft Declaration) to take steps to regulate this asset class and to offer investors protection against unlicensed, unqualified and/or unscrupulous service providers.

What is a crypto asset?

The Draft Declaration defines a crypto asset as “any digital representation of value that can be digitally traded, or transferred, and can be used for payment or investment purposes, but excluding digital representations of fiat

currencies or securities that already fall within the definition of financial product.”

The definition is broad enough to capture all existing crypto currencies as well as those which will be developed in future and furthermore includes other related “digital” assets, such as stable coins and utility tokens.

While the Draft Declaration sets out the FSCA’s intention to classify crypto

THE FSCA HAS IDENTIFIED CRYPTO ASSET PLATFORMS OPERATING IN SA WHICH CONTROL 80%-90% OF THE MARKET

assets as a financial product under the Fais Act to provide, among others, greater protection to South Africans who invest in crypto assets, the FSCA is at pains to clarify the classification of crypto assets as a financial product does not legitimise the asset class and is not intended to influence how crypto assets are treated under any other South African legislation.

Implications of the Draft Declaration If crypto assets are classified as financial products, then only people who are authorised under the Fais Act to provide advice and/or intermediary services in respect of financial products will be permitted to market, offer and/or sell crypto assets and the same consequences for

any failure to comply with the Fais Act will be applicable to financial service providers (FSPs) who make the asset class available to investors.

Further, the service provider (as a licensed FSP) and its representatives will be required to comply with the General Code of Conduct for Authorised Financial Service Providers and Representatives, 2003 and the Determination of Fit and Proper Requirements, 2017.

Timeline for compliance Comments on the Draft Declaration were required to be submitted to the FSCA by January 28 2021.

The declaration makes provision for transitional arrangements which, at this stage, envisages a fourmonth period within which

crypto asset service providers are required to submit their applications for authorisation to act as a FSP. The transitional period will commence on the date on which the declaration is promulgated. The declaration furthermore makes provision for all crypto asset service providers (including those providers who have elected not to apply to become a licensed FSP) to continue to offer financial services in respect of crypto assets during the transition period.

Service providers considering making an application to become an FSP should also be aware of the provisions relating to the sale and purchase of crypto assets as proposed in the Conduct of Financial Institutions Bill.

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BusinessDay www.businessday.co.za February 2021

BUSINESS LAW & TAX

Inclusivity to remain top of tie-up agenda

SPELL IT OUT

competition watchdogs are expected •toAskeepin 2020, working on making economy more diverse Elisha Bhugwandeen & Shawn van der Meulen Webber Wentzel

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n 2020, the competition authorities rose to the challenge of using competition law to deal with many of the problems facing the country.

Although the Competition Commission focused on curtailing price-gouging of consumers during the Covid-19 pandemic, it has also prioritised using competition law to create an inclusive economy.

Many mergers were approved subject to conditions that the firms involved must increase the participation of small and medium enterprises (SMEs) and firms owned by historically disadvantaged persons (HDPs) within markets. For instance, the PepsiCo/Pioneer merger was the first major transaction in which the promotion of a greater spread of ownership by workers and HDPs was a central issue.

Other examples were of commitments by merger parties to maintain supplier and distribution arrangements with SMEs and HDPcontrolled firms, and to pro-

vide financial support to HDP farmers.

From the perspective of conduct, the authority has been focusing on increasing awareness of the new buyer power provisions of the Competition Act. These provisions prevent dominant firms from imposing unfair prices and/or trading conditions on SMEs or HDP-

THE COMMISSION WILL HAVE TO GRAPPLE WITH COMPLEX DIGITAL MARKETS AND THE BEHAVIOUR OF LARGE TECH FIRMS controlled firms in three designated sectors (agroprocessing, e-commerce and online services, and grocery wholesale and retail).

Although there have not been any high-profile buyer power cases yet, the commission has started investigating buyer power complaints, particularly in the milk processing and dairy industry.

Several of the commission’s advocacy initiatives in 2020 were aimed at creating inclusivity in specific markets. These included the publication of automotive guidelines aimed at promoting inclusion and encouraging competition through greater participation of small businesses and historically disadvantaged groups in the automotive industry.

Shoprite and Pick n Pay agreed with the commission that they would no longer enforce exclusivity clauses in lease agreements against SMEs and specialist stores.

Several banks gave commitments to the commission that they would reform their conveyancing practices to encourage transformation in the industry.

An impact study report on the forestry sector was published, detailing the commission’s views on the ability of SMEs and new HDP firms to successfully participate and compete in forestry.

The commission published a paper, “Competition in the Digital Economy”, which proposes several strategic actions to achieve equitable and more competi-

/123RF — ANA BARAULIA tive outcomes in the digital economy. It is expected that the competition authorities will continue to focus on making the economy more inclusive in 2021.

Merger conditions, particularly on the promotion of a greater spread of ownership and the ability of SMEs and HDP firms to participate in markets more effectively, will continue to play a major role.

These conditions could have significant effects, from the timing of the proposed transaction to the way the business of the merged entity is ultimately conducted.

IT WILL BE IMPORTANT FOR LARGE FIRMS IN THE DESIGNATED SECTORS TO HAVE TRANSPARENT CONTRACTS IN PLACE

Another expected trend will be third-party interventions in merger proceedings, especially when the merger could affect a particular region or industry (for example, in the Thabong Coal/ South 32 merger in 2020, it was reported that a forum representing 30 small coal mining companies attempted to intervene in the merger proceedings).

Advocacy initiatives will continue in concentrated industries that have been characterised by long-term exclusive arrangements and large firms with the ability to leverage their market power.

In a similar vein, more buyer power complaints against dominant firms are expected. It will be important for large firms in the designated sectors to ensure they have clear and transparent contracts in place with their suppliers. Costs will have to be quantified and buyers must be able to show why any unfair or discriminatory

trading terms have found their way into contracts.

Significantly, the commission is expected to launch a market inquiry into digital markets. The commission has noted that these inquiries provide a more effective means of tackling barriers to participation in such markets, particularly by SMEs and HDP-owned firms. The scope of this inquiry could potentially be extensive, since the commission has acknowledged that the digital economy cuts across all markets in which goods and services utilise an internet base for production, distribution, trade and consumption.

The commission will have to grapple with complex digital markets and the behaviour of large technology firms, in the context of the growing number of concerns being raised worldwide against these firms .

Although the commission’s inclusivity objectives may appear daunting for businesses, it is arguable that these objectives could also unlock opportunities for SMEs and the broader economy in 2021. For example, if businesses develop relationships with SMEs and HDP firms at both a supplier and customer level, it may reduce the risk of complaints, while demonstrating a commitment to transformation of the economy.

Competition law could also be used to open up markets where large dominant firms constrain the supply chain or inhibit growth. The buyer power provisions could be used by SMEs and HDP firms to facilitate constructive engagements with large buyers or suppliers to avoid unfair treatment, and investment opportunities may be more readily available as merger parties begin to prioritise public interest outcomes.

CONSUMER BILLS

Cheques finally bounced out of payment system

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he beginning of 2021 saw the demise of cheques in SA, and the paper-based method can no longer be used in the national payment system.

It is a good time to do away with this inefficient payment method no matter how much history or nostalgia may be attached to it. Cheques were used from the 9th century in Muslim countries by merchants to avoid travelling on long journeys carrying bags of coins.

These customs were adopted into the laws of all European nations, starting with France in 1673. Our own 1964 statute arose out of the English Bills of Exchange Act of 1882.

The SA act has been the

PATRICK BRACHER bane of many law and commerce students’ lives. I found it a pleasure because it ticked a number of boxes I consider important. It is logical, in plain language, uses short sentences and few cross-references. Lawyers have not escaped the act because it was passed to govern not only cheques but also promissory notes and other conditional and unconditional payment instruments.

As soon as bills of exchange laws were enacted, the form of cheques was formalised and has existed since then in the commonly recognised form that has now met its end.

A cheque is a true example of a picture saving a thousand words. Many devices had to be used to prevent the free negotiability of cheques and prevent fraud. Cheques have been known to carry so many endorsements in favour of new holders that it became like musical chairs, with the last holder of a dud cheque having no support.

The end of the cheque was inevitable in the electronic information age.

More than 80% of current transactions are done by

electronic funds transfers (EFTs). Credit cards are used for most of the rest of the retail transactions, with cheques trailing far behind.

In part, the end of the cheque is another victim of the Covid-19 pandemic.

Between September 2019 and September 2020, the use of cheques went down more than 50% and is falling all the time, especially as more and more people are transacting online.

The clumsiness of the system is graphically illustrated by the fact that when 9/11 occurred in New York and the airports were shut down, it materially affected the US banking system because the delivery of cheques for clearance by air couriers was suspended.

Despite that experience, the cheque is still accepted and commonly used in the US. The UK still persists, apparently for as long as customers need them (a strange test), and Australia and New Zealand are doing away with them soon.

Interestingly, a cheque did not have to be written on paper. AP Herbert, in one of his amusing fictional UK court judgments, wrote of the “negotiable cow”, where the cheque had been written

I WROTE OUT A CHEQUE IN FULL ON THE CARDBOARD PACKING OF A SIX-PACK. THE BANK PAID IT

on the side of the animal and had to be met when the cow was presented to the bank.

Following that example, when I ran out of cash at my hockey club (which was also a successful shebeen), I wrote out a cheque in full on the cardboard packing of a six-pack. The bank paid the cheque.

For those of you who are sorry to see the end of the cheque, bear in mind that anyone who reached commercial age after 2020 is unlikely to have seen a cheque, let alone used it, and will not miss it at all.

Finally, don’t get too attached to the credit card. ● Patrick Bracher (@PBracher1) is a director at Norton Rose Fulbright.

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BusinessDay www.businessday.co.za February 2021

BUSINESS LAW & TAX

Key trends in the workplace

concern of CEOs is safety •andMajor productivity of employees Johan Botes Baker McKenzie

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recent survey conducted by Fortune 500 of the CEOs of 2020’s Fortune 500 list of companies looked at how these companies dealt with the pandemic and how their CEOs are planning for the future.

The majority of CEOs predicted that business travel and a continued physical presence in the office will never return to the levels seen before Covid-19. The accelerated technological transformation of their organisations, experienced by three-quarters of the CEOs surveyed, was cited as the main reason for this changing trend.

In the same survey, the number one concern of 60% of the CEOs was how they could keep employees safe and productive during the pandemic. But more than half of the companies also expected to employ slightly fewer employees in 2021 than they did in 2020, and there was an increasing trend towards restructuring and redundancies in the last six months of 2020. This will continue to add pressure to the increasing global unemployment problem.

Exploring creative alternatives to job losses The global pandemic has certainly brought focus to optimal staffing in any business. While redundancies abound, many employers are also keeping their gaze on the horizon to plan for the eventual upturn in business. To that end, creative solutions to job losses are finding favour.

With a significantly diminished likelihood of securing alternative employment in the short term, many employees are forced to be more receptive to alternative work arrangements in an effort to stave off redundancies. Such arrangements include salary cuts, deferring bonus payments and other benefits, even agreeing to a period of unpaid leave in an effort to retain employment.

Businesses that can unlock the solution to retaining staff at a cost suited to the business may find not only a repayment in employment loyalty when work starts streaming in again, but also trained and experienced staff at the ready to ramp up production in no time.

Working from home Working from home is one creative alternative that could assist struggling businesses or those keen to stay lean and manage their profitability. But will this experiment continue after Covid-19?

Even those who long for the camaraderie of the office, the joviality of the staff canteen and the recounting of the weekend around the water cooler are likely to remember the benefits of our enforced working from home.

Many businesses are now implementing full or partial work-from-home strategies, with the view to requiring smaller bricks and mortar premises for shared office space as and when staff come to the traditional office. A small allowance to assist employees to set themselves up in a home office may make financial sense when contrasted with lease costs — typically one of the major cost elements in most businesses.

WORKER WELLBEING

/123RF — JESÚS SANZ Employee’s right to privacy Employers have begun looking at ways to monitor their employees’ productivity in the work-from-home setting.

However, several laws govern the monitoring of employee communications and information, as well as their closely guarded right to privacy, and there are hefty fines for noncompliance. In 2020, several key provisions of the Protection of Personal Information Act came into force in SA, with implications for employees with regards to the processing and storage of employee data. Regulations around data privacy and protection are expected to take centre stage across Africa in the coming years, as the world fully embraces the digital economy.

The rise of the flexible workforce After the pandemic, it is expected fixed-term employment contracts will become increasingly valuable business tools that allow employers the flexibility to manage the impacts of a volatile business environment.

Employers are increasingly using limitedduration contracts to create certainty and limit legal risk in respect of staffing.

Appointing employees for a fixed period or defined project allows employers to plan for their employees’ exits in advance.

Gender equality needs protecting The long-term effects of the pandemic could have severe implications for gender equality. Employers seeking to play a meaningful part in protecting gains made for gender equality in the workplace have begun taking steps to ensure that roles occupied by female employees receive the required flexibility to telecommute, where possible.

Progressive employers are already implementing equal parental leave provisions, irrespective of the gender of the parent. By allowing their partners to take time off to share the childcare duties, female employees should benefit from not only the

WORKPLACE STRESS HAS BEEN INCREASING SUBSTANTIALLY FOR SOME TIME BUT WAS MADE WORSE

BY THE PANDEMIC

shared workload but also from being able to take up employment in roles where flexible working is not possible. Creating a malleable platform for women to equally participate in all sectors of the economy will reduce the disproportionate impact of the next crisis on those sectors of the economy with significant female workforce participation.

Dealing with violence and harassment at work In dark times like these, with high rates of global violence against women, employers should take time to assess their current policies and consider whether they are fulfilling their common law and statutory obligations when dealing with violence and harassment in the workplace. Some employers are going further and considering the establishment of workplace rules that make it a workplace offence to commit acts of violence against women, stating employees who are convicted of genderbased violent crimes may be dismissed, even if the crime took place away from the workplace and against a private person.

Diverse and inclusive teams In the rapidly changing environment, a successful diversity and inclusion (D&I) programme is an important part of any resilience and recovery strategy. Diverse and inclusive corporate cultures lead to increased productivity and meaningful employee engagement, which offer immense value to businesses.

D&I fosters innovative participation, which gives rise to a confluence of creative ideas arising from the richness of different backgrounds and experiences, all of which work together in the formulation of solutions to

business challenges and idea generation.

Simply put, diverse spaces ultimately lead to better outcomes than homogenous spaces.

As such, conscious and forward-looking businesses consider D&I to be a measure of their success and indispensable to their overall sustainability. D&I is firmly on the agenda of most organisations and businesses around the world.

Stress management According to a survey by mental health service provider Ginger, nearly seven in 10 employees said Covid19 was the most stressful thing to happen to them in their careers to date. Workplace stress has been increasing substantially for some time but was made worse by the pandemic, where employees often felt isolated and anxious about the possible physical, social and economic consequences of the virus. For businesses and team leaders, managing this stress via workplace health and wellbeing programmes has become a business imperative.

Attention capital is running dry Attention capital — defined as employees’ ability to focus on value-creating work — is suffering due an “always online” environment.

Employees, now more than ever, are being bombarded with information from which there is no escape.

This is having a detrimental effect on an employee’s ability to get the job done and drastically impacts on fatigue and burnout.

Protection from bombardment might include limiting unnecessary communications, implementing mindfulness programmes or setting aside days for staff to focus on special projects.

Great strides by Sars in overhauling voluntary disclosure Joon Chong & Wesley Grimm Webber Wentzel During 2020, the SA Revenue Service (Sars) embarked on an extensive overhaul of the Voluntary Disclosure Programme (VDP) process with stakeholders, including tax practitioners and taxpayers.

The VDP process is a legislated means for taxpayers to voluntarily approach Sars to regularise their tax affairs and pay additional tax to Sars after a default. A default may arise when incomplete or inaccurate information has been submitted to Sars or

when a taxpayer has failed to submit relevant information.

The default must result in an understatement of tax payable. The VDP process is a unique opportunity for Sars to increase collections as taxpayers are voluntarily offering to give it additional and much-needed revenue.

To assist Sars with overhauling the VDP process, we and other practitioners as well as representatives from industry bodies participated in Sars’ Voluntary Disclosure Programme Feedback Survey for 2020 and in workshops and contact sessions.

The opportunity for tax

practitioners and taxpayers to engage with Sars on practical issues in relation to the VDP process was valuable. The person tasked with the job of overhauling the VDP process, Nicholas Nemalili, consistently and contentiously engaged with us.

In our most recent contact sessions with Sars during September and October 2020, it was able to give further positive feedback on the strides made in overhauling the VDP process. Sars informed us that nearly three-quarters of the historical backlog in the VDP process has been cleared and

where matters remained unresolved this was primarily due to outstanding information from taxpayers; and more than half of VDP matters submitted to Sars during 2020 had already been resolved. Sars’ progress in this regard is noteworthy.

PRE-SCREENED

During these engagements, Sars also provided insights on how VDP applications are now pre-screened to determine if they may be resolved on an expedited basis. This enhancement alone stands to significantly improve revenue collections and is to be

welcomed.

Nemalili did, however, caution tax practitioners that all VDP applications are scrutinised in detail and where questions are raised or requests for additional information made, it is because such requests usually have a direct, positive impact on the amount ultimately assessed as part of the VDP process.

Simply stated, the relevant Sars official tasked with processing a VDP application applies their mind to all aspects of the application.

Furthermore, when a taxpayer is dissatisfied with the outcome of a VDP process,

they may request that Sars review that decision in terms of section 9 of the Tax Administration Act, 2011.

Sars’s, and Nemalili’s, candour in acknowledging and engaging with tax practitioners and taxpayers on issues regarding the VDP process is a decisive departure from the status quo and a step in the right direction towards an enhanced and more “taxpayer-friendly” VDP process.

Given Sars’ constrained collections, the great strides made in overhauling the VDP process were overdue and necessary.

9

BusinessDay www.businessday.co.za February 2021

BUSINESS LAW & TAX

Africa must protect animals

Policy makers should address the damaging •loopholes in protection laws in their countries Brittany Dodds, overseen by John Bell Baker McKenzie Johannesburg

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he cruel treatment and killing of African wild animals has decimated them, and the continent is crying out for standardised guidelines on animal welfare that follow international best practice.

African countries such as SA, Kenya and Nigeria became signatories recently to the African Union’s Animal Welfare Strategy for Africa, (AWSA) launched in 2017.

AWSA set out a five-year plan for animal welfare in Africa with a vision of one welfare system for animals in Africa that treats animals as sentient beings. But animal-protection legislation in these countries is not yet standardised. Some legal frameworks afford more protection than others, and there are major regulatory omissions and loopholes that should be addressed urgently.

Global animal rights and animal welfare organisations exist to ensure animals do not suffer needlessly in that they are considered to be sentient beings, capable of suffering and worthy of protection.

The welfare of an animal is considered to be good if it is healthy, comfortable, wellnourished, safe, not suffering pain, fear or distress and able to express behaviours important for its mental and physical state.

Guidelines exist to ensure that these rights are afforded

to animals. The World Organisation for Animal Health (OIE) oversees animal health and treatment standards for the World Trade Organisation. The OIE has implemented international standards, including one code and two manuals that provide guidelines for the treatment of terrestrial and aquatic animals.

While the codes and manuals traditionally addressed animal health and zoonoses (diseases or infections that transmit from animals to humans), they were expanded recently to cover animal welfare, animal production and food safety.

OIE recognises five freedoms afforded to animals,

MANY COUNTRIES AROUND THE WORLD HAVE THEIR OWN ANIMAL RIGHTS AND WELFARE WRITTEN INTO LAW including freedom from hunger, thirst and malnutrition; fear and distress; physical and thermal discomfort; pain, injury and disease; and the freedom to express normal patterns of behaviour.

Many countries around the world have their own animal rights and welfare written into law and are members of the OIE, including in SA. SA has implemented animal protection acts criminal-

ising cruelty against domestic and wild animals, regardless of whether they are in captivity or under human control.

This includes the Animal Protection of 1962 (Animal Protection Act) and the Amended Performing Animals Act of 2016, which requires a licence for any organisation that trains animals for exhibition or performance purposes.

There are more than 100 animal welfare societies in SA, and while the agriculture, land reform & rural development (department) has the overriding responsibility of enforcing these laws, animal welfare societies have expressed their concern that important omissions exist in the legislation governing animal welfare, such as the trade in wild animals and animal trophies.

The absence of legal guidelines and vague guidelines have resulted in complex and perennial challenges for the protection of SA’s wild animals.

With the stroke of a pen, the contentious Animal Improvement Act of 2019 (AIA) was promulgated, reclassifying 32 wild animals as farm animals, including lions and rhinos.

On the face of it, the AIA seems innocuous. However, it is arguably not in line with the country’s constitution, which affords animals rights and protection. Neither does AIA uphold the guiding principles of the OIE. As no provision in the AIA protects the welfare and health of wild

CALL OF THE WILD

/123RF — JAROSLAW GRUDZINSKI animal when in captivity, and with the definitions of “wild”, “wild management” and “captive” now having been redefined, the resultant loopholes have caused concern around the laundering of wild-sourced live animals, the trade in animal body parts and the increase in wild animals living in captivity.

Examples of the lawful exploitation of animals include canned lion hunting and the widely condemned trade in rhino horn.

Failure to allow public participation that would have afforded interested parties and organisations the opportunity to engage and consult with the government before giving effect to AIA, as well as the failure to obtain scientific research, is concerning, and does not bode well for the

future protection of wild animals in SA. What is even more concerning is the recently proposed amendment to the Meat Safety Act that will legalise the slaughter of rhinos, hippos and giraffes for human and animal consumption.

As African organisations begin to recover and build the necessary resilience to successfully navigate the Covid19 disruption, a focus on the environmental, social and

GLOBAL ANIMAL RIGHTS AND ANIMAL WELFARE ORGANISATIONS EXIST TO ENSURE ANIMALS DO NOT SUFFER NEEDLESSLY

corporate governance is proving to be essential for long-term success.

After the pandemic, we expect initiatives in Africa will have a heightened focus on improving Africa’s capacity for green, low-carbon and sustainable development, with wildlife protection being a key focus of such initiatives in the continent.

It is therefore essential for businesses operating in Africa to ensure they have their own animal-protection principles in place that follow international guidelines, regardless of current regulatory frameworks in Africa.

Policy makers in Africa should address the damaging loopholes in animal protection laws in their countries to ensure environmental and economic sustainability.

Numerical targets key to equity act tweaks Jonathan Goldberg Global Business Solutions Critical for organisations are the amendments that were tabled and approved by Cabinet in February 2020 concerning the Employment Equity Act. In July 2020, the employment & labour minister published that the bill would go to the National Assembly to start the parliamentary process.

The National Assembly then put the bill out for the public to comment and the process is coming to finalisation.

What do the amendments propose?

The most significant amendment to the proposed Employment Equity Act is section 15, which empowers the minister to prescribe

numerical targets for sectors at all occupational levels to ensure the equitable representation of suitably qualified people from designated groups.

This is followed by section 42, which deals with the assessment of organisational compliance. Specifically, section 42 deals with if the employer is complying with numerical targets prescribed in that sector by the minister.

Finally, section 53(6) is a list of five criteria an employer must meet to obtain a compliance certificate. Key to this is section 53, which has always been in the act but has not been operational. It will be put into effect by these amendments. This will mean state contracts may only be issued to employers who

have been certified as being compliant with the obligations under the Employment Equity Act. One of these is the requirement to achieve the above numeral sector targets prescribed by the minister.

What does not attaining a compliance certificate mean?

Not attaining a compliance certificate would mean these businesses would not be able to do business with the state.

SECTION 53(6) IS A LIST OF FIVE CRITERIA AN EMPLOYER MUST MEET TO OBTAIN A COMPLIANCE CERTIFICATE

Currently, broad-based BEE status is measured in terms of the Preferential Procurement Framework Act in relation to a 10% and 20% evaluation of the total score. This is dependent on the monetary amount of the tender. Should this amendment go through, it will have far-reaching implications for those sectors that have not achieved these targets and are not getting a certificate.

What is critical is that section 42 is not definitive enough and does not contain a clause that would recognise reasonable steps towards the employer achieving the applicable targets.

In terms of section 64, the draft regulations make provision for a designated employer who applies for a cer-

tificate of compliance — to be but has not achieved the applicable targets — to record justifiable reasons for not doing so. However, it is not good enough to have this in the regulations as it needs to be in the act.

In addition, it actively empowers the minister to delegate his authority of compliance to inspectors.

This could lead to far-reaching powers for inspectors.

The five compliance criteria in section 53 Interestingly, if one looks at section 53 of the bill, there are five criteria of compliance for a certificate of compliance: ● The employer has complied with a numerical target set in section 15A that applies to that employer. ● If an employer has not

complied with any target set, the employer has raised a reasonable ground, to justify its failure to comply as contemplated by section 42(4). ● The employer has submitted a report in terms of section 21. ● There has been no finding by the CCMA or a court within the previous three years that the employer breached the prohibition on unfair discrimination in chapter 2. ● The CCMA has not issued an award against the employer in the previous three years for failing to pay the national minimum wage.

These amendments will have far-reaching consequences if they are passed into law and potentially some significant unintended consequences.

10

BusinessDay www.businessday.co.za February 2021

BUSINESS LAW & TAX

Antitrust bodies kept busy

Covid-19 brought claims of •excessive pricing, while cartels

LETTER OF THE LAW

remained in watchdog’s sights

Heather Irvine Bowmans

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ast year was a busy one for the SA competition authorities, and 2021 looks set to be just as active for the Competition Commission, as it continues to play a key role in efforts to create more competitive markets and foster greater economic inclusion.

One of the commission’s main priorities in 2020 was the investigation and prosecution of firms accused of excessive pricing, following the publication by the trade, industry & competition minister in mid-March of regulations aimed at curtailing price gouging on essential medical and food items.

The commission reported that it handled about 1,800 investigations, with companies eventually agreeing to pay R9.3m in administrative penalties and R5.6m in contributions to the Solidarity Fund.

After the tribunal found a small Pretoria hardware company guilty of increasing prices on nonmedical masks and fined it R78,000, the Competition Appeal Court (CAC) upheld the finding of excessive pricing, but set aside the fine. Though the decision was based on the factual circumstances of the pandemic, it was decided under the normal provisions of the Competition Act rather than the Covid-19 rules.

This is the first case in which the amendments to the excessive pricing prohibi-

tion in section 8 of the act have been applied, including the new requirement that if a prima facie case of excessive pricing is made out, the dominant supplier is required to show its price was reasonable.

The approach taken by the CAC may well be applied in future complaints to prosecute suppliers who raise their prices without good reasons for doing so. The decision suggests even temporary dominance may be a basis for a prosecution, which signals a risk of excessive pricing complaints even for firms that don’t generally consider themselves to be “dominant”.

Excessive pricing, particularly by local monopolists pricing above import parity, is likely to continue to attract complaints. For example, the commission is investigating a complaint laid in late 2020 by the steel industry association, Neasa, which alleges excessive pricing by Arcelor Mittal SA. In general, however, aside from the Covid-19 prosecutions, settlements and successful prosecutions of dominant firms were far less common in 2020. Late last year, for example, the CAC overturned the decision of the tribunal that Uniplate (one of the two major suppliers of number-plate blanks and the machines used to emboss number plates in SA) had abused its dominant position by tying the supply of number-plate blanks to its embossing machines.

It remains to be seen whether the amendments to

/123RF — ROBERT WILSON the Competition Act improve either the speed or the rate of successful prosecutions of dominant firms. However, the commission has clearly spelt out its likely approach to both the new price discrimination and abuse of buyer power restrictions in draft guidelines, and it seems likely the commission will be looking out for suitable complaints to test these powers.

Dominant buyers and sellers should review their commercial agreements and practices, particularly if they sell to, or buy from, small and medium enterprises or historically disadvantaged firms.

It is also likely the commission will continue to tackle pricing and business practices that are perceived as “unfair” or which have disproportionately harsh effects on smaller firms or poor consumers, through means other

IN THE MOBILE DATA MARKET INQUIRY, THE COMMISSION RECOMMENDED A SERIES OF REGULATORY CHANGES

than formal complaints.

For example, in 2020 the commission issued final guidelines on automotive aftermarkets which, though not legally binding, suggest original-equipment manufacturers should adopt measures to allow for small, independent and historically disadvantaged service providers to repair vehicles; encourage more historically disadvantaged people to own dealerships; and ensure the fair allocation of repair work by insurers.

In the mobile data market inquiry, the commission recommended a series of regulatory changes to address concentration in wholesale and retail mobile markets.

The commission also reached settlements with all of the mobile network operators (not just the dominant operators), which, inter alia, reduced mobile data prices on certain low-volume data bundles.

Market inquiries are potentially a swifter and more cost-effective way for the commission to tackle structural features, in particular sectors of the economy that hamper competition.

Agreements were also

reached with grocery retailers to phase out clauses in shopping centre leases that prevented smaller retailers from entering these centres for extended periods of time.

The amendments to the act have further extended the potential effect of these market inquiries, particularly in so far as the commission can make recommendations directly to the Competition Tribunal for an appropriate order to tackle concerns identified in the course of a market inquiry.

These new provisions have yet to be tested before the tribunal or the Competition Appeal Court.

Cartels remained a focus for the commission in 2020, with the tribunal confirming 18 settlement agreements as consent orders, involving administrative penalties of R10.5m. This is a significant reduction from the 25 cartel consent orders confirmed in 2019 (totalling R120m), perhaps reflecting a shift in the commission’s focus to deal with the substantial number of Covid-19 excessive pricing complaints.

CARTEL CONDUCT

The commission failed to sustain allegations of cartel conduct in a number of longrunning prosecutions in 2020, including against NPC in the cement cartel case; against I&J in a complaint about alleged division of beef product markets; involving Stuttafords and others in the furniture removal case; and several companies that supplied office stationery to government departments.

In the complaint against Tourvest Holdings and Trigon Travel relating to a government tenders for flights and accommodation for mem-

bers of parliament, the commission based its case on, among other factors, that the bid price was identical and the bids were submitted on the same day. However, the tribunal dismissed this complaint, on the basis this circumstantial evidence alone was not enough to meet the onus on the commission to prove allegations of cartel conduct on a balance of probability.

It seems likely that in addition to acting on information from applicants for leniency in terms of its Corporate Leniency Policy, the commission will intensify its investigations before referring cases to the tribunal.

Though it has been several years since the commission conducted a dawn raid, this remains a powerful weapon in the commission’s arsenal.

Punishing collusion is likely to remain high on the commission’s agenda in 2021, particularly in industries that supply the state and government departments.

Following the CAC’s decision on the scope of the commission’s jurisdiction in the complaint about forex trading against various foreign and local banks, we may see the commission tackling more complaints involving crossborder cartels.

The developments in 2020 signal we should expect even more intensive competition law enforcement in 2021, particularly as the country begins vaccinations, the economy returns to normal activity levels and pandemic-related cases reduce. Comprehensive and effective competition law compliance policies remain a crucial defensive mechanism for companies doing business in SA.

Formal inquiry not mandatory for axing Bradley Workman-Davies Werksmans Labour relations and the fairness standards for dismissal of an employee in SA have long been centred around the formality of disciplinary or incapacity inquiry processes, and the tradition of the use of these processes has built up an expectation that they are mandatory.

However, not only is this not the correct approach in terms of the Labour Relations Act, 66 of 1995 (LRA), but recent case law coming out of a number of diverse forums is demonstrating a greater acceptance on the part of commissioners and judges to accept that a less formal, less

rigorous approach is justified, and especially where compelling circumstances exist.

In the recent bargaining council decision of National Union of Furniture & Allied Workers SA on behalf of Javulani/Dreamworx Bedding (Pty) Ltd, the Furniture Bargaining Council agreed that an employee who had incited violence in the workplace, bullied colleagues, abused female staff and threatened the lives of colleagues, especially having made explicit death threats against foreign employees, had been fairly dismissed even without a formal disciplinary inquiry being held or the employee being formally notified of the holding of a

meeting to discuss the allegations against him.

In this case, the employer called a meeting to hear complaints against the employee, and then called a second meeting at which the employee was present when these complaints were presented.

The employee did not challenge these complaints, other than to allege they were all lies. In the face of the consistent versions presented by his colleagues, this was demonstrably untrue. Was the employee entitled to insist on a formal inquiry and to receive notice to prepare?

Not necessarily, since, Item 4 of Schedule 8 of the Code of Good Practice on

Dismissals provides that “normally, the employer should conduct an investigation to determine whether there are grounds for dismissal. This does not need to be a formal inquiry. The employer should notify the employee of the allegations using a form and language that the employee can reasonably understand.

“The employee should be allowed an opportunity to state a case in response to the allegations. The employee should be entitled to a reasonable time to prepare the response and to assistance of a trade union representative or fellow employee.”

It is important to note the schedule provides that ordi-

narily the investigation should be conducted, but the corollary is that if the circumstances permit, such as where witnesses may be intimidated or would otherwise not be willing to participate in a courtroom-style inquiry, this can be forgone.

Also, ordinarily the employee should be given advance notice of the process, but it is clear that where the matter is relatively uncomplicated and the employee could be expected to provide a response to the complaints against him or her, there is no reason why a formal notice period of not less than 48 hours has to be presented to the employee. There is no reason why the employee in

Dreamworx would have been unable to respond to his accusers in the meeting in which he was present. The Furniture Bargaining Council correctly found that the dismissal was fair.

Employers should, in light of this and other cases, be aware that strict formality is not always required, and provided the process is fair — fairness must also be measured in respect of the employer not just the employee, and the employer should not be exposed to an unnecessarily formal, costly or time-consuming process to discipline an employee — the employee can be dismissed without recourse against the employer.

11

BusinessDay www.businessday.co.za February 2021

BUSINESS LAW & TAX

Hesitate before you vaccinate

INOCULATION ISSUES

does not exist for employers to force staff to •takeLawvaccines, so the constitution comes into play Mehnaaz Bux & Shane Johnson Webber Wentzel

W

ith the imminent arrival of SA’s first batch of Covid-19 vaccines, many employers are considering the vaccination policies they need to put in place in the workplace.

We caution against implementing a mandatory policy requiring all employees to be vaccinated.

Before the arrival of Covid-19, vaccines were primarily necessary at birth to prevent life-threatening infectious diseases that have high mortality in children, such as measles. Although the department of health strongly encourages parents to ensure children are vaccinated, these vaccinations are not compulsory under the law.

After Covid-19, and with the rollout of various Covid19 vaccines, an important question is whether SA has legislation that makes vaccination compulsory. Although yellow fever vaccinations are

compulsory for travel to certain countries, there is currently no such legislation.

Given the latest announcements by health minister Zweli Mkhize, we consider it unlikely that the government will enforce a compulsory vaccination regime for SA citizens.

It is within this context that employers need to consider workplace Covid-19 vaccination policies.

Employers have a legal obligation to provide and maintain (as far as reasonably practicable) a safe and healthy working environment for employees. Despite this obligation, SA law currently does not impose any legal duty or obligation on employers to provide or enforce vaccination.

Employers who seek to enforce a compulsory vacci-

OBLIGING EMPLOYEES TO BE VACCINATED MAY LIMIT ONE OR MORE FUNDAMENTAL RIGHTS IN THE CONSTITUTION

nation regime for employees should consider the following important aspects: Constitutional rights of employees: Obliging employees to be vaccinated may limit one or more fundamental rights contained in the constitution, particularly section 12 (freedom and security of the person) and section 15 (freedom of religion, belief and opinion). Although it is possible for these rights to be limited, that limitation has to be reasonable and justifiable and various factors need to be considered: ● The nature of the right; ● The importance and purpose of the limitation; ● The nature and extent of the limitation; ● The relationship between the limitation and its purpose; and ● Less restrictive ways of achieving the same purpose.

However, it may be possible for employers to argue that section 11 (right to life) and section 24 (right to an environment that is not harmful to health or wellbeing) can be used to support a compulsory vaccination regime for employees.

Due to the interplay of

/123RF — SNEZHANA12 constitutional rights involved, the issue of workplace Covid-19 vaccination policies may ultimately end up before the Constitutional Court for determination. This determination will involve a balancing exercise, with employer obligations and responsibilities towards employees on the one hand and employee rights on the other.

Apart from the constitutional rights of employees, employers should also bear in mind certain sections of the relevant employmentrelated legislation, such as: ● Section 187(1)(f) of the Labour Relations Act 66 of 1995, which deals with automatically unfair dismissals on account of discrimination (including on grounds of religion, conscience, belief, political opinion, and cultural or arbitrary grounds); ● Sections 5 and 6 of the Employment Equity Act 55 of 1995, which offer similar protection to employees against unfair discrimination by employers.

Practical implementation and costs: From a practical

perspective, it should be noted that the SA government is currently the sole procurer and distributor of Covid-19 vaccines. It will therefore not be possible for employers to launch an onsite vaccination drive at the workplace. Accordingly, at the present time mandatory

THE SA GOVERNMENT IS CURRENTLY THE SOLE PROCURER AND DISTRIBUTOR OF COVID-19 VACCINES vaccination is a nonstarter.

The other issue is the costs associated with the vaccine.

Once the vaccines are more easily available to the public, if an employer requires employees to be vaccinated before they are allowed to return to the workplace, it will have to cover the costs of procuring and administering those vaccines.

Employers should also be aware that a compulsory vaccination regime for employees will involve a consideration of various other additional issues, including but not limited to: ● Changes to terms and conditions of employment and reaching agreement with employees on those changes; ● Personal information management of vaccination records/history submitted by employees; ● Reputation management issues (such as employers who employ large workforces and do not seek to make vaccination compulsory facing public criticism for failing to do so).

Workplace Covid-19 vaccination policies involve a host of legal considerations.

There is a need to balance various competing rights and interests.

It is therefore advisable for employers who are contemplating the implementation of a compulsory vaccination programme to seek legal advice on whether it would be permissible to do so.

Shift on loop structures will help SA grow Dr Albertus Marais AJM Tax There has been a longstanding need — almost since the introduction of exchange controls to this country in 1961 — for the prohibition of so-called “loop” structures to be lifted.

These structures were not always used for nefarious tax-related purposes and could result in many legitimate instances, for example, among entrepreneurial businesses seeking to expand with the help of foreign direct investment.

It was often the case that legitimate, nontax-related reasons existed why investments from offshore were sought to be made in this country, yet they became hamstrung due to that

investor having some distinct indirect SA interests held in it.

Loop structures would generally involve SA exchange control residents holding interests in SA assets via an offshore structure, be it through an offshore company or trust.

Previously, these regimes were the subject of strict regulation and “loop structures” would only be allowed in limited instances, such as where SA residents held shares in a foreign company that held interests of up to 40% of an investment back into SA. The prohibition existed to address tax avoidance being perpetrated through using such structures, predominantly SA capital gains and dividend taxes. For example,

if an SA individual would hold shares in an SA firm through a Mauritian entity, the Mauritian entity would have been able to receive dividends and realise gains on sale of the SA shares at a much reduced tax cost, compared to where the SA individual held those shares directly.

BANK DECISION

The recent policy decision by the Reserve Bank, therefore, is to be applauded. This move came in January when the Bank’s financial surveillance department published its first circular of the year, ending the long-standing exchange control prohibition of these structures.

The most encouraging aspect of the change is that it should support SA’s growth as an investment and finan-

cial hub for Africa, and encourage investments into this country.

The changes have been effected through amendments to the Currency and Exchanges Manual for Authorised Dealers.

Under the amended subsection (l) of Section B.2(B)(i), it is made clear that existing unauthorised loop structures (that is, created by individuals prior to January 1 2021) and/or unauthorised loop

WHAT IS THEREFORE IMPORTANT IS THAT THE RELAXATION APPLIES ONLY TO LOOP STRUCTURES CREATED FROM JANUARY 1 2021

structures where the 40% threshold was exceeded, must still be regularised with the financial surveillance department.

What is therefore important is that the relaxation applies only to “loop structures” created from January 1 2021; it does not cater for unauthorised “loop structures” that existed before January 1 2021.

It also only applies to people who are both SA tax and exchange control resident.

In terms of a policy reconsideration, communicated by the finance minister during the 2020 budget, the government took a decision to no longer combat tax avoidance through the use of exchange controls, but took the encouraging decision rather for tax avoidance to be addressed

through tax avoidance legislation.

In accordance with new government policy, exchange controls should be employed primarily to protect the rand; tax legislation should be developed to tax “loop structures” more effectively.

In advancing this policy narrative, the government has introduced tax legislation over the past few years to more effectively tax both direct SA shareholdings in offshore companies, as well as distributions of trust capital from offshore trusts in low-tax jurisdictions.

With SA’s economy under significant strain and the fiscus under growing pressure, it is encouraging to see investment into SA will receive a fillip as a result of the amendment.

12

BusinessDay www.businessday.co.za February 2021

BUSINESS LAW & TAX DUES DATE

Ruling sheds light on VAT on imported services

T

he Court of Appeal recently delivered its findings on the claiming of VAT incurred as an input tax deduction and the raising of VAT on “imported services” in Consol Glass (Pty) Ltd v The Commissioner for the SA Revenue Service (1010/2019) [2020] ZASCA 175 (December 18 2020).

The court had to consider whether VAT incurred on local services acquired relating to a debt reorganisation could be claimed as an input tax deduction. And, whether VAT on foreign services acquired for the same purpose should be subject to VAT on imported services.

Consol Glass manufactures and sells glass containers. In 2007 Consol (at the time a shell company) was part of a company restructuring and undertook debt reorganisation in terms of which it ultimately issued Eurobonds. To hedge against a possible weakening of the rand, Consol also entered into hedging arrangements.

The hedging was entered into since the debt was denominated in foreign currency while the business conducted in SA was in rand.

In the years after 2007, Consol experienced a cost in debt increase which needed to be dealt with. In 2012 Consol entered into agreements with a consortium of banks which effectively swapped the foreign currency debt or exposure for rand debt or exposure. The pre- and postdebt refinancing left the primary business of Consol completely intact, namely to sell glass containers.

Consol claimed the VAT on local expenses incurred relating to these

IN THE BUSINESS OF GLASS

FERDIE SCHNEIDER reorganisations as “input tax” for VAT purposes. In addition, Consol did not account for VAT on imported services on the acquisition of foreign services relating to these reorganisations. Both these VAT treatments indicate that Consol viewed these transactions and expenses as directly relating to the making of taxable supplies.

The SA Revenue Service (Sars) raised assessments on the claiming of the input tax deductions and imposed VAT on imported services, on the basis that the expenses were not incurred to make taxable supplies. Sars argued that the raising of finance was not part of Consol’s business as was the manufacturing and selling of glass containers.

Consol objected against the assessments. Sars

THE PRE- AND POSTDEBT REFINANCING LEFT THE PRIMARY BUSINESS OF CONSOL INTACT disallowed the objections.

Consol appealed to the Tax Court and the court dismissed the appeal, but for a 10% penalty imposed by the commissioner.

To assess the first issue, namely claiming VAT on expenses incurred as an input tax deduction, the definition of “input tax” needs to be considered. The VAT

/123RF — NATALIA RIABCHENKO Act defines “input tax” as “(a) tax charged under section 7 and payable in terms of that section by (i) a supplier on the supply of goods or services made by that supplier to the vendor; … where the goods or services concerned are acquired by the vendor wholly for the purpose of consumption, use or supply in the course of making taxable supplies….”

The court found that this requires answers to two questions: What was the purpose for which Consol acquired the services? And, second, did Consol acquire the services in the course of making taxable supplies?

The court found that Consol did not acquire the services in the course of making taxable supplies.

To assess the second issue, namely whether VAT on imported services should be declared and paid on foreign services acquired, the definition of “imported services” needs to be

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considered. The VAT Act defines “imported services” as “a supply of services that is made by a supplier who is resident or carries business outside of the Republic to a recipient who is a resident of the Republic to the extent that such services are utilised or consumed in the Republic otherwise that for the purpose of making taxable supplies”.

The second issue as with the first inquires whether the services were acquired in the course of making taxable supplies. The court found that Consol did not acquire the services in the course of making taxable supplies.

The court also considered and rejected what it termed Sars’ “exempt supply submission”. Sars argued that Consol issued a “debt security” which, for VAT purposes, is an exempt supply. The court rejected this argument on the basis that “Consol is simply not a vendor of financial services.

It registered as a vendor in respect of the enterprise upon which it engaged, that is, as manufacturer and seller of glass containers and so it remained.”

The court also found that the refinancing (2012) did not have a functional link by reason of the cost savings it caused, and did not link to the making of taxable supplies.

The court in effect found that the original company restructuring and raising of capital through the issuing of Eurobonds (2007) and the subsequent refinancing through the local bank consortium (2012) were not done in the course or

THE SECOND ISSUE INQUIRES WHETHER THE SERVICES WERE ACQUIRED IN THE COURSE OF MAKING TAXABLE SUPPLIES

furtherance of making taxable supplies and that no input tax should have been claimed and that VAT on imported services should have been paid.

The fact that the court found the funding raised did not comprise a debt security issued by Consol (and did not explore any other supplies) seems to indicate the court identified no supplies made

by Consol in relation to the financing and refinancing and that the local VAT incurred and VAT on imported services related to no supplies and did not relate to the making of taxable supplies.

The court also only applied a close connection test (immediate purpose) between VAT incurred and the making of taxable supplies and did not apply the so-called “ultimate purpose” test. ● Dr Ferdie Schneider is CEO of Sta Konsult.