Business Law & Tax: August 2020 by SundayTimesZA

BUSINESS LAW & TAX

AUGUST 2020 WWW.BUSINESSLIVE.CO.ZA

A REVIEW OF DEVELOPMENTS IN CORPORATE AND TAX LAW

Greek Freak and celebrity trademarks

ON THE BALL

Basketball star’s nickname is at the centre of legal •proceedings against retailers to enforce his rights Gaelyn Scott ENSafrica

ne of the biggest names in US basketball right now is Giannis Antetokounmpo. Antetokounmpo is huge in every way and he’s the NBA’s current MVP (Most Valuable Player). For years Antetokounmpo has been all over the sports news but now he is making intellectual property news too. That’s because he’s become involved in trademark disputes. The name Giannis Antetokounmpo hardly rolls off the tongue. Which may be why the basketball star has a nickname, the Greek Freak. If you’re thinking this doesn’t sound like a very nice name, the moniker does, of course, refer to both the star’s heritage and his sporting

prowess. It’s the nickname that is at the centre of the trademark proceedings. Nicknames are common in the world of sport. Kobe Bryant was The Black Mamba or just plain Mamba, whereas Lebron James is King James. The world’s greatest male tennis player is Fed-ex, followed closely by Rafa. The most charismatic of the current crop of heavyweight boxers is the Gypsy King, whereas the most newsworthy football manager is the Special One. In SA we like to give our

WHEN YOU HAVE TO SCRAPE BY ON AN ANNUAL SALARY OF $25M IT’S NOT A BAD IDEA TO CREATE ADDITIONAL REVENUE STREAMS

sports personalities nicknames too. Remember Biff (Graeme Smith), Rhoo aka The Chief (Lucas Radebe) and Nasty Booter (Naas Botha)? In golf we had the Big Easy (Ernie Els) and the big daddy of them all, the Black Knight (Gary Player), who has recently been involved in legal proceedings for unpaid royalties with a company run by his son Marc (awkward), These proceedings have resulted in Player Snr getting a $5m payout. In some cases it may be the sportsperson or team who creates the nickname, but in others it’s the fans, as famously happened in the case of Bafana Bafana, a name eventually and reluctantly acknowledged by the SA Football Association after it had become clear it wasn’t going to go away. But back to the Greek Freak. What Antetokounmpo

/123RF — EFKS is doing is instituting legal proceedings to enforce his rights against a number of companies in the US using his nickname without approval. In an article that appeared on June 3 in The TMCA headlined “The Greek Freak Flexes His Trademark Muscles”, we’re told these proceedings involve various online retailers, and the unauthorised goods feature the nickname and Antetokounmpo’s likeness. So what exactly is going on here? Well, when you have to scrape by on an

annual salary of no more than $25m it’s not a bad idea to create some additional revenue streams. And that is why Antetokounmpo has obtained trademark registrations for the name Greek Freak. He also has pending applications for Greek Fr34K, with 34 being his vest number. He claims to have commercialised his nickname by licensing it, together with his image, to various companies. This story illustrates the extraordinary commercial opportunities that come the

way of famous sportsmen and women, and indeed all celebrities. These opportunities aren’t limited to the celebrities’ real names; they might extend to nicknames, likenesses, signatures, catchphrases and squad numbers. What the smart, or welladvised, celebrity does is register their name, nickname, signature, likeness, catchphrase and the like as a trademark. They register in the countries where they feel they are most likely to need CONTINUED ON PAGE 2

Be part of the Journey. For Nature. For You.

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BusinessDay www.businessday.co.za August 2020

BUSINESS LAW & TAX

E-commerce risk protection

tools and methods to use •to Tips, grow brands in the burgeoning

THE WHOLE PACKAGE

online sales business

Maureen Makoko Adams &Adams

ovid-19 has completely changed dayto-day life when it comes to purchasing goods. With online shopping increasingly becoming the “new normal”, it is important for brand owners to conduct full self-reflection on how they do businesses locally and internationally. This includes considering brand protection, brand related risks of running an e-commerce business and any steps that may be taken to mitigate those risks. China is deemed to be the largest and fastest growing e-commerce market in the world with more than 632-million internet users. It is estimated that China’s e-commerce sales make up 3.2% of the country’s GDP which is compared to 2.7% in the US. It is also estimated that China’s e-commerce represents more than 50% of the total global e-commerce spending. In addition, China has the highest number of intellectual property applications in the world with 1.862-million invention patent applications, 25-million trademark applications between 2007 and 2019 and 481,793 intellectual property dispute cases recorded in 2019 alone. This indicates that China is a lucrative market for brand owners looking to expand their businesses.

BRAND RELATED RISKS IN CONDUCTING AN E-COMMERCE BUSINESS IN CHINA

The latest trends in intellectual property enforcement have shown that the following risks are prevalent in e-commerce business in China: ● Intellectual property litigation is on the rise in China as multinational companies and competitors are becoming more active in enforcing their rights; ● Chinese e-commerce platforms adopt strict selfpolicing policies in accordance with the new e-com-

Greek Freak and trademarks

merce law to limit their own liability. This means e-commerce platform owners take great care in how they deal with e-commerce businesses that are operating on their platforms; and ● IP squatters and extortionists are hijacking foreign brands and exploiting new technology to lodge complaints against the legitimate brand owners on e-commerce platforms. This has devastating and costly consequences for affected brands.

WHAT CAN FOREIGN BRAND OWNERS DO |TO SAFEGUARD THEIR RIGHTS?

Below are tips that can be adopted to minimise the risks highlighted above: ● Ensure all the brands in the business are cleared for use and registration and are registered. China follows a first to file system. This means the

CAREFULLY REVIEW THE IP POLICY AND OTHER BYLAWS OF THE E-COMMERCE PLATFORM THAT WILL HOST THE BUSINESS first person or entity that applies for a trademark will obtain registration regardless whether such person or entity is not the owner of that trademark. Brand owners are well advised to conduct trademark searches, file trademark applications, police use of their brands in China and be quick to take action if any infringements occur. It is possible to register brands without a physical presence in China. ● Carefully review the IP policy and other bylaws of the e-commerce platform that will host the e-commerce business before entering into binding agreements. On January 1 2019, the New E-Commerce Law of the Republic of China was promulgated. The new law is aimed at safeguarding the legitimate rights and interests of e-commerce entities, regulating e-commerce conduct,

CONTINUED FROM PAGE 1 protection. These will certainly be countries that are commercially important, and they may also be countries where piracy is very likely. They register trademarks

/123RF — STRELOK maintaining market order and promoting the continuous and sound development of e-commerce. One crucial feature of the new law is that online businesses are now required to register their businesses and acquire all compulsory licences before actively trading on e-commerce platforms. The framework of the new law is comprehensive. Individual chapters cover: e-contracts and e-payments; guarantees for e-commerce transactions; data protection

for the goods and services in respect of which they are most likely to enter into licensing arrangements, such as clothing, sporting goods and cosmetics, but licensing opportunities might also exist for a host of services.

and promotion of consumer protection, fair competition and mechanisms for dispute resolution; cross-border commerce; and the provision of substantial civil and criminal penalties.

ENSURE ALL THE BRANDS IN THE BUSINESS ARE CLEARED FOR USE AND REGISTRATION AND ARE REGISTERED ROYALTIES

The next step is to enter into licence agreements with manufacturing or serviceorientated companies that then use the trademarks on goods or services. The celebrity then

These are all-important provisions that a foreign company will have to take into consideration before engaging in an e-commerce business in China. ● Diversify the business on multiple e-commerce platforms to have backup in the event that the business encounters problems on one platform. In China, there are more than a dozen different crossborder e-commerce platforms covering different products. It is possible, and would be prudent, for a for-

eign company venturing into the territory to diversify its e-commerce business by conducting its business on more than one platform, depending on its products. If one of the platforms is adversely affected, the company will have flexibility and be able to carry on trading on the other platform under the same brand. These are some tools a company may use together with other methods to protect and grow its brand in Chinese e-commerce. Verified by Lita-Miti Qamata

receives royalty payments for the use of the trademarks. The wise celebrity monitors the markets to ensure no unauthorised users are using the trademarks. If they do find unauthorised use, they enforce their

rights. They let it be known that they will not tolerate any infringements of their rights. Fame is fleeting, and wise celebrities know they need to act quickly if they want to make a real fortune.

BusinessDay www.businessday.co.za August 2020

BUSINESS LAW & TAX

Dis-Chem price ruling lacks clarity

COUNTING THE COST

Competition Tribunal’s departure from peremptory •wording of act resulted in narrowed assessment Jeremy de Beer & Aidan Scallan ENSafrica

he Competition Tribunal recently handed down its decision against Dis-Chem Pharmacies Limited in respect of a Covid-19-related complaint alleging that Dis-Chem charged an excessive price for various surgical face masks during March 2020. This was the second finding by the tribunal in respect of a Covid-19 excessive pricing complaint (where the parties contested the allegation), the first being made against Babelegi Workwear and Industrial Supplies CC. These matters have controversially introduced the concept of “price gouging” into SA competition law, and while this may assist in the fight against “pandemic profiteering”, a closer analysis of the decision in Dis-Chem raises a number of concerns regarding the assessment required in future excessive pricing cases. In both the Dis-Chem and Babelegi decisions, it was accepted that price gouging is a species of excessive pricing. Price gouging is broadly understood to be an unfair increase in the price of essential goods during a time of crisis that has resulted in supply or demand shocks. Many jurisdictions, particularly in the US, have created “simple tests” to determine

whether price gouging has occurred by comparing the pre-crisis prices with the prevailing prices of a firm, and assessing whether there were any cost increases that justified the price increases. This test was incorporated into the Competition Act, 1998 (as amended) through Consumer Protection Regulations published on March 19 2020 to assist the authorities in establishing cases of excessive pricing. However, the application of this simple test is different in SA insofar as excessive pricing under the act entails an abuse of dominance, thereby introducing an

THE TRIBUNAL ALSO DISMISSED DISCHEM’S RELIANCE ON THE FACT ITS PRICES WERE STILL LOWER THAN THOSE OF ITS COMPETITORS important prerequisite before the simple test can find application: the establishment of dominance within the relevant market. In the Dis-Chem case, the tribunal departed from the traditional approach to establishing dominance as it did not make any attempt to assess competitive factors in that market to determine market power and dominance. Instead, the tribunal

accepted a somewhat circular argument advanced by the Competition Commission based on inferential reasoning, that because Dis-Chem was able to charge what it did (which it would not have been able to do but for the peculiar circumstances of Covid-19), means it had “temporary market power” and was therefore dominant. Essentially, the tribunal found that the existence of an excessive price proved that Dis-Chem had dominance. While Dis-Chem conceded it is correct, in principle, that market power can be inferred from a firm’s economic behaviour, it said this must still be assessed with regard to the competitive factors in the relevant market as required by the act. Notably, the tribunal alluded to the likelihood that in crisis situations more than one store in close proximity to a competitor could enjoy market power vis-à-vis consumers; an unprecedented approach. Having “established” dominance by way of temporary market power, the tribunal then proceeded to determine whether the price was excessive. Section 8(1)(a) of the act prohibits a dominant firm from charging an excessive price to the detriment of consumers or customers. To determine whether a price is excessive, section 8(3) states that regard must be had to whether (i) such price is higher than a competitive

A worker wearing a protective face mask replenishes stocks of sanitising products inside a DisChem store. /Waldo Swiegers/Bloomberg price and (ii) the difference is unreasonable taking into account all relevant factors, some of which are listed in section 8(3). An assessment of excessive pricing therefore requires, first, a determination that a firm is dominant; second, an assessment of what the competitive price is; and third, an assessment of whether the difference between the price charged and the competitive price is reasonable, having regard to the factors set out in section 8(3). It is here that the simple price-gouging test would apply, with the regulations providing that the simple test would be a “relevant and critical factor” in terms of section 8(3), and prima facie indicate excessive pricing. Section 8(2) provides that where a prima facie case of excessive pricing exists, the dominant firm must show that the price was reasonable, thus reversing the onus.

MANY JURISDICTIONS CREATED ‘SIMPLE TESTS’ TO DETERMINE WHETHER PRICE GOUGING HAS OCCURRED

The tribunal noted that though the simple pricegouging test “is supported by ample authority”, the regulations could not be applied directly as they were only promulgated after the complaint period, and nothing in the regulations rebuts the presumption that legislation cannot apply retrospectively. However, because the list of relevant factors provided in section 8(3) is nonexhaustive, the tribunal used this leeway to “import” the simple pricegouging test from the regulations and apply it as one of the relevant factors. The tribunal arguably erred in its approach to the factors in section 8(3) thereafter. The wording of the section is peremptory: all relevant factors must be taken into account in determining whether a price is excessive. While the tribunal was correct in finding that not all the listed factors will be relevant in every case, it did not engage with several factors relied on by Dis-Chem to determine whether they were indeed relevant, but focused only on factors that bear relevance in the simple test for price gouging. In restricting itself to indirectly applying the simple price-gouging test to the exclusion of other potentially relevant factors, the tribunal showed a departure from the

peremptory wording of the act and focused on whether the prices were higher than the comparator prices, namely the prices the firms charged pre-Covid-19, rather than competitive prices, as required by the act. This fundamentally changed the inquiry, as though it is evident that prices increased, it is not clear to what extent competition failed, if any. The tribunal also dismissed Dis-Chem’s reliance on the fact that its prices were still lower than those of its competitors, so there could not be “detriment to consumers” as required by section 8(1)(a). Further, the tribunal did not justify why the other factors Dis-Chem sought to rely on were irrelevant or of insignificant weight. By excluding these, the tribunal ultimately ended up applying the regulations after finding that applying them would contravene the rule of law. Unfortunately, the incorporation and application of price gouging has arguably resulted in some confusion as to how excessive pricing cases will be determined in future. This may be because both Dis-Chem and Babelegi were heard on an urgent basis, when the tribunal could have benefited from more time and argument on these novel points of law.

Fraud, arbitration and spelling out what you intend Michael Gradidge ENSafrica Is a dispute resolution clause in a contract that came about as the result of fraud and misrepresentation regarded as invalid? This is a question the SA Supreme Court of Appeal (SCA) recently considered in Namasthetu Electrical (Pty) Ltd v City of Cape Town and James Robert Garner NO. In this case, Namasthethu had been awarded a contract

to render services to the City of Cape Town through a tender process. However, there were later allegations that Namasthethu had made fraudulent representations during the process. As such, the city sought to cancel the contract, and Namasthethu disputed this.

STICKING POINT

The sticking point was whether the dispute had to be adjudicated by arbitration in accordance with a clause in

the contract, or whether this clause was invalid because the contract was induced by fraud. If invalid, then the dispute would need to proceed in court. Logically, it would seem that if the contract is invalid because it was induced by fraud, then the clause referring any disputes to arbitration would also be invalid and the dispute should proceed to court. However, this presupposes that the allegations of fraud are true. If not, the

contract — and the arbitration clause — would be valid and the dispute should have been referred to arbitration. The court confirmed its previous approach that fraud invalidates the contract as well as the arbitration clause. It restated the general principle that disputes regarding the validity or enforceability of contracts induced by fraud are not generally intended to be arbitrable. However, the court (referring to English authority) held

that in each case, it is a question of interpretation of the arbitration clause to determine if the parties intended that a dispute as to the validity of the contract in the face of fraud should be submitted to arbitration rather than court. If the parties intend this, the language of the arbitration clause would have to be clear and unequivocal. The court found that such a clear provision was not found in the contract in this case and the referral to

arbitration was invalid. As a result, it confirmed the previous decision to set aside the arbitration award.

CLEAR WORDING

It is clear from this case that if parties to a contract want disputes regarding the validity of the contract when fraud is alleged to be referred to arbitration rather than proceed to court, they should expressly provide for this in the contract, in clear and unequivocal wording.

BusinessDay www.businessday.co.za August 2020

BUSINESS LAW & TAX

Distressed M&A: moving fast matters

TWO BECOME ONE

need to consider whether it is better to •buyBuyers an asset inside or outside of business rescue Tony Lee & Justin Balkin

hile a buyer may be able to acquire a good asset at a significantly discounted price through the business rescue process, a buyer would need to consider whether it is better to acquire the asset inside or outside of the business rescue process. A buyer and a seller should both make use of an experienced legal M&A restructuring team to help them navigate this complex aspect of the distressed M&A process.

FAIR AND FLEXIBLE PRICING MECHANISM

A key issue when negotiating an M&A deal is the agreed pricing mechanism and related adjustments. There is almost always a gap in expectations on price and even more so in a distressed M&A scenario. Think how best to use the pricing mechanisms such as the locked box (fixed price plus an interest component), working capital, capex and net debt adjustments and earn-out (upfront payment plus a performance related component) to bridge this valuation gap. Buyers are not willing to

overpay for a distressed asset and will see the distressed sale as an opportunity to acquire the asset cheaply. No one likes the idea of selling cheap, and sellers are going to want to attempt to maximise value. An earn-out mechanism can provide some protection on both sides because the buyer can receive downside protection if the asset acquired does not maintain the same level of performance as before Covid-19, and the seller has a chance to receive a purchase price similar to the one it would have received before Covid-19 if performance improves. A working capital, capex and/or net debt adjustment mechanism post-implementation may also provide some downside and upside protection if there is a negative or positive change to the financial position at closing compared with the financial position when the initial acquisition valuation is done. Both these pricing mecha-

THE TRIGGERING OF THE FAILING FIRM DEFENCE DOES NOT MEAN THAT THE TRANSACTION WILL AUTOMATICALLY RECEIVE APPROVAL

nisms tend to speed up the negotiations because of their inherent upside and downside protections.

AVOID MAKING A MEAL OF A MAC

Just as buyers will want to preserve “walk-away” protections by including a material adverse change (MAC) condition, sellers are going to resist these “free options”. Backward and forward negotiations on a MAC clause are time consuming. A MAC should be used to protect a buyer for a significant deterioration of the target asset between signing a completion. It should be used for this purpose only, and not as an opportunity to walk away because of buyer’s remorse. Less significant deteriorations in the target asset can be catered for in a well-crafted price mechanism.

BE NIMBLE

The buyer should do a targeted due diligence on the main issues and then use warranties and indemnities (W&I) more extensively. W&I insurance cover should be taken out to allocate risk. The premium payable can be factored into the price. Beware that W&I insurance policies will include standard exclusions relating

/123RF — ANDRII DODONOV to the impact of Covid-19 as well as mandatory and/or advisory restrictions issued by government authorities. Buyers will want to shift the exclusion risk to the seller and the seller will need to understand the consequence of taking on this risk as an uninsured warranty.

COMPETITION REGULATORY APPROVAL

If required, the submission of a merger notification to the competition authorities is a joint obligation. A notifiable transaction cannot be implemented until approval has been obtained. This could delay implementation of the transaction as well as receipt of much-needed funds by a distressed seller. The buyer and the seller will need to work together to submit the merger notification as soon as possible. It is useful to engage an experienced competition law team to assist in navigating this complex regulatory requirement. In practice, it is possible to submit the merger notification before the acquisition agreement is signed, provided that the elements of the transaction giving rise to the change of control are clear. For example, the merger notification can be submitted on the basis of a comprehen-

sive signed term sheet. When the acquisition agreement is signed, it can be submitted to the competition authorities as confirmation that the change of control structure has not changed. Merging parties can seek to expedite the investigation process on the basis that a failure to speedily implement the transaction will result in the demise of the target firm (with knock-on impact for competition and the public interest, in the form of job losses). One of the factors that is considered in assessing whether or not a merger transaction is likely to substantially prevent or lessen competition is whether the business or part of the business of a party to the merger has failed or is likely to fail (the “failing firm defence”). The triggering of the failing firm defence does not mean that the transaction will automatically receive approval. Mergers that substantially lessen competition will generally be prohibited. Conversely, when a firm is likely to fail and exit the market, this may actually lead to a less competitive environment relative to the implementation of a merger (where the failing firm is absorbed and sustained by an acquiring firm). A merger between an acquir-

ing firm and a failing firm could thus potentially neutralise or lessen the competitive harm caused by the failing firm’s exit. The Competition Commission, in its recent presentation to parliament, stated that it is improving its procedures to better manage the expected surge in merger notifications from the Covid19 crisis. While the Competition Commission will still investigate the transactions submitted to it, this is a clear indication that the regulator is willing to assist in supporting distressed M&A. The parties to a distressed M&A will need to move quickly and be able to navigate the complexities and challenges in executing the transaction. By leveraging outside expertise (such as M&A legal counsel with M&A restructuring experience) the buyer and the seller can make informed decisions that are likely to result in a successful transaction with fewer setbacks along the way. If your company is on the brink of financial distress and you are considering selling assets or if you are buying assets from a distressed company, it is advisable to get an experienced M&A legal restructuring team on board sooner rather than later.

Traders need to brush up on new border agency Virusha Subban & Prenisha Govender Baker McKenzie Johannesburg Until now, SA’s border management, which includes the tasks of securing the country’s borders and protecting its national interests, has been managed by multiple organs of state. Despite this multiparty involvement, border management has been an ongoing challenge and has resulted in increasing levels of crossborder crime. The trade in illicit cigarettes, for example, is one of the many crossborder crimes SA has had to

deal with in recent years, with such trade increasing during the national lockdown. On July 21, however, the Border Management Authority Act 2 of 2020 came into force. The act recognises the need for integrated and coordinated border management, in alignment with the constitution, as well as international and domestic law. The act seeks to oversee the management of legitimate trade and to secure crossborder travel, prevent illegal cross-border movement and the smuggling and trafficking of humans, protect the

country’s environment and natural resources, and shield the country from harmful and infectious diseases, pests and substances. In particular, the act aims to ensure effective and efficient border law enforcement functions at ports of entries and along the country’s borders. To achieve this, it provides for the establishment of the Border Management Authority, the appointment and employment of border officials, and the establishment of an interministerial consultative committee, border technical committee and advisory committees.

Organs of state such as the SA Revenue Service will now be separate from the Border Management Authority. The act does, however, require the authority to co-operate and co-ordinate its border law enforcement functions with other organs of state,

THE ACT RECOGNISES THE NEED FOR INTEGRATED AND CO-ORDINATED BORDER MANAGEMENT

border communities and/or any other persons. The implementation of the act is expected to result in more efficient border management, which will benefit commercial crossborder traders. However, one of its aims will be to curb the occurrence of cross-border crime, with various obligations and duties imposed on border officials to accomplish this. It is important for crossborder transporters, importers and exporters to familiarise themselves with the act and be mindful of the duties, functions and powers

of border officials and the circumstances in which they may search, seize, arrest and detain goods. With the African Continental Free Trade Area agreement expected to be operational soon, boosting cross-border trade in the process, the implementation of the act and the more efficient management of trade and movement across the country’s borders is to be welcomed. However, only time will tell if the measures introduced in the act will be effective in helping SA win the battle against cross-border crime.

BusinessDay www.businessday.co.za August 2020

BUSINESS LAW & TAX

Threat of the other viruses

Many organisations lack proper •protection against cybercrime,

even as more staff work remotely

Suad Jacobs ENSafrica

s Covid-19 forces more people across the globe to work from home, we are becoming increasingly reliant on technology to live, work and play. However, many organisations are ill-equipped to deal with employees working remotely and the cybersecurity risks that come with it. After SA’s Protection of Personal Information Act, 2013 came into effect on July 1 2020, it has never been more important to ensure the security of organisational data. How can companies protect themselves from cyberattacks? One way is by implementing the global standards set out in ISO Standards 27001, 27005 and 27032. Organisations have a wide array of systems, controls, processes and procedures to safeguard client data and company intellectual property, such as firewalls, regular password changes and multifactor authentication. However, these safeguards can be rendered ineffective if employees compromise them by, for example, accessing websites that are infected with viruses.

Occasionally, and perhaps due to economic pressures experienced by staff (especially now during the pandemic), employees may also find themselves on the other side of the law by intentionally colluding with cyber criminals to manipulate company systems and client data with the promise of financial reward. Companies such as Life Healthcare, Honda, the World Health Organisation, Nedbank, Amazon and Microsoft have all experienced incidents of cyberattacks in 2020. However, the law is not necessarily wellequipped to deal with the problem. For example, SA’s current legislation dealing with cybercrime, primarily the Electronic Communications and Transactions Act, 2002, has not kept up with the dynamic and constantly evolving nature of technology and associated cybercrime. To worsen things, the new Cybercrimes Bill, which will codify numerous existing offences and create a variety of new offences, has still not been passed by parliament. Further complicating matters is that the effective investigation and prosecution of these types of crime is complex, requiring specialist skills, and raises challenging

issues of cross-jurisdictional co-operation among law enforcement agencies. As such, implementing measures to prevent a cyberattack from happening in the first place should be a top priority for companies. The International Organisation for Standardisation (ISO) has issued a number of standards that provide information security risk management and cybersecurity guidelines for organisations. The focus of these standards is to tackle internet security issues and provide technical guidance in addressing common internet security risks.

PROTECT YOUR ASSETS

/123RF — RAWPIXEL

RISK ASSESSMENT

ISO 27032 recommends that an organisation conducts a risk assessment to identify relevant risks. Among the issues that should be considered are: ● Identifying critical assets: It is not cost-effective to protect all assets equally. It is therefore essential that critical assets are identified so that particular care may be taken to protect them. The designation should be made from a business context by considering what the impact

RUNNING APPROPRIATE ANTIVIRUS AND ANTISPYWARE SOFTWARE ON SERVERS IS ALSO RECOMMENDED

on the business would be if the asset were to be lost or degraded. ● Identifying relevant risks: Current risks faced in a business context, as well as additional and evolving risks, threats and attacks that may become relevant when participating in cyberspace, should be considered. ● System or service retirement: Obsolete systems or services should be retired and all security-related information should be invalidated to ensure that interfacing or related systems are not compromised. ● Consistency: The approach to risk management should apply across the entire cyberspace. The cybersecurity controls recommended by ISO 27032 include server protec-

tion controls. These are used to protect servers against unauthorised access and the hosting of malicious content. These controls include server configuration to ensure that there are appropriate access controls on programs and system directories, enabling audit trails on systems and the regularly conductof such audit trails. Running appropriate antivirus and antispyware software on servers is also recommended. End-user controls include using the latest supported software applications with the most updated security patches to ensure that programmes are secure and any known vulnerabilities have been dealt with. Antivirus and antispyware tools should be installed and appropriate

safeguards implemented. Further controls include using phishing filters and enabling personal firewalls and host-based intrusion detection systems. Policies that govern information security risk management should be introduced, on top of basic policies governing the creation, collection, storage and transmission of data, as well as corporate policy statements and penalties relating to the misuse of cyberspace applications. Organisations should include awareness and training as part of their cybersecurity so that they regularly and continually raise their employees’ awareness to cybersecurity threats and how to identify and deal with these threats. Having a robust and organisation-specific cybersecurity plan is vital considering that SA has enacted Protection of Personal Information Act. It obliges organisations to report data breaches and it is therefore essential for an organisation to take steps to manage the risk of a cyberattack and to mitigate against any harm caused. Cyberattacks can have a crippling effect on organisations. Not only can they cause significant damage to reputation, affect business continuity and result in the loss of sensitive and confidential information, but damages may also have to be paid to individuals whose data has been breached.

CONSUMER BILLS

Declare violence against the vulnerable a disaster

he latest political game is to say a lot about violence against women and children as the scourge of SA and to do nothing useful about it. There is something that can be done in a way in which we now have lots of experience. The situation must be declared a disaster under the Disaster Management Act. A disaster, according to the act, includes a progressive human-caused occurrence which causes death or injury and a significant disruption to the life of a community. The definition says a disaster must be of a magnitude that exceeds the ability of those affected by the disaster to cope with its effects using only their own resources. What could better describe the situation in SA? Some women are scared to go out and others are scared to go home. Parents of young

PATRICK BRACHER girls are racked with anxiety about how to bring up their children safely. Those affected clearly cannot cope with this disaster using only their own resources. Huge resources are needed. Once the disaster is declared, the law allows the government to apply its resources to manage the disaster with a special emphasis on prevention. There is a great deal that can be done. Speak to women who have been to a magistrate’s court to get protection orders against abusive men. The women get the protection

order but there is nowhere for them to go. Shelters throughout the country have been closed down, leaving the women to go back to their homes to experience worse abuse. We have seen under the current disaster how factory buildings have been turned into hospitals and havens. There is no reason why the same thing can’t be done to provide shelter for abused women and children. The police, who seem to have endless time to harass innocent people or overzealously pursue minor misdemeanours under the current disaster, can apply their time, energy and commitment to deal with the issue. If we can find the resources for courts and justice department officials to deal with the hundreds of thousands of people who have been charged under the

Covid-19 disaster management regulations, we can presumably find the resources to deal with a scourge that directly affects more than half the population and indirectly affects all of us, disastrously. A major part of the criminal court system must be applied to deal with the disaster. Judicial officers must be properly trained to intervene in cases to prevent the complainant from being revictimised by aggressive lines of questioning. Judicial officers should adopt a more investigative or inquisitorial approach, directing questioning rather than letting the case unfold before them for better or, often, for worse. Cases must be properly investigated and endless postponements have to be avoided. The bench should be occupied by at least as many female judicial officers

as men to give broad perspective to the issues. What we need most of all are regional laboratories that can deal effectively and immediately with DNA testing, with properly trained law enforcement officers to gather, preserve and submit the specimens for testing and as evidence. The greatest advance in criminal law in recent times has been the ability to prove guilt or innocence by DNA tests. The absence of immediate testing in this country is a disaster in itself. This commitment alone would make a difference to the number of convictions.

JUDICIAL OFFICERS SHOULD ADOPT A MORE INVESTIGATIVE OR INQUISITORIAL APPROACH

Wouldn’t it be encouraging if we were to witness our president going on television once a month to tell us about the latest actual and financial commitment to dealing with the abuse of women and children? If anything needs a national command council it is this problem. Those on the council can then be tested against their plans and their solutions. Perhaps we can have daily headlines about the number of events reported and the number that have led to a conviction with the same prominence we are now have with the pandemic. We have the legislation, we have the experience and we have the problem. It’s time to deal with this disaster for what it is. ● Patrick Bracher (@PBracher1) is a director at Norton Rose Fulbright.

BusinessDay www.businessday.co.za August 2020

BUSINESS LAW & TAX

When sure contracts can’t be trumped

PAPER TRAIL

Good faith, fairness and reasonableness do not •provide a freestanding basis for courts to intervene Dale Hutchinson, Michael Katz & Julius Oosthuizen ENSafrica

he power of a court to strike down or refuse to enforce a contract it considers to be unfair, unduly harsh or unreasonable, has been a controversial one in SA law for some time. It has long been accepted that a court may do so when the contract or its enforcement is contrary to public policy. However, this has traditionally been in respect of harm to the general public rather than individual contracting parties, and courts will only exercise such powers in the clearest of cases. This approach traditionally emphasised the fundamental notion of sanctity of contract — that contracts freely entered into should be enforced. However, this raised questions about the role of good faith (which embraces notions of fairness, justice and reasonableness) in SA law of contract and, particularly, the defence of bad faith (exceptio doli), that many thought to still be available when a party sought to enforce a contractual right in unconscionable and inequitable circumstances. In 1988, the then Appellate Division found the exceptio doli to be an anachronism that had never formed part of SA modern law. Subsequent judicial attempts to treat good faith as an informing principle of contract law were stymied by a Supreme Court of Appeal (SCA) judgment in 2002. This judgment held that good faith — an abstract value that underlies the law of contract — finds expression in the various rules and doctrines of contract law, and shapes and controls its development, but does not give a court the discretion to strike down or refuse to enforce an otherwise valid contract term. The question arose as to whether this conservative approach was consistent with the spirit and values of the constitution and, particularly, the values of ubuntu. The first opportunity for the Constitutional Court to pronounce on the issue came

in the 2008 Barkhuizen case, over a challenge to a timelimitation clause in a shortterm insurance contract. A majority ruled that the constitution applies indirectly to contract through common law, and the vehicle for introducing greater equity into the law of contract was public policy rather than good faith. In addition, such public policy is rooted in the values of the constitution and imports the notions of fairness, justice and reasonableness, which are reflected in the values of ubuntu and must be weighed against the “profoundly moral principle” of sanctity of contract when deciding on its enforcement. A two-stage test was adopted. First, a clause in a contract, which appears so unreasonable as to be contrary to public policy, will be struck down. Second, if the clause survives that test and is accordingly valid, a court might still refuse to enforce it,

THE VALUES EMBRACED BY UBUNTU CAN PLAY A VITAL ROLE IN DEVELOPING THE COMMON LAW OF CONTRACT if itwould be contrary to public policy in the particular circumstances of the case. The Constitutional Court again emphasised the need to infuse contract law with the values of ubuntu, fairness and reasonableness in subsequent cases. In the 2014 Botha v Rich, it refused to allow cancellation of a contract for the purchase of immovable property on instalments, when the purchaser had paid nearly 80% of the purchase price and then defaulted on payment, holding that to allow cancellation would be a disproportionate sanction for the breach. Meanwhile, the SCA was steadfast in its view that, until the Constitutional Court ruled otherwise, a court could not refuse to enforce an otherwise valid contract term merely on the ground that, in its subjective opinion, to do so

would be unfair. It kept stating that values such as fairness, justice and reasonableness are not self-standing requirements for the validity or enforcement of contracts, and that to hold otherwise would introduce an undesirable level of uncertainty into contractual relations. This divergence between the SCA and the Constitutional Court caused confusion in courts. An unequivocal judgment of the Constitutional Court on the issue was sorely needed, and presented itself recently in the case of Beadica CC v Trustees for the time being of the Oregon Trust. In this case, the National Empowerment Fund had entered into an agreement with a franchisor, Sale’s Hire CC, to fund the acquisition of franchise businesses by former long-time senior employees of Sale’s Hire CC, as a broad-based black economic empowerment (BBBEE) initiative. The employees established close corporations which concluded 10-year franchise agreements with Sale’s Hire CC, as well as lease agreements with the Oregon Trust, of which Mr Sale (the sole member of Sale’s Hire CC) was a trustee. The leases were for five years, with a renewal option for a further five years which (as is usual), had to be exercised in writing no later than six months before the expiry of the first lease. The lessees failed to exercise their renewal rights timeously and were given notice to vacate the premises shortly before the expiry of their leases. They then brought an urgent application before the Western Cape High Court for an order that the renewal options had been validly exercised, and prohibiting the trust from evicting them. Relying on Botha v Rich, Davis J granted the order, holding that termination of the leases would result in the collapse of the applicants’ businesses and the failure of the BB-BEE initiative — a disproportionate sanction for the failure of the lessees to comply with the strict terms of the renewal clauses. The decision was overturned by the SCA, which denied that SA law recognised such a princi-

/123RF — ZIMMYTWS ple of disproportionality, and held that no considerations of public policy made the renewal clauses unenforceable. The Constitutional Court granted leave to appeal but, seven to three, ruled against the lessees. The majority judgment, delivered by Theron J, addresses the issue of the proper constitutional approach to the enforcement of contracts, specifically the public policy grounds on which a court may refuse to enforce a contract term and the role of ubuntu. This approach delivers a much greater degree of harmony and certainty in the law of contract, by effecting a reconciliation of the seemingly divergent approaches of the SCA and the Constitutional Court. The majority does so by essentially endorsing the approach of the SCA, but with certain qualifications, and by limiting the effect of the decision in Botha v Rich. The key principles to emerge from the judgment are the following:

LIKE ALL LAW, CONTRACT LAW IS SUBJECT TO THE CONSTITUTION AND MUST CONFORM WITH ITS RIGHTS AND VALUES ● The freedom of contracting parties to regulate their own affairs, even to their detriment, is founded on the constitutional values of freedom and dignity; and the associated principle of sanctity of contract is the bedrock of economic activity and vital for economic development. The rule of law requires that the law be clear and ascertainable, so that parties can regulate conduct accordingly, with confidence that the application of the legal rules

will produce reasonably predictable outcomes. ● Like all law, contract law is subject to the constitution and must conform with its rights and values. ● The constitution applies indirectly to contract through the common law requirement that a contract must be in accordance with public policy, which today is rooted in the constitution and the values it espouses. As stated in Barkhuizen, a contract term contrary to public policy will be declared invalid. Even if the term is valid, the court may refuse to enforce it. ● A careful balancing act is required: the principle that contracts freely entered into must be honoured is not the only, nor even the most important, principle informing the judicial control of contracts; it cannot be privileged over other constitutional rights and values. Ubuntu, which encompasses the values of fairness, reasonableness and justice, is now recognised as constitutional value, and in the scales of public policy, may outweigh sanctity of contract. ● However, abstract values such as good faith, fairness and reasonableness do not provide a freestanding basis upon which a court may intervene in contractual relationships. A court may not refuse to enforce a contract term simply on the basis that enforcement would, in its subjective view, be unfair, unreasonable or unduly harsh. It is only where a contract term, or its enforcement, is so unfair, unreasonable or unjust that it is contrary to public policy, that a court may refuse to enforce it. ● Botha v Rich was concerned with a particular statutory regime — the protection of persons who buy land under instalment sale contracts, governed by the Alienation of Land Act, 1981, and

did not introduce a generally applicable test of disproportionality as ground for not enforcing a contract. ● The power of the court to refuse to enforce a contract on public policy grounds should be exercised only in worthy cases, but that it should be done with “perceptive restraint” should not lead courts to shrink from their constitutional duty to infuse public policy with constitutional values. The idea that public policy is concerned only with harm to the general public, rather than to individual parties, is alien to SA law of contract. ● The party who attacks the contract or its enforcement on public policy grounds bears the onus of establishing the facts. Where the party has failed to comply with a valid contract term, it must provide an adequate explanation. ● Courts are bound by section 39(2) of the constitution to promote the spirit, purport and objects of the Bill of Rights when developing the common law. The values embraced by ubuntu can play a vital role in developing the common law of contract to ensure its harmonisation with the requirements of the constitution but the courts must exercise resourcefulness and restraint in so developing the common law. Prudent and disciplined reasoning is required to ensure certainty of the law. In the circumstances of the case, and in dismissing their appeal, the Constitutional Court in particular emphasised that the applicants had not provided an adequate explanation for noncompliance with the provisions of their leases. It will therefore be watched with interest how the courts apply the above principles in circumstances where an applicant has given reasons for noncompliance.

BusinessDay www.businessday.co.za August 2020

BUSINESS LAW & TAX

Digital economy: where do we draw tax lines?

DOZENS OF DEVICES

African businesses and regulators need •toSouth be part of the debate for a new tax era Michael Hewson Graphene Economics

s the world continues to evolve to be more centred around digital services, everything — from the way we purchase and consume media, to the way we bank — is affected. But as the way we buy and sell changes, the implications are deeper than just developing secure payment gateways. In fact, the entire way that tax works will also need to shift. Questions of how taxation should change in the digital era are under way globally and are being led by the Organisation for Economic Co-operation and Development (OECD). It’s not just tax revenue authorities that are looking at this issue — given that 60%-70% of transactions worldwide occur within multinational entities, these companies are also taking an active part in the dialogue. Ultimately, taxation affects almost everyone, so although it’s maybe not an exciting subject to many people, it is an important one. There’s no real consensus at the

moment about digital taxation. SA businesses and regulators need to be part of the debate to position the country as best as possible for a new tax era.

COMPLEXITIES OF DIGITAL SERVICES

Traditional tax models generally fall into one of two categories: residence tax and source taxation. Residence tax is based on the idea that people and companies should contribute towards the public services provided for them by the country where they live, no matter where their income originates. Source taxation, on the other hand, is based on the idea that the country where the income is generated is providing that opportunity and therefore should be able to levy tax. However, it’s difficult to

TRANSFER PRICING OPERATES ON THE BASIS THAT PROFITS SHOULD BE TAXED IN THE COUNTRIES WHERE VALUE HAS BEEN CREATED

use either of these models in relation to digital services because consumers in one country might access a product or service without the supplier of that product or service physically being present in the country. Think about music. Previously, you would go to a music shop and buy a CD. Now, you probably subscribe to a streaming service. In the case of purchasing a physical CD, you were paying VAT, but now you’re not paying any tax in SA although you are still purchasing and consuming the product in SA. This is why some regulators are trying to clamp down on taxing digital services. For example, SA’s regulation on VAT on electronic services, which took effect on April 1 2019, widens the definition of what is considered an “electronic service”. “Electronic services” are now defined as “any services supplied by means of an electronic agent, electronic communication or the internet for any consideration”. This means that foreign suppliers of electronic services to SA recipients will be required to register as VAT vendors if they meet certain

/123RF — SCANRAIL requirements. The effect is potentially a higher administrative burden on qualifying companies, which might be passed on to the consumer through price increases on such services. Protectionist measures are under consideration in various African countries, but they can backfire. While they might make sense in the short term because most African countries currently “import” more digital services than they “export”, these sorts of policies can discourage the growth of services economies or foreign direct investment. Revenue and other authorities need to be proactive in engaging on this issue and look at issues such as how to identify digital transactions, determine their value and tax them, while encouraging growth of the local digital economy. Transfer pricing (TP) is another area affected by evolving tax regulation. TP involves the prices charged, or profits earned, by members of large multinational

enterprises for goods and services exchanged between the entities that make up the company. For example, a technology company based in China might manufacture components in different countries, and distribute its products through local subsidiaries globally. These companies might drive sales through their own marketing initiatives or by developing sales channels. TP principles dictate how transactions between these companies within the group are accounted for, and how profit is distributed, depending on the value created by each entity. TP generally operates on the basis that profits should be taxed in the countries where value has been created. The trouble with digital services is that it can be difficult to apportion value. For example, if you’re using a music streaming service, where is the value created? Is it in the country where the service is based, the country where it runs the bulk of its operations or the

countries where the music is being listened to? These are the types of issues that are being looked at by the OECD, which has presented a work plan for further work on the digital economy to the G20 finance ministers. The final consensus set of outcomes is expected to be finalised by the end of 2020 and because SA is a member of the G20 and an observer of the OECD, it’s likely the country will consider the final proposals made by the OECD in shaping its tax policies. While it will impact on business, they should not lose sight of the silver linings. Digitalisation can help SA businesses enter into new markets and achieve higher levels of growth and development than previously available. The important thing is to find ways of using digitalisation to work better and smarter. As value chains evolve, companies need to reassess the way they operate to remain competitive in the digital environment.

Judgment on restaurants must be reviewed Brian Patterson & Nomampondo Banzi ENSafrica It is an unfortunate reality that many businesses have struggled to survive during the Covid-19 lockdown. This is the position four restaurants in SA found themselves in after they were prohibited from operating during a level 5 lockdown. They subsequently applied to the high court for business rescue. A key question that arose was whether the restaurants were obligated to pay their employees during the lockdown. One of the considerations in being granted business rescue is whether a company has failed to pay any amount in terms of an obligation

related to a public regulation or contract, with respect to employment related matters. While the court found that the requirements to be put under business rescue were met, the court considered whether it was impossible for the restaurants to have complied with their obligations to pay their employees’ salaries during lockdown. It pointed out that the requirements for the doctrine of supervening impossibility (that is, to terminate or suspend a contract) are stringent and that, if there is a proper tender of services by an employee, an employer would generally be under an obligation to their pay salary. Controversially, the court seemed to accept that the level 5 lockdown regulations

made it clear that employers were not excused from their obligation to pay their employees’ salaries. This was because the regulations contained a list of essential services that were permitted to operate. This included the “implementation of payroll systems to the extent that such arrangement has not been made for the lockdown, to ensure timeous payments to workers”. How-

A KEY QUESTION WAS WHETHER THE RESTAURANTS WERE OBLIGATED TO PAY THEIR EMPLOYEES DURING THE LOCKDOWN

ever, this interpretation of the regulations is incorrect. The regulations authorised employees who worked with payroll systems to work to make it possible to pay other employees who were permitted to work. It did not permit employees of restaurants to work. As such, the regulations rendered it unlawful for the restaurant employees to tender their services due to statutorily imposed supervening impossibility and this excused the restaurants from the legal obligation to pay salaries. So, though there was no legal impediment on the restaurants to pay salaries, it is our contention that the duty to pay salaries did not arise because any tender of service

by the restaurant employees would have been unlawful in terms of the regulations. The court correctly records the “no work, no pay” principle which means the duty to pay salaries arises upon a tender of services by employees. An allegation to that effect was never made by the restaurants and the basis on which the court found that employees did tender their services is unclear. The court also argued that the restaurants could have opened for the sale of cold foods once this was permitted by the regulations. With respect, the court is not best placed to make such a business decision. While the applicants produced evidence to support that contention, courts are not

empowered to usurp business decisions of employers. The restaurants had taken a decision to not operate during the national lockdown and to rather assess their financial position and commence business once the lockdown had ended. Arguably, the restaurants could have been opened for deliveries only in May and collections and deliveries in June, in which case employees could have tendered their services and a duty to pay salaries would then arise. However, if the duty to pay salaries arose, that would only be in respect of May and June, not April as the court held. As such, it is our view that this judgment should be reconsidered and overturned on appeal.

BusinessDay www.businessday.co.za August 2020

BUSINESS LAW & TAX DUES DATE

Diageo case uncorks single-supply VAT issues

FERDIE SCHNEIDER comprising promotional giveaways and samples that were consumed in SA and assessed Diageo for VAT of about R15m. The Tax Court found the promotional goods to be a cognisable supply of goods capable of notional separation from the total A&P services supplied subject to the standard rate and upheld the Sars commissioner’s assessments. Diageo rendered these services for a fee, based on the costs and expenditure

THE COURT DISAGREED WITH DIAGEO’S CRITICISM THAT THE DEEMING RESULTED IN AN ARTIFICIAL … AND COMMERCIALLY UNREAL OUTCOME incurred. The advertising and marketing activities included advertising from various channels, brand-building promotions, events, sponsorships and market research. Diageo also used two categories of goods. First, alcoholic beverages of the brand owners taken from trading stock and used for sampling or tasting. Second, items such as branded glasses and T-shirts given to third parties, for no consideration. Diageo also provided aprons and caps to employees at no cost.

The promotional giveaways and samples, items used and the quantities and manner of use and distribution were undertaken as part of an integrated marketing campaign to build and maintain the brand. Diageo’s tax invoices to the brand owners reflected a total fee for services and did not differentiate between goods and services. The court held that the legal requirements to invoke the deeming provision are, first, a “single supply” of two or more types of goods or services or a combination of goods and services. Second, one consideration must be payable for the single supply. Finally, if the supply of the goods and/or services had been charged for separately, part of the supply would have been standard rated and part zero rated. The single supply made by Diageo to the brand owners consisted of goods and services, distinctly and clearly identifiable from each other. One consideration was payable to Diageo for that single supply. The court found that the supply of the A&P services to the foreign brand owners comprised a single supply of goods and services for which a single consideration was payable and, if it had been supplied separately, would have attracted a different VAT rate. The court disagreed with Diageo’s criticism that the deeming resulted in an artificial, insensible and commercially unreal outcome. The court found the meaning of the deeming provision to be clear and its purpose to ensure that Diageo and VAT vendors in similar positions fulfil their obligation to pay VAT at the

TO THE LETTER

/123RF — TASHATUVANGO standard rate on goods supplied. The court found Diageo liable for the VAT output tax adjustments in respect of advertising and promotional costs incurred by Diageo constituting goods not exported but consumed in SA. The court dismissed the appeal with costs. The findings in the Diageo case are interesting for a number of reasons. Section 8(15) of the VAT Act has never, or at least not often, been considered at this level, and though not particularly difficult to interpret, leaves room for interpretation. What makes the deeming provisions a bit more difficult to interpret is that they deal with fictitious scenarios, necessary to act as “gapstoppers” or in certain instances to address antiavoidance. It also makes it clear that the courts will not necessarily rely on foreign court findings unless the context and purpose of the foreign legislation are closely aligned. The court also referred to the VAT system’s objective to

tax private domestic consumption, which is not a concept enshrined in the VAT Act. The act also does not contain explicit place-ofsupply rules. VAT place-ofsupply or interjurisdictional rules aim to determine where a supply takes place, which could impact where a person should register for VAT purposes or the rate of the supply. The place of supply needs to be inferred from various sections in the act. Section 8(15) can be seen as one such “inferred” placeof-supply rule. Finally, though the Diageo case deals with the alcoholic beverage industry, it is clear the deeming of a single supply for a single

WHAT MAKES THE DEEMING PROVISIONS A BIT MORE DIFFICULT TO INTERPRET IS THAT THEY DEAL WITH FICTITIOUS SCENARIOS

consideration into more than one supply with different tax rates can have far-reaching consequences for various industries. SA companies that supply marketing services to foreigners of which goods are supplied for no charge and form part of a zero-rated supply of services may need to rethink their VAT positions. Certain commentators warn that this case may be applied to zero-rated foodstuffs, which could split the actual zero-rated item from its packaging, transport and other cost. While the item will remain zero rated, other components capable of being carved out could potentially be subject to the standard rate. Though this is a possible consequence, the application thereof may not be aligned with the intention of the legislator, could lead to absurdities and will have a substantial associated compliance cost. ● Ferdie Schneider is CEO of Sta Konsult.

OGILVY SA 8293/E

he Supreme Court of Appeal delivered its findings in Diageo South Africa (Pty) Ltd v Commissioner for the South African Revenue Service on April 3 2020. The court had to consider whether a single supply of goods and services to nonresident entities is considered a single supply or deemed to be separate supplies of the constituting parts in terms of the ValueAdded Tax Act, 1991 (the VAT Act), which could give rise to a standard and zero-rate component. Services supplied to a nonresident who is outside SA when the services are rendered can be zero rated, with certain exceptions. Section 8(15) deems each part of a single supply to be a separate supply if that “supply of goods or services or of goods and services would, if separate considerations had been payable, (would) have been charged with tax in part at the rate applicable under section 7(1)(a) and in part at the rate applicable under section 11”. Diageo is an SA VAT vendor that imports, manufactures and distributes alcoholic beverages. Diageo entered into agreements to make single supplies of advertising and promotional goods and services (A&P services) to various nonresident entities (brand owners) to advertise and promote their alcoholic products in SA. Diageo supplied A&P services at the zero rate. The commissioner for the SA Revenue Service (Sars) deemed Diageo to make separate zero-rated supplies of services and standardrated supplies of goods

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