S.Africa: Expat Tax – Supreme Court of Appeal hands SARS big win over BMW and their Big 4 advisors

13 September 2019 Jean Du Toit, Senior Attorney at Tax Consulting SA

The Supreme Court of Appeal (SCA) delivered a judgment on 6 September 2019 that handed SARSThe South African Revenue Service (SARS) is the official tax authority responsible for the administration and enforcement of tax laws in South Africa. It plays a crucial role in managing the country’s fiscal policy by collecting revenue, administering customs, and ensuring compliance with tax legislation. Established under the South African Revenue Service Act, No. 34 of 1997, SARS functions independently... one of their most influential wins in recent times.

The SARSThe South African Revenue Service (SARS) is the official tax authority responsible for the administration and enforcement of tax laws in South Africa. It plays a crucial role in managing the country’s fiscal policy by collecting revenue, administering customs, and ensuring compliance with tax legislation. Established under the South African Revenue Service Act, No. 34 of 1997, SARS functions independently... Commissioner did not pull any punches and took BMW South Africa to task on tax services performed for their expatriates by their top tier advisors KPMG and PWC.

Ironically, this case centred around whether the tax services performed by the appointed advisors, to ensure tax complianceTax Compliance refers to the adherence of individuals and businesses to the tax laws and regulations of a specific jurisdiction. It encompasses the timely and accurate filing of tax returns, the payment of tax liabilities, and ensuring that all tax-related obligations are met as stipulated by legislation. Compliance involves more than just submitting tax forms; it includes maintaining accurate financial..., constituted, in itself, a taxable fringe benefit.

In a unanimous decision handed down in BMW South Africa (Pty) Ltd v SARSThe South African Revenue Service (SARS) is the official tax authority responsible for the administration and enforcement of tax laws in South Africa. It plays a crucial role in managing the country’s fiscal policy by collecting revenue, administering customs, and ensuring compliance with tax legislation. Established under the South African Revenue Service Act, No. 34 of 1997, SARS functions independently... (Case No: 1156/2018) the SCA had the final say and confirmed the tax assessmentA tax assessment is a formal determination made by a tax authority to calculate the amount of tax an individual or entity owes. It is a comprehensive evaluation based on financial records, declared income, expenses, deductions, and any applicable tax laws or regulations. Tax assessments may arise from routine self-assessments by taxpayers, or they may be conducted by revenue authorities... raised by SARSThe South African Revenue Service (SARS) is the official tax authority responsible for the administration and enforcement of tax laws in South Africa. It plays a crucial role in managing the country’s fiscal policy by collecting revenue, administering customs, and ensuring compliance with tax legislation. Established under the South African Revenue Service Act, No. 34 of 1997, SARS functions independently.... The costs of motion were also awarded to SARSThe South African Revenue Service (SARS) is the official tax authority responsible for the administration and enforcement of tax laws in South Africa. It plays a crucial role in managing the country’s fiscal policy by collecting revenue, administering customs, and ensuring compliance with tax legislation. Established under the South African Revenue Service Act, No. 34 of 1997, SARS functions independently... and it would be interesting to know whether BMW will be picking up the tab or if the advisors will have to make a call to their indemnity insurance.

The Facts
The BMW Group procured the services of the tax advisorsA Tax Advisor is a professional who provides specialised advice to individuals, businesses, and organisations on various tax-related matters. They play a crucial role in guiding clients through complex tax laws and ensuring compliance with the latest regulations while identifying opportunities for tax efficiency. Tax Advisors must stay updated on legislative changes and understand the impact of international tax treaties,... to assist expatriates with their domestic tax obligations, specifically to assist with their tax returns and to deal with queries and objections.

In SARS’ view the payments to the tax advisors constituted a taxable fringe benefit, as contemplated by paragraph (i) of the definition of gross incomeGross Income is a comprehensive term used to define the total income received by an individual or entity before any deductions, exemptions, or allowances. The concept is central to the calculation of taxable income across different tax jurisdictions. It encompasses a broad range of income sources, such as wages, salaries, business income, dividends, interest, rental income, and other forms of... in the ITA, read with paragraphs 2(e) or (h) of the Seventh Schedule thereto.

In its notice of objection, the taxpayer contended that the services were for the benefit of the taxpayer and not its employees, as they had no choice in the matter.

The basis for this argument was that the services were procured to protect the taxpayer to ensure that South African taxes are not overstated or understated. In fact, it was put forth that the largest component of the fee is directed towards providing assurance to the taxpayer regarding its responsibilities in relation to the tax due. SARS disagreed with this assertion and the matter went all the way to the SCA.

Implications for South African Employers of Expatriates
The tax position is now confirmed that tax services for expatriate employees is a taxable fringe benefit in itself. This means that any employer who had or has expatriate employees, especially those who were under similar engagement terms with the mentioned Big 4 providers, may have a tax exposure.

The only legally created mechanism to address such a tax exposure is following the Voluntary Disclosure Programme.

It is no secret that SARSThe South African Revenue Service (SARS) is the official tax authority responsible for the administration and enforcement of tax laws in South Africa. It plays a crucial role in managing the country’s fiscal policy by collecting revenue, administering customs, and ensuring compliance with tax legislation. Established under the South African Revenue Service Act, No. 34 of 1997, SARS functions independently... is behind on its targets and they would probably make full use of this landmark win to increase tax revenueTax Revenue is the income collected by governments through various taxes imposed on individuals, corporations, and transactions. It is a primary source of funding for public expenditures, including infrastructure, healthcare, education, and social services. Tax revenue can come from different types of taxes, such as income tax, corporate tax, value-added tax (VAT), excise duties, and customs tariffs. The level and... collection. Taxpayers would be well advised to come clean voluntarily before they are audited on this item.

Do all expatriate employers have a tax exposure?
To understand the decision, the Tax Court and High Court judgments must be studied in light of the engagement terms for the tax services. It may be noted that the objection strategy followed by BMW, presumably using the approach recommended by their advisors, comes across as most peculiar.

The whole angle of defence was framed on the premise that the tax services are taxable only if their use is wholly private or domestic.

Taxpayers are limited to the grounds stated in their notice of objection and a weak technical position was quickly snuffed out by SARSThe South African Revenue Service (SARS) is the official tax authority responsible for the administration and enforcement of tax laws in South Africa. It plays a crucial role in managing the country’s fiscal policy by collecting revenue, administering customs, and ensuring compliance with tax legislation. Established under the South African Revenue Service Act, No. 34 of 1997, SARS functions independently... and BMW were given three losses in a row in the Tax Court, the High Court and now the SCA.

Unfortunately, this precedent has now been created and expatriate employers will have to distinguish their facts from this decision to determine if they have an exposure.

What does this mean for the “expat tax”
One of the biggest criticisms of the expatriate tax, effective 01 March 2020, is that there is not adequate tax relief given for fringe benefits. This means the R1m exemption will be quickly eaten-up by housing, vehicles, security, home leave, school fees, insurances etc.

Now tax services can be added to this list.

Hopefully SARS’ persistence in taking on some of the big names and seeing the matter through to the SCA will put an end to the naysayers thinking that SARSThe South African Revenue Service (SARS) is the official tax authority responsible for the administration and enforcement of tax laws in South Africa. It plays a crucial role in managing the country’s fiscal policy by collecting revenue, administering customs, and ensuring compliance with tax legislation. Established under the South African Revenue Service Act, No. 34 of 1997, SARS functions independently... will not enforce the fringe benefit sections when it comes to expatriates. The fiscus is simply too farFunctional analysis is the cornerstone of transfer pricing and international tax compliance, ensuring that intercompany transactions adhere to the arm’s length principle. It evaluates the roles, contributions, and risk profiles of entities within a multinational enterprise (MNE) to determine how profits and costs should be allocated. This process ensures that related-party transactions reflect the pricing that independent enterprises would establish... behind on tax collection to not utilise every legal avenue and Big 4 rates make an attractive target to tax.

Final analysis
On the facts before the court, the decision by the SCA cannot be criticised. Whether the tax advisorsA Tax Advisor is a professional who provides specialised advice to individuals, businesses, and organisations on various tax-related matters. They play a crucial role in guiding clients through complex tax laws and ensuring compliance with the latest regulations while identifying opportunities for tax efficiency. Tax Advisors must stay updated on legislative changes and understand the impact of international tax treaties,... are at fault is perhaps a different question, but it is hard to ignore what seems to have been an ironic oversight on their part.

This is an unfortunate decision for employers of expatriates.

It was conceded by all involved, including the SCA, that understanding the tax regime, especially insofar as it applies to expatriate employees, is no cake walk (evidently not even for professionals). For this reason, these employers prudently incur costs to ensure SARSThe South African Revenue Service (SARS) is the official tax authority responsible for the administration and enforcement of tax laws in South Africa. It plays a crucial role in managing the country’s fiscal policy by collecting revenue, administering customs, and ensuring compliance with tax legislation. Established under the South African Revenue Service Act, No. 34 of 1997, SARS functions independently... gets paid its dues and the fact that these costs invite additional taxes is perhaps a bit harsh.

In a climate where expatriates are under increasing scrutiny by revenue authorities across the globe, including SARSThe South African Revenue Service (SARS) is the official tax authority responsible for the administration and enforcement of tax laws in South Africa. It plays a crucial role in managing the country’s fiscal policy by collecting revenue, administering customs, and ensuring compliance with tax legislation. Established under the South African Revenue Service Act, No. 34 of 1997, SARS functions independently..., this is another blow to the taxpayer. In the South African landscape, this judgment will compound the adverse effects of the “expat tax”, due to take effect on 1 March 2020.