In a 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... reaching judgment the Supreme Court of Appeal (SCA) held on 01 October 2014 that Mark Shuttleworth could have repatriated his funds out of South Africa without the imposition of a 10{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} exit levy that was imposed by the South African Reserve Bank (SARB) at that stage. In particular, it was indicated that the SARB had to repay such levy together with interest at the prescribed rate from 13 April 2012 to the date of payment.

The application that Mark Shuttleworth brought against the SARB pursuant to the exit levy that he had to pay on the repatriation of his funds outside South Africa has been the subject matter of much debate. The initial application (which was unsuccessful on the remission of the 10{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} levy) was worded quite widely and also sought that a number of the provisions of the Exchange Control Regulations (Regulations) had to be declared unconstitutional. He also criticised the so called ‘closed door’ policy of the SARB on the basis that applications had to be submitted through means of authorised dealer banks. Ultimately Shuttleworth emigrated from South Africa in order to free up his funds to invest outside South Africa on the basis that the exchange control system in South Africa was “severely restrictive and rendered investments outside” the South African borders prohibitive.

In the SCA the argument was confined to the appropriateness of the exit levy on the basis that the other relief sought by Shuttleworth did not impact upon his position directly. The argument of Shuttleworth was essentially that:

• the exit levy was levied on a generalised basis and no discretion was exercised in the deciding whether or not the exit levy should be applied; and

The SARB, in turn, contended that the levy was intended to constitute a disincentive to exit large amounts of capital and that it thus assisted to maintain the financial stability of the South African economy. For this the SARB relied upon regulation 10(1)(c) of the Regulations which provides that:

“No person shall, except with permission granted by the Treasury and in accordance with such conditions as Treasury may impose enter into any transaction whereby capital or any right to capital is directly or indirectly exported from [South Africa]”.

It was accepted that the regulation serves a legitimate purpose and that the external balance of payments must be a continuing concern for National Treasury. However, the issue was whether such regulation could be used as a revenue raising mechanism and not whether there was merit in such prohibition.

Given the fact that the relevant procedure to raise the levy was not adopted in circumstances where the exit levy was held to constitute ‘taxation’, it was indicated by the SCA that one cannot levy taxation without representation and that the executive branch of Government should not be entitled to raise revenue. Rather, it should be dependent on the taxing power of Parliament which is the vehicle that is accountable to South Africa’s taxpaying citizenry.

Reference was also made to the Constitution and specifically that a specific procedure must be adopted to the extent that so called ‘money bills’ are adopted. For instance a money bill cannot be introduced in the National Council of Provinces. The principle was thus confirmed that taxes cannot be levied by delegated legislation which is not specifically authorised in a money bill.

It was specifically indicated that the exit levy raised revenue for the Government in circumstances where the exit levy was paid into the National Revenue Fund (it appears that approximately R2,9 billion was paid in the form of exit levies during the time concerned).

Having held that the exit levy was unlawfully imposed, the SCA indicated that it would be inequitable for National Treasury to retain an amount “what it had no right to claim”. Even though the exit levy was paid by Shuttleworth, it was paid under protest with a view to repatriate the monies concerned. There was no other mechanism available to Shuttleworth at the time. The payment under protest was thus involuntary and he was thus entitled to a repayment of the levy together with interest.

The SCA was at pains to emphasise that matters will not be heard in the abstract and without proper consideration for its effect on the exchange control regime and the South African economy as a whole. In other words, the relief that was sought by Shuttleworth in respect of the remaining exchange control provisions were not considered in circumstances where Shuttleworth acknowledged that he was acting in the public interest. Given the fact that a consideration of these other issues would have had no practical effect, the SCA refused to consider same. In particular, the SCA specifically did not consider the validity of the so called closed door policy of the SARB in circumstances where it has limited resources and that it cannot deal with a potential flood of applications.

The principle that taxes cannot be levied without having adopted the appropriate procedures, is not only limited to the exit levy that was imposed by the SARB. It goes further and extends to a number of other areas where amounts or levies were applied in terms of delegated legislation or authorities other than Parliament. One such example in an income taxIncome Tax is a direct levy imposed by governments on the income generated by individuals, corporations, and other entities within a specific jurisdiction. It serves as a major source of revenue for governments and funds various public expenditures, such as infrastructure projects, healthcare, education, national security, and welfare programs. The tax is generally calculated as a percentage of the taxable... context related to the way in which transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... provisions could have been applied by the Commissioner for the South African Revenue Service (Commissioner). In particular, these provisions provided that the Commissioner could adjust consideration so as to reflect an arm’s length price for goods and services which effectively amounted to the imposition of a tax without the correct process having been adopted.