South Africa’s courts hand down judgment on Sasol and substance over form
International Tax Review is part of the Delinian Group, Delinian Limited, 4 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 00954730
Copyright © Delinian Limited and its affiliated companies 2024

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

South Africa’s courts hand down judgment on Sasol and substance over form

Sponsored by

sponsored-firms-ww.png
AdobeStock_88925886_ZA case 630  x570

South Africa's Supreme Court of Appeal (SCA) handed down an important judgment on the doctrine of simulation, or substance over form, on November 9 2018, putting to rest some significant confusion created by an earlier judgment of the Gauteng Tax Court.

The case concerned the purchase of crude oil by an Isle of Man company in the Sasol Group (SOIL), which in turn sold the oil to a UK intermediary (SISL), which in turn sold it to Sasol Oil in South Africa. All three companies were members of the Sasol group of companies. The South African Revenue Service (SARS) had challenged this supply chain, contending that the interposition of SISL was an artificial and unnecessary step designed to avoid certain South African controlled foreign company tax liabilities that would have arisen had SOIL sold the oil directly to Sasol Oil.

The Tax Court agreed with SARS that the back-to-back sales agreements involving SISL were simulated transactions, arguing that even if the agreements supporting the Sasol Group were genuine, the transactions were tax motivated and served no commercial purpose.

This is in conflict with well-established law: the key test for a simulated transaction is the intention of the parties, and whether there is a real intention that differs from the simulated intention. If, after detailed inquiry, it appears that the parties' real intention accords with the tenor of the agreements, the agreements are deemed genuine. If not, they are deemed simulated. However, the Tax Court seemed to suggest that a transaction can be both genuine and simulated at the same time (i.e. the test for a simulated transaction is not dependent on the genuineness of the agreements involved).

Statements made in a previous case between CSARS v NWK (2011 (2) SA 67 (SCA)) had suggested that even an honest transaction might be deemed to be simulated and fraudulent simply because it was motivated by a desire to avoid tax. However, prior to the Sasol case, the SCA had affirmed clearly in the case of CSARS v Bosch (2015 (2) SA 174) that NWK had not altered South African tax law on the subject and that a transaction cannot be classified as simulated simply because it may be tax driven.

This principle was again confirmed by the majority judgment in the Sasol SCA case. The SCA found that there were good commercial reasons for the SISL arrangement, and it was not created solely for the avoidance of tax. Importantly, it clarified the common law test for a simulation, confirming the approach taken by Wallis JA in CSARS v Bosch that:

"Simulation is a question of the genuineness of the transaction under consideration. If it is genuine, then it is not simulated, and if it is simulated it is a dishonest transaction, whatever the motives of those who concluded the transaction."

This does not mean that the purported artificiality or motivation underlying a transaction is irrelevant. Such artificiality or motivation could indicate that the parties have a real intention that is fundamentally inconsistent with the tenor of the underlying agreements. However, once it is established that the parties genuinely intended the agreements to be implemented in accordance with their tenor, as opposed to dressing up an underlying transaction to make it appear to be something that it is not, the resulting transaction cannot be found to be simulated.

more across site & bottom lb ros

More from across our site

PwC could elect a woman into the senior leadership position for the first time; in other news, KPMG Australia has extended its CEO’s term
The Senate report into PwC’s scandal is titled ‘The cover up worsens the crime’
Law firms that are conscious of their role in society are more likely to win work, according to a survey of over 23,000 in-house professionals
The firm’s tax business generated a quarter of HLB’s overall revenues in 2023
While successful pillar two implementation will require collaboration across all units, a combination of internal and external tax advice is at the centre of the effort
Binance has also been accused of manipulating foreign exchange rates via currency speculation and rate-fixing
Six individuals should have raised questions over information they received but did not breach professional standards, according to the firm
The partnership of KPMG UK has installed Holt for a second term as CEO and senior partner; in other news, a Baker McKenzie partner has sued the IRS
HSBC has settled a claim originally worth £240m relating to a failed film tax relief scheme without admitting liability or wrongdoing
Their prediction comes after the IRS announced it would send compliance letters to large foreign companies emphasising their US tax obligations
Gift this article