Case Law: Telkom SA SOC Limited vs The Commissioner for the South African Revenue Service

Case Law: Telkom SA SOC Limited vs The Commissioner for the South African Revenue Service

• 25 March 2020
• Corporate Tax
• Southern African Legal Information Institute

Heard: 4 March 2020

Delivered: 25 March 2020

JUDGMENT

Swain JA (Cachalia, Mbha and Mokgohloa JJA and Koen AJA concurring)

[1] The origin of the present dispute lies in a disastrous investment made by Telkom International (Pty) Ltd (Telkom International), a wholly-owned subsidiary of the appellant, Telkom SA SOC Limited (Telkom), when it acquired 75 per cent of the issued share capital in Multi-Links Telecommunications Ltd (Multi-Links), a company registered and tax-resident in Nigeria, during May 2007. To make matters worse, Telkom then acquired the remaining 25 per cent shareholding in Multi-Links during a subsequent year of assessment that ended in March 2009.

[2] In addition, Telkom made a number of shareholder loans to Multi-Links, as it required substantial capital from Telkom to become commercially viable, all of which were denominated in US dollar. By October 2011, a total amount of USD 877 022 900.86 had been advanced to Multi-Links, of which USD 346 000 000 was converted into preference share equity, while the remainder of the loans in the amount of USD 531 022 900.86 were outstanding on the loan account.

[3] From 2009 the prospects of Multi-Link repaying these loans appeared to be remote and it was apparent there was little prospect of Telkom resuscitating the business of Multi-Links. Telkom however continued advancing loans to Multi-Links until October 2011, when Telkom and Telkom International disposed of their equity interests in Multi-Links to HIP Oils Topco Ltd, an unrelated third party. As part of the sale Telkom also sold its rights in respect of its loan to Multi-Links, to HIP Oils Topco Ltd, for USD 100. This occurred in Telkom’s 2012 tax year of assessment.

[4] In its audited financial statements for the 2013 financial year, Telkom reflected the realisation of these loans, in the following terms: ‘[i]n determining the taxable income for the Annual Financial Statements ended 31 March 2012, Telkom included a foreign exchange [FX] gain to the value of R247 million on the realisation of the loan.’ However, in its income tax return for the 2012 year of assessment delivered to the respondent, the Commissioner for the South African Revenue Service (the Commissioner), Telkom instead of reflecting the realisation of the loan as a foreign exchange gain, claimed a deduction in the amount of R3 961 295 256 as a foreign exchange loss, in terms of s 24 I of the Income Tax Act 58 of 1962 (the Act). The effect of this was that what would have been reflected as a taxable income of R3.12 billion, with a resultant tax liability of R875 million, was now reflected as a tax loss of R106 billion, with the result that Telkom was due a refund of the provisional tax paid for that year, in the amount of R822 million. The Commissioner therefore issued an additional assessment for the 2012 tax year, disallowing the deduction of R3 961 295 256 and assessing Telkom for tax in the amount of R425 188 643, as a foreign exchange gain in terms of s 24 I of the Act. This issue will hereafter be referred to as the foreign exchange issue.

[5] Telkom also claimed a deduction of R178 788 421 in respect of cash incentive bonuses paid to Velociti (Pty) Ltd (Velociti), pertaining to the connection of initial subscriber contracts for a specific tariff plan, which Velociti made on behalf of Telkom Mobile. The Commissioner, however, only allowed a deduction R42 256 879 and added back R136 531 542, in terms of s 23H(1)(b)(ii) of the Act. This issue will be referred to as the cash incentive bonus issue.

[6] In addition, the Commissioner imposed an understatement penalty in respect of the 2012 year of assessment in an amount of R91 232 665.64, on the grounds that Telkom’s conduct constituted a substantial understatement of its tax liability. In the view of the Commissioner, it was a standard case which warranted a ten per cent penalty in terms of s 223 of the Tax Administration Act 28 of 2011. This issue will be referred to as the understatement penalties issue.

[7] Telkom therefore appealed to the Tax Court, Cape Town (Davis J and assessors). Telkom’s appeal on the foreign exchange issue was dismissed, but its appeal on the cash incentive bonus issue as well as the understatement penalties issue, was upheld. Telkom, with the leave of the Tax Court, appeals to this Court against the Tax Court’s dismissal of its appeal on the foreign exchange issue. The Commissioner cross-appeals against the Tax Court’s decision to uphold Telkom’s appeal on the cash incentive bonus issue, but does not cross-appeal the decision by the Tax Court, on the understatement penalties issue, which is accordingly not an issue in the appeal.

The foreign exchange issue

[8] The resolution of the dispute as to the deduction of R3 961 295 256 by Telkom, must be found in the interpretation of the provisions of s 24 I of the Act, which deals with ‘gains or losses on foreign exchange transactions’. However, before dealing with the detailed submissions of Telkom and the Commissioner, as to the correct interpretation to be placed upon this section, the submission by Telkom that its interpretation that resulted in a foreign exchange loss of R3 961 295 256 reflected the commercial reality of the transaction, whereas the interpretation advanced by the Commissioner, that resulted in a foreign exchange gain of R267 421 739, did not, must be considered. It relied upon the following dictum in Natal Joint Municipal Pension Fund v Endumeni Municipality [2012] ZASCA 13; 2012 (4) SA 593 (SCA) para 18:

‘Interpretation is the process of attributing meaning to the words used in a document, be it legislation, some other statutory instrument, or contract, having regard to the context provided by reading the particular provision or provisions in the light of the document as a whole and the circumstances attendant upon its coming into existence. Whatever the nature of the document, consideration must be given to the language used in the light of the ordinary rules of grammar and syntax; the context in which the provision appears; the apparent purpose to which it is directed and the material known to those responsible for its production. Where more than one meaning is possible each possibility must be weighed in the light of all these factors. The process is objective, not subjective. A sensible meaning is to be preferred to one that leads to insensible or unbusinesslike results or undermines the apparent purpose of the document.’ Telkom submitted that the interpretation advanced by the Commissioner produced a result that was removed from commercial reality and was not sensible or businesslike. It also undermined the purpose of s 24I of the Act and was unjust, inequitable or unreasonable.

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This article first appeared on saflii.org.

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