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Deductibility Of Empowerment Costs – Part 2

15 November 2013   (0 Comments)
Posted by: Author: Danielle Botha
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Author: Danielle Botha (Cliffe Dekker Hofmeyr)

In the Tax Alert of 6 July 2012, we considered the deductibility of advisory costs in the context of black economic empowerment transactions (BEE transactions). The general argument being that costs associated with empowerment transactions are akin to obtaining a license to operate and on this basis, these costs should form part of the income earning operations of the company

Generally, the Income Tax Act, No 58 of 1962 (ITA) contains various provisions relating to deductibility of specific expenditure and certain of these have been identified as possibilities for the deduction of expenditure relating to indirect BEE empowerment measures, such as s12H learnership allowances, s12I additional investment and training allowances, s18A donations to public benefit organisations and various capital allowance provisions. If one of the specific deduction provisions does not apply, the general deduction formula contained in s11(a) read together with s23(g), must be applied. It must therefore be determined whether any such empowerment expenditure was incurred in the production of income and that it is not of a capital nature. 

It was confirmed in the case of CIR v Pick 'n Pay Wholesalers (Pty) Ltd [1987], 49 SATC 132, that expenditure incurred for general philanthropic purposes, would most likely not be regarded as being incurred in the course of carrying on a trade and would therefore not be deductible under s11(a) read with s23(g). In the matter of Warner Lambert SA (Pty) Ltd v Commissioner for SARS [2003], 65 SATC 346, the court dealt with the deductibility of social responsibility expenditure and found that the relevant expenditure incurred was deductible. The company that had incurred the expenditure was a subsidiary of a US company and adhered to the Sullivan Code, which is very similar to the current empowerment principles in South Africa.

As mentioned previously, SARS has issued two rulings dealing with the deductibility of similar expenditure. Binding Class Ruling 2 (BCR 2) dealt with expenditure in respect of corporate social responsibility, indicating that such expenditure would be deductible (this expenditure related to bursary payments). Binding Private Ruling 113 (BPR 113) likewise indicated that expenditure associated with Broad Based Black Economic Empowerment, would be deductible. 

Recently, BCR 2 has created some concern amongst taxpayers, given that its period of validity, dated 28 August 2009 to 27 August 2013, had expired and many taxpayers sought to rely on the ruling in deducting similar expenditure. In light of the above, it must be borne in mind that the application of BCR 2 was specifically limited to a class of taxpayers and could not be seen to be generally applicable to every taxpayer. SARS has no obligation to apply a class or private ruling to any other particular set of facts in the same way.

We therefore suggest that the taxpayer always apply the provisions of the ITA, namely either specific deduction provisions or the general deduction formula contained in s11(a), read with s23(g), to their individual set of facts and does not rely blindly on rulings in determining the deductibility of empowerment or similar expenditure. This evaluation should have been completed both during the application of BCR 2, as well as after its expiry and as such, the expiry of the ruling is not a cause for great concern. SARS can only be bound by the provisions of general rulings and when it comes to empowerment expenditure, it is always best not to count one's deductibility chickens before they hatch.

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