Business may look to the decisions reached in the Warner Lambert vs SARS case and the Sullivan principles to substantiate their case.Warner Lambert deducted certain costs incurred in complying with the US legislated Comprehensive Anti-Apartheid Act.The act embodied the Sullivan principles,named after the Reverend Leon Sullivan,a US citizen and anti-apartheid activist.
Sullivan was appointed to the Board of General Motors in 1971, where he used his position to oppose apartheid in South Africa.At the time General Motors was the largest employer of black people in South Africa and Sullivan, through his position as director,used his influence to generate what he termed "corporate civil disobedience”.
The Comprehensive Anti-Apartheid Act required that South African subsidiaries of US companies comply with seven broad principles which included improving the quality of life for black people outside the work environment in such areas as housing,transportation, school, recreation and health facilities, as well as the initiation and development of training programmes that would prepare, in substantial numbers, black people for supervisory, administrative,clerical, and technical jobs.
In the case mentioned above, the taxpayer company had incurred certain costs in complying with the Sullivan Code which it sought to deduct as having been incurred in the course of trade and in the production of income and not being of a capital nature. SARS,however, was of the view that the costs incurred were not incurred in the course of carrying on a trade and moreover, were capital in nature.
The case went to the Supreme Court of Appeal, which held that the expenditure in question satisfied the criteria laid down in section 11(a), namely that it was incurred in the production of income and was not of a capital nature and was thus deductible.As to whether the expenditure was of a capital nature,the court held that the periodic expenditure incurred pursuant to the code was not incurred to protect the company’s income-earning structure, but to protect its income and was in many ways similar to insurance premiums.As such, the expenditure was found to be of revenue rather than capital in nature.
Whilst the Sullivan Code continues to exist in the revised Global Sullivan Principles of Corporate Social Responsibility launched by both Leon Sullivan and the former United Nations Secretary General Kofi Annan, the Comprehensive Anti-Apartheid Act has since disappeared.
I would advise that where companies are seeking to rely on the decision reached in the Warner Lambert case, they should ensure that they do their homework thoroughly-particularly so as any argument on the deductibility of costs based on the Warner Lambert case may be fraught with
I am of the opinion that very often lawyers,accountants and tax attorneys/accountants like doctors, are more effective when consulted at an early stage.To quote an old adage, prevention is better than cure.By making use of professional consultants early on, the tax savings alone, aside from the legal costs should any dispute reach court, often far exceed the costs incurred.
Source: By Greg Tarrant (TaxTALK)