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You Can Structure Your Affairs To Pay The Least Tax

Friday, 30 July 2010   (0 Comments)
Posted by: Author: Virusha Subban
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You Can Structure Your Affairs To Pay The Least Tax

Court upholds long-established principle

This judgement showed how a taxpayer countered an attack by SARS on law and facts. In C:SARS v LG Electronics (428/09) [2010] ZASCA 79 delivered on 28 May2010, the Supreme Court of Appeal (SCA) found in favour of the importer, LG Electronics (LG),deciding that there was no evidence to suggest that the respondent manipulated the design ,manufacturing, or importation processes to avoid the payment of duties.

LG imported 42" inch plasma screens and tuners from South Korea.The plasma screens were imported by ship whereas the tuners were imported separately and would arrive by air.After importation, when the screen and tuner are affixed together they would form a television set.

Video monitors are dutiable at a rate of 25% in terms of tariff heading 8528.21.20.1. but would be subject to full rebate of duty because they do not incorporate reception apparatus for television.During 2004 to 2006 LG imported the screens on this basis, and therefore claimed a full rebate of the 25% duty. SARS allowed the entries as such until July 2006, after which, following investigation, it issued a revised determination in terms of Section 47(9)(d)(i)(bb) of the Customs and Excise Act No. 91of 1964, as amended ("the Customs and Excise Act”) in respect of the screens, placing them under tariff item 8528.12.30.2.

Under the re-determined heading, the screens attracted duty at a rate of 25% without the benefit of a full rebate.As a result of the new determination by SARS, the Commissioner became entitled to an amount of R43 530 187.70 for customs duty, ad valorem excise duty, and value added tax. LG disputed its liability and applied to the High Court for relief. Incoming to its decision, the SCA sought to answer a number of pertinent questions.

Were the incomplete screens "reception apparatus for television” at the time of importation?
The first issue before the SCA was whether screens which are incomplete at the time of importation are reception apparatus for television in terms of the General Rules for Interpretation,which is Rule 2(a).In turn, the second issue was monitors were supplied as standard with tuners.Evidence was led that certain large retailers
• only ordered complete television sets;
• received, as the delivered product, a screen (with a remote control) and an uninstalled tuner;
• sold the product to their customers as television sets; and
• were, until about March 2007,invoiced by the respondent for television sets, and, thereafter, for the monitors and tuners separately.

As convincing as the above evidence might seem at first blush,it was not enough to convince the SCA of the existence of a "scheme”to avoid duty and taxes.The crux of the factual findings of the court a quo in relation to the charge of fraud or a "sham” was that the screens were designed to serve two markets—one for video monitors or information display panels, the other for television sets—and that LG supplied both markets. Neither of these facts were denied by SARS in the court aquo or disputed on appeal.

The court also found that cogent commercial reasons existed for the manner in which the screens were designed, manufactured, and imported into South Africa.LG's modus operandi of selling the screen and tuners as separate items (despite the contrary description in the invoices) was not rebutted at all by the Commissioner.

Affording due weight to those of the grounds relied on by SARS which are either common cause or not seriously denied by LG, the High Court concluded that the Commissioner had proved no stratagem on the part of LG in regard to the importation of the screens.

The SCA agreed with this finding, and held that there was no evidence to suggest that the LG manipulated the design or manufacturing or the importation process to avoid payment of duties.The Commissioner's appeal was dismissed with costs on an attorney and client basis.Importantly, the SCA concluded that "this seems clearly to fall within that category of cases where a man may legitimately order his affairs so that the tax is less than it otherwise would be” (see IRC v Duke of Westminster [1936] AC 1at 19).

This judgement is important as it demonstrates how a taxpayer countered an attack by SARS, not only in law, but on the facts themselves.It also demonstrates that despite the fact that SARS is keen to introduce the anti-avoidance provisions into the Customs legislation, as it has done with the Draft Customs Bills, the reality is that it is difficult for SARS to prove the existence of a "scheme” or "sham”, and that the courts are reluctant to find fraud in the absence of clear evidence.

Source: By Virusha Subban (Tax breaks)



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