Taxpayers score a legal win against SARS

Recent Tax Court rulings have upheld taxpayers’ rights by rejecting SARS’s attempts to increase disputed assessments after prescription.

Webber Wentzel’s Nina Keyser and Karen Miller explained that the first major transfer pricing judgment in South Africa, the 2024 ABD case (IT 14302), was a watershed moment.

The South African Revenue Service (SARS) argued that the 1% royalty charged by ABD to its subsidiaries in other jurisdictions was too low and raised additional assessments for the 2009 to 2012 years of assessment.

The disputed assessments were based on an expert opinion obtained by SARS in 2015, Keyser and Miller explained.

“SARS’s litigation strategy raised eyebrows. In 2020, SARS engaged a new expert who was of the view that the disputed assessments should have been significantly higher,” they said.

“By that time, the period within which SARS could raise additional assessments for the relevant tax years had long since expired.”

SARS instead asked the Tax Court for an order to “alter” the disputed assessments, in other words, to increase them, Keyser and Miller said.

“The Tax Court disagreed. It noted that it would not make commercial sense for ABD to undercharge its subsidiaries and inflate their profits, as this would unduly benefit the subsidiaries’ minority shareholders,” they said.

“Moreover, ABD’s motive could not have been to avoid tax in South Africa, as the jurisdictions in which the subsidiaries were situated had tax rates equal to or higher than those in South Africa.”

Keyser and Miller explained that SARS’s new expert witness, referred to as Dr Slate, relied on the analysis of a survey based entirely on hypothetical facts.

“This was surprising, given that SARS has consistently maintained that, in transfer pricing matters, only actual transactions constitute a reliable source of comparable data. Why SARS strayed from that position in this instance remains unclear,” they said.

It also did not assist SARS’s case that the survey data were collected in 2020 but related to the 2009 to 2012 tax years, they added.

Expert evidence under scrutiny

In the ABD case, the Tax Court held that “the reliability of questions asked in 2020 about a willingness to pay for a period that commenced ten years earlier is self-evidently unreliable”, Keyser and Miller said.

“Despite this, Dr Slate remained closely wedded to his views, and the Tax Court found him to be strong-willed, biased and unwilling to make concessions.”

The 2025 Supreme Court case (IT 45840), which considers what SARS may include in its statement of grounds of assessment, followed a similar trajectory to ABD, Keyser and Miller said.

SARS raised additional assessments for the 2015 and 2016 years of assessment, using the Comparable Uncontrolled Price (CUP) method.

SARS also concluded that the taxpayer should have charged non-RSA group companies a royalty of 4% of sales rather than 1%.

In 2024, SARS obtained an expert opinion from Dr Maning, who stated that the CUP method was inappropriate and that the Profit Split Method (PSM) should have been applied.

The Tax Court allowed SARS to refer to Dr Maning’s report in its statement of grounds of assessment, Keyser and Miller said.

This was apparently based on the view that SARS was not abandoning the CUP method used in the assessments.

Instead, it was reasoned that SARS was merely advancing the PSM as an alternative means of supporting them. “The practical value of this approach is questionable,” Keyser and Miller said.

“Dr Maning’s report concludes that SARS should not have used the CUP method at all, meaning that SARS’s own expert disagreed with the basis on which the assessments were raised.”

Keyser and Miller said it is not clear from the reported judgment whether applying the PSM would have resulted in the same or a higher arm’s-length royalty than that derived under the CUP method.

“Having argued strenuously that the PSM was merely an alternative means of supporting the assessments, it would be difficult for SARS to ask, as it did in ABD, for an order increasing the disputed assessments,” they said.

Procedural uncertainty

The taxpayer in the Supreme Court vigorously objected to the inclusion of any reference to Dr Maning’s report in SARS’s statement of grounds of assessment, Keyser and Miller said.

“It is unclear from the reported ABD judgement whether the taxpayer applied to strike out references to Dr Slate’s report, or why the court permitted evidence suggesting that the assessments should be increased,” they said.

They explained that, since the Tax Court ultimately found against SARS, this issue was not explored further.

Even though the outcome of this case is positive for taxpayers, Keyser and Miller explained that it still raises questions about whether the Tax Court ever order SARS to increase an assessment.

Typically, taxpayers disputing an assessment can expect one of two outcomes. Either they win, and the assessment is reduced, or SARS wins, and the assessment remains unchanged.

However, SARS’s recent litigation strategies suggest an attempt to reopen prescribed assessments, an approach that, if successful, could leave taxpayers worse off for having challenged an assessment.

“For now, the law and precedent favour taxpayers: disputes remain confined to the original assessment and objection,” Keyser and Miller added.

“Nevertheless, vigilance is essential. Transfer pricing remains a contested space, and litigation strategies in this area continue to evolve.”