SARS warning for companies doing business with the South African government

Companies doing business with the South African government are facing growing scrutiny as SARS expands its ability to trace suspicious payments, challenge questionable deductions and trigger criminal investigations.

Section 23(o) of the Income Tax Act, which prevents businesses from claiming a tax deduction for money they pay as a bribe or kickback, has recently come under the spotlight.

Tax Consulting SA’s tax technical team lead, Bronwin Richards, explained that the provision was introduced in 2005 to support South Africa’s anti-corruption efforts.

It denies a tax deduction for any payment that amounts to corrupt activity under our main anti-corruption statute, the Prevention and Combating of Corrupt Activities Act (the PCCAA).

For over a decade, section 23(o) was rarely used. However, the recent Tax Court judgment of Taxpayer LE v Commissioner for the South African Revenue Service, delivered on 10 April 2026, has now brought it into the open.

Richards explained that, at the heart of the appeal in this case was a familiar pattern dressed in new clothing.

A South African company, part of a foreign rail-equipment group, won contracts worth more than R25 billion to supply locomotives to a state-owned enterprise.

Roughly 20% of each contract’s value was paid away, through a chain of related foreign companies, to consultancy firms that did no real work – payments dressed up as “Business Development Services”.

SARS refused to allow those payments as tax deductions, relying on the usual rules in sections 11(a) and 23(g) of the Income Tax Act and, in addition, on section 23(o). The Tax Court agreed on all three grounds.

Two points stand out from the Court’s reasoning. First, Richards said the taxpayer need not have been convicted or even charged with any crime for section 23(o) to apply.

As SARS confirmed in its Interpretation Note 54, the section applies the civil standard. SARS must only show, on a balance of probabilities, that the payment was corrupt. It does not need to wait for a prosecutor to act.

Second, having made its section 23(o) finding, the court referred the matter to the National Director of Public Prosecutions for possible criminal investigation.

“A tax disallowance is therefore not the end of the matter for the taxpayer – it can be the start of a criminal one,” Richards said.

An old SARS weapon comes alive

According to Richards, both of the consequences highlighted by the court fit the reason section 23(o) was enacted in the first place.

Before it was introduced, South African tax law did not specifically address whether bribes, fines, or penalties could be deducted.

The Budget at the time made clear that this had to change, “as a matter of good governance and to reinforce South Africa’s anti-corruption drive”, Richards explained.

“The reasoning was that if a company could claim a tax deduction for the cost of unlawful conduct, the State would effectively be sharing the cost of that conduct. That outcome cannot be defended.”

Section 23(o) was the answer. It bars any deduction where the payment itself amounts to corruption under the PCCAA.

It also bars any deduction where the payment is a fine or penalty for unlawful conduct. “The provision is a policy statement: the fiscus will not subsidise corruption.”

According to Richards, this judgment also shows how far the revenue service’s investigative capability has come.

Its Illicit Economy Unit used formal information requests under the Tax Administration Act, an exchange-of-information request to Hong Kong.

It also utilised forensic cash-flow tracing and independent expert evidence to build a detailed record of the payment flows.

“The 20% pattern was not advanced as a theory. It was proven, transaction by transaction, against bank records, invoices and contemporaneous correspondence.”

“Against that backdrop, section 23(o) is a precise tool in SARS’ anti-corruption toolkit. It protects the tax base by making sure that corrupt expenditure receives no support from the fiscus.”

Richards added that judgment also sends a message to taxpayers structuring “advisory”, “facilitation” or “business development” fees in connection with public procurement.

It makes it clear that they should expect those arrangements to be tested rigorously, both against the ordinary rule that an expense must be incurred to produce income and against the corruption ground in section 23(o).

Richards explained that this case is a turning point for section 23(o). “The provision has come alive. SARS has shown both the will and the skill to use it.”

“This judgment is also a reminder that cross-border arrangements face pressure from two sides at once – SARS on the tax side, and the South African Reserve Bank on the exchange-control side.”

The two regulators increasingly share information, and structures that look fine at a glance can unravel under closer scrutiny, she warned.