Tax statutes: It’s all about context

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Decisions of South Africa’s courts are an essential source of law. The courts uphold and enforce the Constitution and develop common law that is consistent with the values of the Constitution, and the spirit and purpose of the Bill of Rights. In a taxation context, court decisions assist in how legislation must be interpreted or confirm the rights and obligations of taxpayers and the South African Revenue Service alike. One, therefore, cannot appreciate the tax landscape, without having regard for the decisions of our courts.

In Commissioner for SARS v United Manganese of Kalahari (UMK) (25 March 2020) the interpretation of tax statues in conjunction with other statutes was considered. UMK conducts mining operations and specifically that of manganese. UMK was caught in the crosshairs based on its interpretation of section 6(3)(b) of the Royalty Act, which regulates how mining ventures should calculate their so-called “gross sales”. This figure is vital for the fiscus, as it determines the value of royalties payable by mining companies.

Central to the matter was deductions for transport, insurance, and handling costs (hereinafter referred to as TIH costs) from sales prices, in arriving at a “gross sales” number. SARS contended that these TIH costs should not be taken into account when determining “gross sales”. In other words, there should be no deduction from sales figures, which then results in a higher dutiable amount.

The Supreme Court of Appeal (SCA) was tasked with determining what the correct interpretation of the phrase “without regard to any amount received or accrued for the transport, insurance and handling of an unrefined mineral” and whether TIH costs could be deducted in the calculation of UMK’s gross sales.

The SCA found that the Royalty Act did not stipulate that UMK should account for the expenses separately when determining prices to be paid by clients. The court turned to the purpose of the section, considered its origin, and took international practices and Explanatory Memorandum on legislative amendments into account. Based on this, the court found that the extractor of minerals should not be burdened by paying royalties on amounts expended on transport, insurance and handling, and recovered these as part of the sale price paid by the customers – since these costs are necessarily incurred bringing the manganese into a state as required by the incoterms (such as free onboard or cost freight insurance).

This judgement on the interpretation of statutes is in line with the (now accepted) approach in South African interpretation, being a contextual, purposive, and literal approach. Taxpayers should, therefore, always apply this three-tiered approach when they interpret statutes.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)