Tax ruling against BMW
TAXABLE FEES: CONSULTING FEES PAID BY EMPLOYERS ARE PART OF EMPLOYEE INCOME
BMW challenged Sars all the way to the Supreme Court of Appeal.
Ten years ago, the South African Revenue Service (Sars) queried the fact that BMW South Africa paid for the services of several tax consultants to assist some of its employees with their tax affairs. This enquiry led to several court cases, with the final judgment delivered only a few weeks ago.
The saga went all the way to the Supreme Court of Appeal – where the judge ruled that Sars’s interpretation of the Income Tax Act was correct, despite BMW arguing that the only intention of contracting tax consultants was to ensure that its employees paid their due taxes.
At the centre of the disagreement between BMW and Sars was that BMW hired tax consultants in cases where employees were posted to work in different countries, each with its own tax laws and different tax agreements between countries with regards to tax. In addition, BMW ascribed to a policy in which it assured employees their net monthly income would be at least equal to the income they received in their home country.
The postings to different countries were of either short or medium duration, with the employees retaining their status as taxpayers in their home countries.
They were required to submit tax returns and pay all due taxes.
This required a lot of tax planning, with BMW footing the bill. Court papers also showed BMW paid tax consultants to help people administer their tax affairs.
The court accepted that the tax regime is very complex insofar as it applies to expatriate employees, and had no problem with the services of tax consultants. However, Sars argued that each affected employee should have been taxed on the value of the services they received from the tax consultants and BMW should have deducted pay-as-you-earn tax on the value of these services.
In 2009, Sars issued an assessment for the tax years from 2004 to 2009 on the basis that payments to the tax consultants were a taxable benefit in the hands of the employees. A total of R6.8 million was paid to tax consultants, with Sars claiming tax of nearly R2.4 million at a rate of 35%.
BMW objected, telling Sars that the employees received no “benefit” as they were in exactly the same financial position. When the local Sars office persisted, the case was tried in the Tax Court.
The tax consultants testified that they were contracted by BMW and accepted BMW as their client, not the individual employees.
However, the Tax Court ruled that the tax services were a benefit, could be valued in money terms and fell within the law’s definition of gross income. Subsequent appeals to higher courts were all dismissed, with the ruling by the Supreme Court of Appeals finalising the matter.
Thus the precedent has been set – the value of tax services supplied by employers is a taxable benefit in the hands of employees.