X (Pty) Ltd v CSARS : another ride on the substance-over-form rollercoaster?

• Pages: 16-25
• Record Number: btclq_v8_n4_a4
• Published date: 01 December 2017
• Date: 01 December 2017
• DOI: 10.10520/EJC-b6a2a89b3
• Author: Ed Liptak

16 © SIBER INK

X (Pty) Ltd v CSARS:

ANOTHER RIDE ON THE SUBSTANCE-OVER-

FORM ROLLERCOASTER?

ED LIPTAK1

ABSTRACT

In X (Pty) Ltd v Commissioner for the South African Revenue Services,2 the Tax

Court held that certain back-to-back sales agreements were simulated transac-

tions. Whatever the merits of that ultimate conclusion, the Court’s reasoning

appears to rest upon a logical impossibility — namely, that an agreement can

be both genuine and simulated.3 Thus, despite the repeated efforts of the

Supreme Court of Appeal to dispel the confusion in this area generated by the

judgment in CSARS v NWK Ltd,4 taxpayers seemed to be embarked on another

ride on the ‘substance-over-form’ rollercoaster.

This article discusses the merits of the decision in some detail and

concludes that while SARS’s attempt to disregard the back-to-back agree-

ments is understandable, the answer does not lie in attempting to stretch the

substance-over-form doctrine to cover what SARS might consider to be step

transactions or f‌iscal nullities under foreign law. The author further concludes

that to the extent that SARS feels compelled to rely upon those concepts

(tacitly or otherwise) to attack steps in composite transactions it does not

like, it will inevitably f‌ind itself implicitly conceding the very point it seeks to

disprove — i e that the underlying agreements are indeed genuine.

The transactions at issue

Stripped to their essentials, the transactions at issue were relatively straight-

forward. At all times relevant to the dispute, X (Pty) Ltd (‘the Taxpayer’)

had a subsidiary in the Isle of Man (‘IOM Sub’) that purchased crude oil

from third parties.5 Prior to South Africa’s move from a sourced-based to

a residence-based tax system and the concomitant enactment of broader

controlled foreign company legislation in March 2001, the IOM Sub sold

the oil directly to the Taxpayer.6 In terms of the contract between the parties

during this period, risk and ownership of the oil passed to the Taxpayer

1

Independent Tax Consultant.

2

IT 13065/13, an unreported judgment of the Gauteng Tax Court delivered on 30

June 2017.

3

Ibid at para 24.

4

2011 (2) SA 67 (SCA).

5

Ibid at paras 7 and 8. From 1998 until 2004, the subsidiary was X Trading

International Ltd. From 2004 onwards, the subsidiary was X Oil International Ltd.

The change in companies did not have an effect upon the issues.

6

Ibid at para 8.