When taxpayers dispute an assessment, the expectation is straightforward: either the taxpayer wins and the assessment is reduced, or the South African Revenue Services (SARS) wins and the assessment remains unchanged. However, recent cases raise a surprising question – could the Tax Court ever order SARS to increase an assessment? This possibility has sparked debate following recent judgments and SARS’s evolving litigation tactics.
The legal framework
The Tax Court may order SARS to “alter” an assessment. Does this permit only downward adjustments? The rules suggest that it does.
The Tax Court may rule only on the issues contained in SARS’s statement of grounds of assessment, the taxpayer’s statement of grounds of appeal, and SARS’s reply thereto. SARS’s statement of grounds of assessment may not introduce new factual or legal grounds that amount to a novation of the assessment or that would require the issuing of a revised assessment. Accordingly, SARS cannot argue before the Tax Court that the disputed assessment should have been higher.
If SARS believes that the disputed assessment should have been higher, it must issue an additional assessment. SARS must issue any additional assessment within three years from the date of the original assessment for the relevant tax period. After three years, the assessment prescribes, unless the taxpayer made a misrepresentation or committed fraud.
The ABD Case (IT 14302, February 2024): A strategic gamble
The first major transfer pricing judgment in South Africa – ABD – was a watershed moment. 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.
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. 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.
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. 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 or higher than those in South Africa.
SARS’s new expert witness, 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.
It also did not assist SARS’s case that the data for the survey was collected in 2020 but related to the 2009 to 2012 tax years. 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”.
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 Tax Court accordingly upheld ABD’s appeal.
Prescription: Why SARS is out of time
The practical reality is that, by the time a matter reaches the Tax Court, the three-year period within which SARS may raise an additional assessment is almost always closed. In ABD, the timeline is instructive:
- 2015: SARS raised the additional assessment based on its first expert.
- 2020: SARS consulted a second expert with a different view of arm’s length pricing – long after the three-year period had expired.
This makes it nearly impossible for SARS to argue that the failure to raise a further assessment was due to misrepresentation. The real reason was a change in expert opinion, not the concealment of facts.
Taxpayers are required to declare their “affected transactions” in their income tax returns at arm’s length prices. Where financial year accounts cannot be adjusted, taxpayers may correct pricing by making an adjustment in the tax return. This places the onus on the taxpayer to prove that the affected transactions have been priced at arm’s length.
Accordingly, a taxpayer must be able to provide support demonstrating that the affected transactions were priced on an arm’s length basis. Once such evidence is provided, the taxpayer discharges the onus of proof, which then shifts to SARS to establish an alternative arm’s length position. The determination of an arm’s length amount is not binary; it is inherently open to debate and involves the exercise of judgement. If a taxpayer adopts one approach and SARS another, this does not mean that the taxpayer made a misrepresentation of a material fact.
In Pear (IT 46080, December 2024), the Tax Court confirmed that the three-year prescription period does not apply where a taxpayer has misrepresented material facts. However, how an amount must be taxed is not a fact, but a question of law involving a legal opinion. Similarly, whether an amount is arm’s length is a matter of opinion rather than fact. If a taxpayer declares what it believes to be an arm’s length price, SARS must issue an additional assessment within the three-year period. If this were not the case, transfer pricing matters would never prescribe.
Can SARS circumvent prescription?
With prescription having taken effect, SARS is left to argue that the Tax Administration Act permits the Tax Court to order SARS to issue an increased assessment. In our view, this argument is unlikely to succeed. The dispute resolution framework is premised on the issues before the court being those contained in the original assessment and objection, not a new basis introduced years later.
This principle was confirmed in Flower (IT 25209, February 2025), where the court rejected SARS’s attempt to pivot to a new basis for the assessment midstream. SARS’s statement of grounds of assessment must be measured against the assessment itself. The rules allow for amplification of the grounds of assessment before the Tax Court, but not for their substitution.
The SC case (IT 45840, April 2025), which considers what SARS may include in its statement of grounds of assessment, follows a similar trajectory to ABD. SARS raised additional assessments for the 2015 and 2016 years of assessment, using the Comparable Uncontrolled Price (CUP) method, and concluding that the taxpayer should have charged non-RSA group companies a royalty of 4% of sales rather than 1%.
In 2024, SARS obtained an opinion from an expert, Dr Maning, stating 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, apparently on the basis that SARS was not abandoning the CUP method used in the assessments but merely advancing the PSM as an alternative means of supporting them.
The practical value of this approach is questionable. 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. It is not clear from the reported judgement whether the application of the PSM would have resulted in the same or a higher arm’s length royalty than that derived using 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.
The taxpayer in SC vigorously objected to the inclusion of any reference to Dr Maning’s report in SARS’s statement of grounds of assessment. 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. As the Tax Court ultimately found against SARS, this issue was not explored further.
Looking ahead
SARS’s recent litigation strategies suggest an attempt to reopen prescribed assessments – an approach that could, if successful, 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.
Nevertheless, vigilance is essential. Transfer pricing remains a contested space, and litigation strategies in this area continue to evolve.
- Nina Keyser & Karen Miller from Webber Wentzel
