SA ruling on BEE expenditure

In a recent Binding Private Ruling (BPR 13), Sars was asked to rule on the deductibility of expenditure associated with black economic empowerment (BEE) under the general deduction formula contained in s11(a) of the Income Tax Act, No 58 of 1962 (Act) as read with s23(g) of the Act.

The applicant, a private company resident in South Africa, proposed to address the ownership component of its BEE scorecard by introducing an Equity Equivalent Programme (EE Programme).

In short, the EE Programme entails the following:
The applicant will invest four percent of its annual turnover, over a period of seven years, in selected qualifying small black owned independent vendors.

The vendors will incur expenditure in respect of infrastructure, recruitment and employment of black graduates, sales and marketing, software development, training and skills development, traveling and other external services such as legal, accounting, tax, advertising, public relations and management consulting.

The vendors will be reimbursed by the applicant on presentation of the relevant invoices subject to an agreed allocated budget equal to four percent of the applicant’s annual turnover.

The applicant will not subscribe for equity in the companies of the vendors and the vendors will not necessarily form part of the applicant’s existing value chain.

Section 11(a) of the Act, which is phrased positively, allows for a deduction of expenditure and losses actually incurred in the production of income, provided such expenditure and losses are not of a capital nature. Section 23(g) of the Act, its negative counterpart, disallows a deduction of moneys to the extent to which such moneys were not laid out or expended for the purposes of trade.

SARS ruled that the applicant will be entitled to claim the EE Programme expenditure as a deduction under the general deduction formula. The deduction, however, would have to be spread over the relevant years of assessment in terms of s23H of the Act.

TAXtalk: www.taxtalkblog.com