Commissioner for the South African Revenue Service v Levi Strauss South Africa (Pty) Ltd

A recent judgment was delivered in the Supreme Court of Appeal of South Africa ("SCA"), on 7 April 2021, which dealt with a dispute over import duties and Value-Added Tax ("VAT") payable - originating from clothing imports acquired from countries in the South African Development Community ("SADC") by Levi Strauss South Africa (Pty) Ltd ("Levi SA"). This case was brought on appeal from the Gauteng Division of the High Court, where a judgment was delivered in favour of Levi SA.

Background:

Levi SA is a subsidiary of Levi Strauss & Co ("LS & Co") and is a global brand, with its Southern African operations being carried out by Levi SA.

The Commissioner for the South African Revenue Service ("SARS") deemed the originating certificates for the import of clothing items from SADC countries to be invalid, resulting in a disentitlement of the favourable rate of zero percent duty under the Protocol on Trade in the SADC Region ("the Protocol").

SARS also challenged the determination of the transaction value on the imported good on which the duty is payable. Certain commissions and royalties paid by Levi SA to the Levi Group should have been included in determining the transaction value, contended SARS.

During the period 2010 to 2014, the majority of Levi SA's clothing items were imported (approximately sixty percent) and forty percent was produced locally. The Levi Strauss Asia Pacific Division Pte Ltd ("Levi APD"), a company incorporated in Singapore, was tasked with assisting with the arrangements regarding the importing of the garments.

Levi APD entered into an agreement titled "Buying Agent Agreement" ("the BAA") with Levi SA on 1 December 2005 which entitled it to receive an amount equal to seven percent of the value of the goods, for its service rendered to Levi SA. On 1 December 2010, there was an amendment to the BAA, changing the value of the percentage to twelve percent. This was described as the 'buyers commission'.

Between 2010 and 2011, Levi SA imported the clothing items directly from the producers. However, from 2011 the system was altered to allow Levi SA to purchase the garments from Levi Strauss Global Trading Company Limited ("Levi GTC"), incorporated in Hong Kong. Levi GTC entered into a Master Sales Agreement ("MSA") with Levi SA on 1 January 2011, which provided for Levi SA to purchase the clothing from Levi GTC. Levi GTC would acquire the clothing items from the same contracted suppliers in the SADC countries that were used previously, however would charge a mark-up of twelve percent to Levi SA. The garments were supplied directly to Levi SA.

SARS indicated that they were not satisfied with the manner in which the Protocol was being applied, post 2011. It was explained that the purpose of the Protocol was being undermined, as the intention was to encourage trade between member countries and for there to be a commercial relationship between countries within the SADC Region.

Levi SA pays a royalty to LS & Co at varying rates on every sale of garments it makes and for purposes of determining the 'transaction value', SARS indicated that this needs to be included. As a result, the transaction value will differ, implying that there would be VAT adjustments that need to be accounted for.

Origin issue:

Levi SA contended that the origin of the goods was from within the SADC countries, as the goods were manufactured in SADC countries and delivered directly to South Africa. Levi SA relied on the the definition of an export referred to in the Glossary of International Customs Terms published by the World Customs Organisation, of which South Africa and all other SADC countries are members (with the exception of the Democratic Republic of Congo). This definition refers only to the physical movement out of the 'customs territory' (which Levi SA believed to be within the SADC region), rather than the existence of a commercial relationship.

However, SARS relied on the ordinary meaning of what an export entails and that a duty is to be levied when such movement occurs out of South Africa. SARS were of the view that the exporter in this scenario would be Levi GTC and not the SADC countries, where the garments were produced - as Levi GTC paid for the goods, bore the risk in them and sold them to Levi SA.

Judge Wallis, in his judgment, indicated that he agreed with the decision made in the high court, which set aside SARS' contention that the certificates were invalid. The reason stated was similar to that of Levi SA, whereby mention of physical movement of the items was all that was required and no commercial relationship had to have existed.

Alternative Origin Issue:

Despite the system change in 2011 by Levi SA, an audit revealed that some producers still issued invoices (47 to be exact) to Levi SA as opposed to Levi GTC. Vouchers of correction were prepared and lodged with SARS and any additional amounts were paid.

SARS then indicated that the 47 invoices were 'issued on the basis of declarations tainted by misrepresentation using 'fictitious invoices' and were invalid. Judge Wallis was not convinced with this argument and stated that the acceptance of the correction vouchers as well as the tax due on those indicated that SARS did not think the invoices were invalid initially - and do not have a basis to question these now (unless there were exceptional circumstances, for which rule 9.3 in Annex I to the Protocol provides).

SARS contended that the 47 invoices identified by the auditors was indicative of Levi SA being unable to discharge the onus placed on it to prove that the fictitious invoices issued were limited to the 47 that were identified; and that other invoices were not affected in a similar manner.

Judge Wallis was not in agreement with this view, as it was argued that this was not the matter that was to be investigated and that SARS cannot rely on this opportunity to now make a wholly different determination, as the matter in question was related to Levi GTC not being a SADC country, and therefore unable to apply the preferential rate.

The buying commission issue:

Judge Wallis, in his judgment, looked at the approach applied by the United States of America; as well as the United Kingdom in defining a buying commission - as there is little guidance as to the meaning of the different terms in the definition of a buying commission.

In both the U.S and the U.K, the approach followed was similar, in the sense that both emphasized that a bona fide buying agent is one that acts on behalf and for the benefit of the buyer and not the seller / themselves.

After a lengthy analysis of the BAA as well as the organised system called 'Global Sourcing Organisation' ("GSO"), Judge Wallis, in his judgment, contended that the BAA was aligned with the GSO, which was globally -planned and coordinated by Levi San Francisco. It follows that Levi APD was not acting as a buying agent of on behalf of Levi SA. As such, Judge Wallis stated that the High Court erred in agreeing with Levi SA that the payments made to Levi APD were buying commissions.

The royalty issue:

Levi SA pays a royalty to LS & Co at varying rates on every sale of garments it makes, whether manufactured by it or imported. These are paid in terms of a Trademark License Agreement (the TLA) dated 1 December 2010.

Judge Wallis, in his judgment, provided a lengthy analysis of different tax cases which expressly dealt with the obligation to make payment of royalties and was of the view that the royalties paid, whether directly or indirectly, arise out of the terms prescribed in the TLA.

In the judgment put forward, it was concluded that SARS were correct in saying that the royalty needed to be included in determining the transaction value of the imported goods.

Conclusion:

The appeal relating to the origin issue failed, but succeeded in respect of the buying commission as well as the royalty issues.

It was held that the determination in regard to the invalidity of the Certificates of Origin is set aside. The corresponding demand for payment of duty of R52 466 124.19, as well as the VAT of R87 240 129.71 is accordingly set aside as well.

In terms of the BAA, the commissions paid by Levi SA to Levi APD or Levi GTC are accordingly not classified as buying commissions, as SARS had contended. Likewise, the determination that the royalties due to LS & Co on the goods imported, whether under the Levi APD or the Levi GTC regime must be added to the purchase price of those goods.

The appeal is upheld with costs, such costs to include those consequent upon the employment of two counsel.

Link to the full judgment:

https://www.sars.gov.za/AllDocs/LegalDoclib/Judgments/DRJ-SCA-2021-02%20%E2%80%93%20CSARS%20v%20Levi%20Strauss%20SA%20(Pty)%20Ltd%20(509-2019)%20[2021]%20ZASCA%2032%20(7%20April%202021).pdf