The Supreme Court of Appeal (“SCA”) delivered judgement on 25 March 2020 in a matter that primarily deals with gains or losses caused by foreign exchange fluctuations. Key to the debate was the interpretation of statutes and specifically whether section 24I of the Income Tax Act (which regulates foreign exchange gains and losses) is a self-standing provision for deduction of a commercial loss which is unconnected to foreign exchange currency differences. Therefore, does section 24I allow for the deduction of a commercial loss that is completely unrelated to foreign exchange currency differences?
The dispute arises from a disastrous investment made by Telkom when it acquired a majority share in a Nigerian telecommunications company. Telkom acquired the remaining shareholding in this company a year later. As part of the acquisition, various shareholder loans (denominated in US Dollars) were made and some of the loans were converted into preference shares equity. The Nigerian subsidiary was struggling, and no real prospects of reviving the business were evident, but Telkom continued to advance loans. Telkom sold its shares in the Nigerian company to an unrelated third party, including its loan claims.
The dispute arose when Telkom reflected a foreign exchange gain of R247 million in its financial statements while claiming a deduction of R3.96 billion as a foreign exchange loss on realisation of the loan claims in its 2012 tax return, which covers the same period. The effect of this was that instead of showing taxable income, Telkom showed a loss and claimed the repayment of provisional taxes. The South African Revenue Service (“SARS”) issued additional assessments in which it disallowed the loss claimed. Telkom thereafter appealed unsuccessfully to the Tax Court, bringing the matter before the Supreme Court of Appeal for adjudication.
In its judgment, the SCA held that an interpretation of section 24I was necessary to resolve the foreign exchange dispute. Telkom argued that the interpretation offered by SARS was unjust, inequitable and unreasonable, and that the contra fiscum rule should be invoked at the outset as part of the technique used in establishing the words of fiscal legislation. SARS, on the other hand, contended that the rule should only be invoked where, after interpretation, there remains an irresoluble ambiguity as to the meaning of a provision.
The SCA emphasised that there was no real mystique about tax law and the interpretation thereof. In terms of section 24I, the SCA found that when interpreting the section, the word “rate” reflected a currency rate, and the purpose of the section was to ensure that amounts reflected in foreign currencies, were converted into Rands and not to cater for commercial losses when loans are realised. The court agreed with SARS in that it was insensible that a business could make a profit, but show a loss based on underperforming exchange rates.
The SCA agreed with the Tax Court in this regard and dismissed Telkom’s appeal to the foreign exchange matter as relates to the claim of commercial losses under the section.