A recent decision by the Supreme Court of Appeal in the case of the commissioner of the SA Revenue Service versus Dragon Freight holds great importance for the integrity of the tax system in general and the collection of customs in particular.
The various respondents were requested to complete a standard trader questionnaire generated by Sars, in which they were asked,, to provide the following information: how the importer sourced this foreign supply and established a trading relationship; and details of travel abroad to negotiate trade, substantiated with copies of pages from the importer’s/buyer’s passport showing all trips overseas to meet the suppliers.
Understandably, Sars believed that Dragon Freight and the importers were liable for underpaid customs duty and VAT. After this decision, Sars sought to seize the goods in terms of section 88 of the Customs & Excise Act of 1964. “The evidence of the expert, Dr [Jaywant] Irkhede, and that of [the SA Apparel Association] and [Apparel & Textile Association of SA] makes it clear that the prices declared by the importers were unrealistic and unattainable.”
Assume the suit sold on the open market for R4,000. The customs savings would be lost by way of an increased income tax liability. Inevitably, therefore, a form of transfer pricing would have been invoked to increase the deductible expenses in respect of the transaction and radically reduce the income tax liability of the importer.