A simulated transaction is one which expresses an ostensible intention of the parties thereto, which differs from their actual intention.
South African law requires that its courts give effect to the parties’ actual intention, particularly in circumstances where the recorded intention is so recorded to circumvent any law or requirement, or evading tax. The courts therefore give effect to the substance of a contract over its form, by determining the real intention of the parties from surrounding circumstances, documentary evidence, and witness testimony.
In the reportable judgement handed down by the South African Supreme Court of Appeal in the matter between Sasol Oil (Pty) Ltd v the Commissioner for the South African Revenue Service, the law relating to simulated transactions was restated.
In this case, a group company resident in the Isle of Man (Company A) purchased crude oil from the Middle East, sold it to another group company resident in the United Kingdom (Company B), which then on-sold it to yet another group company resident in South Africa (Company C).
The South African Income Tax Act (the ITA), as stated in the script then applicable to the facts of the case, provided that –
· as a general rule, if a South African resident company controls a company based abroad, the gross income of the foreign controlled company (a CFC) is taxed (under the ITA) as if that company were resident in South Africa; however
· any of the CFC’s income which is attributable to the CFC’s business establishment in the foreign jurisdiction (that is income which is generated because of the CFC’s incorporation in the relevant jurisdiction), is excluded and taxed under the laws of the CFC’s jurisdiction of incorporation; however
· income earned from goods supplied by the CFC to a connected person (its holding company or other commonly controlled company) which is resident in South Africa is not capable of being excluded unless the goods are purchased by the CFC within its country of residence from a supplier which is not a connected party vis-a-vis the CFC.