Deductibility of Royalties: A Recent Case that Ruffled Feathers [Discussion of the Judgment of Waglay J in Case Number 11454 in the Tax Court]
![handle is hein.journals/stelblr17 and id is 196 raw text is: DEDUCTIBILITY OF ROYALTIES: A RECENT
CASE THAT RUFFLED FEATHERS
[DISCUSSION OF THE JUDGMENT OF WAGLAY J IN
CASE NUMBER 11454 IN THE TAX COURT]-
I du Plessis
BCom LLB LLM
Lecturer, University of Stellenbosch
1 Introduction
The Tax Court, sitting in Cape Town, recently had occasion to
consider the deductibility of royalty payments.' In general it may be said
that royalties are payments for the use of another's intellectual property,
such as patents or trade marks. As such, royalty payments are made on a
daily basis in the commercial world. It has always been widely accepted
that royalty payments are deductible from income in terms of the general
deduction formula2 and taxpayers have for years claimed this deduction
without objection from the South African Revenue Service. In the case
under discussion, the Commissioner for the South African Revenue
Service (the Commissioner) successfully challenged this accepted view
regarding the deductibility of royalties, the court finding that the
payments were of a capital nature and therefore not deductible.
2 The Facts
The taxpayer manufactures supplies and markets certain products in
South Africa. Together with a number of other companies, the taxpayer
dominates the market in South Africa. Each of these companies conducts
its operations under a brand name, which it either owns or is licensed to
use. In terms of the taxpayer's memorandum it is obliged to use a certain
corporate name by permission of its holding company with the
stipulation that on withdrawal of such permission, it would cease to
use this name or trade mark.
The taxpayer's holding company, which is incorporated in England
and Wales, is the owner of the trade mark and other licensed marking
indicia (collectively referred to as the trade mark) used by the taxpayer.
Until 1997, the taxpayer used this trade mark free of charge. In 1997 an
agreement was entered into between the taxpayer and its holding
company in terms of which the taxpayer obtained the non-exclusive and
non-assignable authorisation to use this trade mark, whilst the holding
I would like to thank Chemus Taljaard and Pieter Oosthuizen for reading an earlier draft of this paper.
Case no 11454.
2 Emslie, Davis, Hutton & Oliver Cases and Materials 350; De Koker Silke on South African Income Tax
(2005) par 7.25.](ViewImageLocal?handle=hein.journals/stelblr17&div=16&collection=&method=preview&ext=.png&size=3)
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