Levi Strauss jeans
(Getty)
  • The SA Revenue Service has been pursuing Levi Strauss for nearly a decade, on what it said was R140 million worth of taxes due on imports.
  • The Supreme Court of Appeal this week denied the tax man that money, confirming the tax-free status of years worth of imports from Mauritius and Madagascar.
  • But money that Levi Strauss in South Africa pays to Levi Strauss in Singapore or Hong Kong should be part of a tax calculation, the court said, in a partial victory for Sars.
  • For more stories go to www.BusinessInsider.co.za.

The SA Revenue Service (Sars) is not entitled to claim very nearly R140 million from jeans maker Levi Strauss, the Supreme Court of Appeal (SCA) has ruled – even if some of Levi's tax calculations are dubious.

The court this week handed Sars a partial defeat, at the end of nearly a decade in which the tax man has doggedly pursued the South African unit of the American company which it had accused of, among other things, using "fictitious invoices" to dodge tax.

The fight was about Levi's goods imported in the first half of the 2010s, when the company imported 60% of Levi's sold in SA. After a two-year audit on the details of those imports, Sars demanded R87 million in VAT and R52.5 million in duties on those imports.

But that was not fair, the SCA said; where those imports had come from Mauritius and Madagascar, they were indeed tax-free in terms of a Southern African Development Community (SADC) trade deal, despite some commercial complications within the global Levi Strauss group.

Without that special tariff protection, the clothing would have attracted duties of between 30% and 45%, the treatment of similar imports from Europe showed.

Levi's are made, or at least assembled, in Mauritius and Madagascar, and the company's South African unit used to buy it from those islands. In 2011, though, a third island came into play. Levi's in South Africa and in Asia changed the way they do business so that the South African company technically bought jeans and other branded goods from a Levi's trading company in Hong Kong – though they were still shipped straight from the African islands to South Africa.

The change in the buying arrangement replaced a 7% commission Levi's SA had been paying to the Asian arm with a 12% markup on the manufacturing price.

This, said Sars, meant that a "significant portion of the economic benefits of the trade transaction are diverted to Hong Kong or Singapore", while the tax-free SADC deal is intended to benefit Southern African countries.

The SCA ultimately disagreed, saying Sars had "misconceived" the commercial arrangements to arrive at the idea that jeans made in SADC did not qualify as made in SADC just because they were paid for via other countries.

"The economic benefits to the producing countries were unchanged, as were the economic benefits to Levi SA and South African consumers," said the court.

But in a finding that may be worth more to Sars over time, the court did agree with the revenue service that Levi Strauss had not properly calculated the purchase price of imports.

The South African company had claimed its royalty or commission payments to other parts of the Levi's commercial empire as "buying commission" – which is excluded when calculating tax – rather than as part of the purchase price. 

After carefully looking at supposed arms-length contracts between different parts of Levi's, the court said one part of the company could not be seen to be acting as a buying agent.

For goods imported from tax-free SADC countries, the impact remains zero. But for imports by Levi Strauss from other countries, that would mean a 12% higher price on which tax is levied.

Companies with similar international structures may likewise find their tax bills increased.

(Compiled by Phillip de Wet)

Receive a daily news update on your cellphone. Or get the best of our site emailed to you

Go to the Business Insider front page for more stories.