In South Africa, the Income Tax Act No. 58 of 1962 (“the Act”) provides tax exemptions to registered and qualifying Public Benefit Organisations (“PBOs”). Organisations that are incorporated, formed, or established within the Republic, must submit an application to the South African Revenue Service (“SARS”) along with the necessary documentation to apply for tax-exempt status. The approval of such applications rests with the Commissioner for SARS, who evaluates whether the PBO meets the prescribed criteria; if not, the Commissioner may reject the application.
A fundamental requirement under section 30(1) of the Act is that a PBO’s primary objective must be to carry out one or more Public Benefit Activities (“PBAs”). These activities are clearly defined in Part I of the Ninth Schedule to the Act, which lists categories recognised by SARS as qualifying PBAs. Additionally, the Minister of Finance has the authority to expand this list by declaring other activities as benevolent in nature through notices published in the Government Gazette. Such declarations take into consideration the needs, interests, and welfare of the general public.
The PBAs are broadly outlined in paragraphs 1 to 11 of the Ninth Schedule and include areas such as Welfare and Humanitarian services, Healthcare, Land and Housing, Education and Development, Religion, Belief or Philosophy, Culture, Conservation and Environmental Protection including Animal Welfare, Research and Protection of Consumer Rights, Sports, Provision of Funds, Assets or Resources to other PBOs, and Support Services to PBOs.
To qualify for tax exemption, these activities must be carried out without the intention of generating a profit. Their purpose should be charitable or selfless, ensuring no personal gain for employees or fiduciaries beyond fair and reasonable remuneration. Moreover, the organisation’s activities should benefit the general public or a broad segment thereof, rather than a restricted or exclusive group.
Once granted approval as a PBO by the Commissioner, the organisation enjoys preferential tax treatment provided it continues to comply with all relevant conditions and requirements outlined in the Act. Section 10(1)(cN) specifically exempts the receipts and accruals of approved PBOs from normal tax under certain conditions. When income is derived from non-business activities or from commercial ventures that are directly tied to the PBO's primary public benefit goals, this exemption is applicable. Such business activities should primarily aim at cost recovery without creating unfair competition with taxable enterprises.
In addition to core activities, occasional trading activities mainly conducted by volunteers without compensation may also qualify for tax exemption. Based on their charitable intent, compatibility with the PBO's goals, anticipated profitability, and possible economic impact, the Minister may authorise certain business ventures. Furthermore, minor trading activities not covered by other exceptions may still qualify if their income does not exceed 5% of total receipts or R200,000, whichever is greater.
Recognising that many non-profit organisations depend heavily on public donations, the South African government and SARS provide tax incentives to encourage generosity. Taxpayers can claim deductions on certain donations made to qualifying organisations. However, only organisations that have been approved by the Commissioner are able to issue section 18A receipts, which enable the donors to take advantage of these deductions. These organisations must use the donations exclusively to carry out or fund designated Public Benefit Activities within South Africa.
Organisations wishing to issue section 18A receipts must formally apply to the Commissioner for approval. This application must be done by completing the prescribed application form EI 1 and the information for the application process is available on the SARS website. Approval allows them to issue these receipts only from the date the Commissioner confirms their status. Additionally, the Commissioner assigns a reference number for section 18A purposes, which must be included on all receipts issued.
In summary, tax exemption eligibility for PBOs in South Africa is tightly regulated to ensure that organisations genuinely pursue public benefit objectives. Compliance with the Act’s criteria, continued adherence to approved activities, and proper approval processes are essential for PBOs to maintain their tax-exempt status and enable donors to benefit from tax deductions. This framework not only supports the sustainability of non-profit organisations but also promotes transparency and accountability in the sector.
Author: Nkosivumile Lwanyana – Junior Consultant – Tax Advisory
In the recent Kenyan case of Cipla Kenya Limited v. Commissioner of Domestic Taxes (Tax Appeal E422 of 2024) [2025] KETAT 223 (KLR) , the Tax Appeals Tribunal issued a significant ruling that clarified the application of the median in transfer pricing benchmarking. The dispute involved Cipla Kenya, a pharmaceutical distributor sourcing products from its parent company, Cipla India. For the 2018 financial year, Cipla applied the Transactional Net Margin Method (TNMM) and submitted a benchmarking study showing an operating margin of 3.02%, which fell within the interquartile range (1.60% to 9.14%) with a median of 5.08%.
However, the Kenya Revenue Authority (KRA) challenged Cipla’s analysis, citing flaws in the selection of 21 comparable companies. According to KRA, some of the comparables dealt in veterinary and herbal products, making them unsuitable without adjustments due to differences in regulation, branding, and market segmentation. Rather than conducting its own benchmarking or quantifying the alleged differences, KRA adjusted Cipla’s margin up to the median of 5.08%, relying on paragraphs 3.57 and 3.62 of the Organisation for Economic Co-operation and Development, (OECD) Transfer Pricing Guidelines.
Cipla objected, arguing that these OECD provisions only allow the use of the median where there are identifiable comparability limitations that cannot be quantified. Since KRA had already identified the differences in the comparables, Cipla contended that the authority was obligated to quantify the impact of these differences or conduct an independent analysis to justify the adjustment. The Tribunal agreed with Cipla, ruling that KRA had misconstrued the OECD guidelines. By failing to provide its own benchmarking study and simply relying on the Appellant’s, KRA lacked a solid basis to apply the median. The Tribunal emphasized that the median should only be used to minimize error where comparability defects cannot be identified or measured, which was not the case here.
This ruling underlines the importance of robust, evidence-based transfer pricing analyses. While OECD Guidelines are not binding, they are often used as persuasive tools in tax matters. The decision reinforces that tax authorities must support their adjustments with credible, independent benchmarking rather than defaulting to the taxpayer’s data and applying general assumptions. It also highlights the taxpayer’s burden of proof in defending their methodology, a burden that Cipla successfully met in this case.
Interestingly, this approach aligns with guidance in other jurisdictions, such as South Africa, where SARS’s Practice Note 7 provides that the point in the range selected must reflect the facts and circumstances of the transaction. In the absence of persuasive evidence, SARS may use the median, but only if justified. In summary, this case is a reminder to both taxpayers and revenue authorities that transfer pricing disputes must be resolved based on detailed, quantifiable evidence, not assumptions. Where there’s a challenge, each party must bring its own data to the table.
We encourage taxpayers to proactively consult with experienced tax professionals and transfer pricing experts to help them navigate complex compliance requirements and build defensible positions. This includes preparing robust transfer pricing documentation, selecting appropriate comparables, and articulating clear justifications for their pricing methodology.
Authors :
Tinotenda Chizanga- Consultant - International Tax and Transfer Pricing Mthokozisi Kunene - Junior Consultant- International Tax and Transfer Pricing
1. Introduction
The Supreme Court of Appeal’s (SCA) recent judgment in SARS v Woolworths[1] provides much-needed clarity on the Value-Added Tax (VAT) treatment of capital-raising costs incurred by investment holding companies. The case squarely confronted the long-standing tension between South African Revenue Service’s (SARS) restrictive interpretation of “enterprise” and the economic reality of active holding companies.
2. Factual background
In 2014, Woolworths Holdings acquired the Australian retailer David Jones for R21.4 billion. To fund the acquisition, Woolworths launched a R10 billion fully underwritten rights offer, incurring significant professional and underwriting fees from both resident and non-resident service providers. Woolworths claimed input tax of R8.47 million on domestic underwriting services. VAT on imported services was declared but offset in part on the basis that supplies to non-resident shareholders were zero-rated. SARS disallowed the input tax claim on its view that the rights issue did not constitute an enterprise activity of Woolworths, raised additional VAT on imported services, and imposed a 10% understatement penalty.
3. Legal issues
The dispute turned on two central questions:
4. The court’s reasoning
The SCA adopted a purposive and expansive reading of the definition of “enterprise” in s 1 of the VAT Act, noting that it encompasses activities incidental to the commencement or termination of business. The Court distinguished De Beers Consolidated Mines Ltd v CSARS,2 emphasising that unlike De Beers which was engaged in the mining activities, Woolworths was itself an active investment holding company. Its raison d’être was acquiring and managing subsidiaries, and capital-raising was integral to this enterprise.
Drawing on Tiger Oats,3 the Court reaffirmed that investment holding companies engaging actively in capital and management functions fall squarely within the statutory definition of an enterprise. By contrast, the once-off nature of the rights offer was immaterial: continuity of the enterprise, not of the particular transaction, was the touchstone.
In line with Capitec Bank Ltd v CSARS4 and Consol Glass,5 the Court applied the functional link test: the decisive question is whether the expenditure was incurred to advance the making of taxable supplies. Since the underwriting services facilitated expansion of Woolworths’ investment enterprise, the costs were taxable supplies and deductible input tax.
As for imported services, the Court held that services acquired in furtherance of an enterprise cannot be deemed “imported services” under s 1, since the services acquired by Woolworths were solely for the making of its enterprise activities.
5. Why this matters
6. Conclusion
The Woolworths judgement is a landmark for VAT vendors. It broadens the scope of deductible input tax for investment holding companies, limits SARS’ restrictive interpretations, and reinforces the principle of VAT neutrality. Critically, it underscores the importance of assessing an enterprise holistically rather than through the lens of isolated transactions.
Author: Cavin Mothobi- Tax Consultant – Tax Advisory
RECENTLY PUBLISHED RULINGS
No new rulings were published after 31 March 2025.
SARS UPDATES
SARS Clarifies Tax Obligations for Social Influencers
The South African Revenue Service (SARS) has addressed public discussions about the taxation of social influencers, confirming that this group forms part of its new taxpayer segmentation model, alongside the gig economy and government entities.
SARS emphasises:
Social Influencers as Taxpayers
Support and Compliance
Commissioner's Message
SARS Commissioner Edward Kieswetter reaffirmed the agency's willingness to help honest taxpayers and called on influencers to "uphold their end of the bargain."
