Royalty payments are tax deductible under the Income Tax Act, the Supreme Court of Appeal held on Tuesday.
The court upheld an appeal by BP Southern Africa against a judgement of the Cape Town Income-Tax Special Court.
The case was about the BP trademarks, colour schemes, designs and symbols that BP Southern Africa has used since 1959.
The trademarks and other "indicia" were owned by BP worldwide. Initially, BP Southern Africa could use the "indicia" under a written agreement with BP, free of any payment of royalties.
However, during 1997 BP Southern Africa entered into a trademark licence agreement with BP, under which the local firm could use trademarks and indicia if it paid royalties.
BP Southern Africa claimed these payments as deductions under the Income Tax Act in the determination of its taxable income. The South African Revenue Service (Sars) disallowed the deductions.
BP Southern Africa questioned the disallowance, but Sars overruled it, whereafter BP South Africa appealed to the Cape Town Income Tax Special Court. It was again dismissed.
The royalties for the tax years 1997, 1998 and 1999 were R40-million, R45-million and R42,5-million respectively.
The Appeal Court held that the annual royalty payment was for the use by BP Southern Africa of the indicia, and not for the "ownership" of the intellectual property of its parent company.
The court found the recurrent nature of the payment -- which neither created nor preserved any asset in the hands of BP Southern Africa -- was indistinguishable from recurrent rent paid for the use of another's property.
The Bloemfontein court held that the sums are deductible under section 11(a) of the Income Tax Act, and directed that Sars change the assessments for each of those tax years accordingly.
story from M&G here