Infracciones Aduaneras

At the outset of this investigation as to whether a ‘trade’ can be said to exist, it was stated that the most prudent approach would be to take into account all aspects of trade to determine whether a trade is being conducted or not. All of the evidence reviewed, barring the subjective test (as it is not possible to state the motive of a taxpayer with certainty), indicate that a bidder in a tender process is conducting a trade. It is noted that the question may rather be one of timing, namely that prior to the successful allocation of trade, there is

some uncertainty as to whether a trade is being conducted. However, once the tender has been awarded and the bidder takes up the tender, it is clear that trade is being conducted.

Once it is established that a trade is being conducted by a taxpayer, it is furthermore required to establish that there had been ‘expenditure or losses’ which had been incurred as per section 11(a) and whether this requirement has been met in the context of a tender process.

In conclusion, the onus is on the taxpayer to show whether it has been trading and to provide evidence in this regard (Davis et al., 2015:11(a)–4) and therefore in the case of a bidder who is participating in a tender, it would be for the bidder to provide evidence that the activities it partakes in can reasonably be seen as conducting a trade. The conclusion on the requirement of ‘trade’ and factors for consideration have been set out in Table 3.2, below, as it applies to the tender process. Once it is found that a trade is being carried on, the additional requirements of section 11(a) need to be met in order to consider the tax consequences of the expenditure incurred in a tender process.

Table 3.2: Summary on the requirement of ‘trade’ applied in the tender process: Objective versus subjective tests

Bidding cycle Definition of trade Subjective test of intention Objective factors

Pre-bidding stage (including request for invitation and calling for tenders)

In view of the very wide wording of the definition, it would appear that virtually all activities of the taxpayer would constitute a trade for this purpose (Davis et al., 2015:11(a)–2). Applying the definition of ‘trade’ to the activities occurring during the process of a tender, is thus redundant as the resultant answer is clearly in the affirmative

In C:SARS v Smith 2002, the court came to the conclusion that a subjective approach has to be followed to determine whether a taxpayer generally carried on a ‘trade.’

A subjective approach requires a determination as to the state of mind of the taxpayer, however it is only the taxpayer himself who knows what his intention is (specifically in the case of an individual) (Oguttu, 2003:231). In the case of juristic persons, Tshikororo (2014:8) states that a legal entity normally has been incorporated indicating the purpose of trade through means of its MOA.

It is not possible to identify the subjective intention of each potential bidder, as it is based on intention or motive which is dependent on each person. The nature of a bid is such that the taxpayer will be conducting activities that would appear to be business-like and it is submitted that the majority of bidders would have the intention of carrying on a trade.

When considering continuity in the context of a tender, one could be lead to a negative conclusion on whether a trade is being conducted, specifically since the allocation of the tender is not under the control of the bidder, thus the continuity of its activities could be questioned (especially if the bidder’s future existence is dependent on allocation of a bid and thus prior to such bid allocation there is no continuity in its activities). Where a bidder is an incorporated person which, as part of its normal business activities, regularly tenders for the delivery of goods or services it is submitted that the continuity factor would exist since the trading activities of the person extends not only to delivering the goods and services, but also to bidding for tenders. Profitability has been indicated as a persuasive indication that a trade is being conducted, however the absence of a profit would not disqualify activities of a taxpayer from being classified as a trade. At any given point during the tender process, until such time as the bid is awarded, it is doubtful whether it is possible to say that the bidder has any reasonable, actual expectation of profits despite the bidder’s intention in the long term to make a profit.

Submission and opening of tender

Assessing of tender

Awarding of tender and Post tender process

Tender awarded to bidder and taken up

Once the tender is taken up the bidder commences with providing services/goods in terms of the tender documents. At this time there seems to be no doubt that the bidder is carrying on a trade.

Tender not taken up or not awarded to bidder

Where the tender is not taken up, one needs to determine whether there had been a trade subsequent to such point in time. If it is argued that the tender activities prior to this point is equated to the ‘carrying on of a trade’ then at this point the trade of the bidder ceases. Alternatively, if no trade had yet been applicable then no trade is ever carried on by the bidder and section 11(a) and section 11A is not applicable and expenditure is not deductible in terms of either sections.

Tender awarded to bidder and taken up

During the stages prior to ‘bid allocation’ there remains some uncertainty as to the question of whether a bidder is profitable and thus this factor may not provide conclusive evidence to the fact that a trade is carried on. However, after such time as a bid is awarded, the successful bidder is in a position where there is a reasonable expectation of profits and thus it is submitted that the tender is conducting a trade at such time.

After successful bid allocation, there may also be more continuity in the activities of the bidder which also indicates trade.

Tender not taken up or not awarded to bidder

If the bid is not awarded successfully, it is doubtful that the profitability or continuity factor would aid in concluding that a bidder carried on a trade, except in the case of a bidder who regularly and continuously bids for tenders. Based, however, on the broad definition of ‘trade’ and the fact that expenditure is incurred for purposes of generating income it could still be regarded as a ‘trade’.

Author compiled based on literature review