South Africa’s Tax Court has delivered one of the most consequential tax judgments arising from the broader state-capture era, confirming SARS’s additional assessments against Taxpayer LE (Pty) Ltd in a matter involving alleged inflated locomotive procurement costs, offshore ‘business development’ payments, and billions in disputed deductions.

The judgment in IT 77151 is about far more than technical tax compliance. It signals a decisive shift in how SARS, supported by international information-sharing mechanisms, is approaching corporate structures linked to corruption-risk transactions.

At the centre of the dispute were locomotive supply contracts worth more than R25 billion concluded with a state-owned rail entity. SARS alleged that approximately R3 billion in costs had been artificially inflated and channelled through offshore intermediaries under the guise of ‘business development services’.

The Tax Court ultimately agreed.

Substance Over Form

One of the clearest themes emerging from the judgment is the court’s willingness to look beyond contractual labels and examine the commercial substance of transactions.

The taxpayer argued that the payments represented legitimate consultancy and advisory expenses incurred in generating income. SARS, however, contended that the arrangements were effectively disguised ‘kickbacks’ linked to procurement contracts.

The court found compelling evidence that approximately 20% to 21% of contract values flowed through intermediary entities associated with politically connected parties. These payments were documented through ‘Business Development Services Agreements’ and supported by banking records obtained via international exchange-of-information mechanisms with Hong Kong authorities.

Importantly, the court held that the taxpayer failed to prove that the services described in the agreements had actually been rendered. Some of the entities receiving the fees did not even exist at the relevant times, whilst others had no demonstrated operational presence in South Africa.

The implication for businesses is significant: simply documenting payments through contracts and invoices will not shield transactions from scrutiny where commercial reality suggests otherwise.

Corruption-Linked Expenditure Is Not Deductible

The judgment also provides a strong judicial endorsement of section 23(o) of the Income Tax Act, which prohibits deductions linked to corrupt activities.

Section 23(o) provides the following:

‘No deductions shall in any case be made in respect of the following matters, namely:

• any expenditure incurred—
  • ​where the payment of that expenditure or the agreement or offer to make that payment constitutes an activity contemplated in Chapter 2 of the Prevention and Combating of Corrupt Activities Act, 2004 (Act No. 12 of 2004);
  • which constitutes a fine charged or penalty imposed as a result of an unlawful activity carried out in the Republic or in any other country if that activity would be unlawful had it been carried out in the Republic; or
  • which constitutes fruitless and wasteful expenditure as defined in section 1 of the Public Finance Management Act and determined in accordance with that Act;’

SARS argued that the inflated costs and purported consultancy fees fell within the Prevention and Combating of Corrupt Activities Act, because they constituted payments intended to secure improper advantages in procurement processes.

The court did not need to make criminal findings to uphold SARS’ assessments. Instead, it accepted that the objective evidence demonstrated that the payments were not genuine business expenses incurred in the production of income.

For corporate South Africa, this is a critical reminder that tax deductions are increasingly being assessed alongside broader governance and anti-corruption standards. A payment that may expose a company to bribery or procurement-risk allegations can also trigger severe tax consequences.

International Cooperation Changes the Risk Landscape

Another noteworthy feature of the judgment is the court’s treatment of information obtained from Hong Kong tax authorities under a Double Taxation Agreement.

The taxpayer challenged the admissibility and authenticity of foreign banking records and related documents. The court rejected those objections and confirmed that information exchanged between treaty partners constitutes official information admissible in South African proceedings.

This aspect of the ruling has far-reaching implications for multinational businesses.

Historically, offshore structures and cross-border payment arrangements have often complicated investigations. Increasingly, however, SARS is leveraging international tax cooperation frameworks to trace flows of funds across jurisdictions.

Companies operating internationally should therefore assume that cross-border banking records, beneficial ownership details, and transactional data may become accessible to revenue authorities.

Governance Failures Carry Litigation Consequences

The case also illustrates the reputational and procedural risks associated with poor litigation conduct.

The taxpayer ultimately closed its case without leading evidence and later failed to participate meaningfully in proceedings. The court was highly critical of this approach and imposed punitive costs, including the costs of multiple counsel and expert witnesses.

For boards and executives, the judgment underscores the importance of:

• maintaining reliable supporting documentation;
• ensuring that transactions can be commercially justified;
• responding fully to SARS information requests; and
• approaching tax disputes strategically and credibly.

A Broader Enforcement Signal

Perhaps the most important takeaway is the broader enforcement message.

The judgment demonstrates that SARS is increasingly willing to pursue tax recovery linked to state-capture and corruption-related transactions, even many years after original assessments were issued. The court confirmed that prescription protections fall away where fraud, misrepresentation, or material non-disclosure is established.

This significantly increases the long-tail risk associated with historic procurement arrangements and related-party transactions.

For companies with complex supply chains, politically exposed intermediaries, or offshore advisory structures, the ruling should prompt renewed attention to governance, transfer-pricing integrity, anti-bribery controls, and documentary substantiation.

The era in which questionable payments could be defended merely because they were contractually documented appears to be ending.

In IT 77151, the Tax Court has made it clear that where commercial reality points to disguised corruption or artificial pricing structures, SARS — supported by international cooperation and forensic financial analysis — will look through form to substance.