FRANCHISEES may have to pay back over R6 billion in taxes if a recent tax case which the South African Revenue Services (Sars) won against a taxpayer, who attempted to deduct royalty payments that he paid to a franchisor, becomes law.
This came to light during a Franchise Association of Southern Africa Seminar held in Cape Town recently where tax specialist Daniel Erasmus’s talk on the landmark court ruling revealed that franchisees might no longer be able to claim tax for royalty payments and might even have to pay back royalty taxes that they’ve claimed.
According to a typical franchisor and franchisee contractual agreement, franchisees must pay an initial start-up fee to acquire the rights to operate the franchise in a particular area, followed by an annual or monthly fee or royalty to maintain that right.
That right includes an exclusive use area to conduct the business in and the right to use the intellectual property including trade marks, trade name, patents and copyrights.
Erasmus, tax specialist and lawyer at Daniel Erasmus Tax Consulting, says if Sars start aggressively enforcing the principles in the judgment against all franchisees on their franchise royalties to franchisors, the franchise industry could suffer enormous losses.
Says Erasmus: “Until now royalty payments have been held to be tax deductible if paid for the use of the franchisor’s intellectual rights. This is seen as an expense which forms part of the running expenses of a franchisee and is therefore a revenue expense.�
In this case, however, the court ruled that royalty expenditure was the same as expenditure incurred in setting up a business, and was therefore capital in nature and not tax deductible, says Erasmus.
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