Gauteng court rules against Adidas in R1.9 billion tax disput

ADIDAS International and its South African licensee have encountered a significant setback in their ongoing legal battle, as the Gauteng High Court in Pretoria has denied their request to transfer the South African Revenue Service’s (SARS) bid to recover nearly R1.9 billion in unpaid taxes from Gauteng to the Western Cape.

The German sports apparel giant, registered in Switzerland, along with its Cape Town-based licensee, Adidas South Africa, sought to have the matter heard in the Western Cape division of the high court, arguing that it would be more convenient.

This legal dispute arises from Adidas’s challenge to SARS’s value determination under the Customs and Excise Act. Adidas South Africa is licensed to sell branded products across several territories, including South Africa, Botswana, Lesotho, Malawi, Mauritius, Mozambique, Namibia, Swaziland, Zambia, and Zimbabwe.

Court documents reveal that the value determination pertains to the customs value of Adidas-branded goods imported into South Africa between August 2007 and February 2013. SARS concluded that the customs value should reflect the price paid by Adidas South Africa to Adidas International, rather than the price paid by Adidas International to foreign manufacturers.

This decision led to a customs duty and VAT (value-added tax) assessment, including penalties and interest, amounting to just over R1.87 billion as of June 30, 2018.

One of the reasons Adidas cited for requesting the transfer of the case from Gauteng to the Western Cape was the mandatory mediation directive issued in April 2024 by the then Gauteng Judge President, Dunstan Mlambo, who was appointed Deputy Chief Justice in July of the previous year.

The companies expressed concerns that mandatory mediation could further delay access to justice for cases requiring judicial resolution, as parties would need to undergo mediation before obtaining a trial date.

They argued that the directive's blanket approach to mandatory mediation did not account for cases like theirs, which they believed were unsuitable for alternative dispute resolution. The Gauteng High Court in Pretoria heard their concerns.

Additionally, the companies noted that the audit by SARS customs and border management regarding Adidas’s compliance was conducted in Cape Town, and the letter of demand issued in June 2018 originated from SARS’s Cape Town office.

They contended that the cause of action arose within that jurisdiction, as the majority of the applicants’ factual witnesses reside in Cape Town, including one witness intended to be called by the respondent (SARS).

Adidas further claimed that their international witnesses had confirmed that Cape Town would be more convenient for them. Given that the trial is expected to exceed three weeks, holding proceedings in Cape Town would be less disruptive to the witnesses’ everyday lives.

SARS, however, has indicated its opposition to the proposal to move the hearing to Cape Town, a suggestion first raised at a pre-trial conference in June 2024. The tax revenue collection agency explained that the Gauteng High Court in Pretoria has available trial dates in the fourth term of 2026 or the first or second term of 2027, which are comparable to or earlier than the dates available in Cape Town.

SARS also cautioned that transferring the case to Cape Town would significantly increase costs for both parties due to the need for travel and accommodation for legal teams and witnesses based in Gauteng.

“Since the majority of witnesses, legal teams and parties involved are based in Gauteng, transferring the case to Cape Town would result in increased travel and accommodation costs for both parties,” the taxman warned.

Furthermore, SARS agreed that mediation in this matter would be inappropriate due to its public-law nature and the substantial amount involved. It stated that Adidas’s claim of trial roll congestion is no longer valid due to the directive, which resolved the backlog and allows for trial dates to be allocated within 18 months.

“I find that the applicants (Adidas) have failed to prove that the trial roll congestion or mediation requirements in the Pretoria High Court would justify the transfer of proceedings. The applicants’ contention that mandatory mediation in the Gauteng division would further delay proceedings is unfounded,” ruled Acting Judge Phuti Manamela last month.

She noted that transferring the case to Cape Town would lead to significant additional expenses for travel and accommodation, particularly for the legal teams and witnesses based in Gauteng.

“This would contradict the principle of ensuring cost-effective litigation. On that score, I also find that the cost efficiency argument does not support the transfer of proceedings to Cape Town,” stated Acting Judge Manamela, adding that such a move would create logistical challenges and inconvenience for the majority of participants.

Ultimately, she dismissed Adidas’s application for the removal of the trial proceedings to the Western Cape High Court, with costs.

SUNDAY TRIBUNE