Telkom SA SOC Limited v The Commissioner for the South African Revenue Service

Telkom SA SOC Limited, through its wholly owned subsidiary Telkom International (Pty) Ltd, acquired 100% of the shares in Multi-Links Telecommunications Ltd, a Nigerian company, between 2007 and 2009. Telkom advanced substantial shareholder loans to Multi-Links, denominated in US dollars, amounting to over USD 531 million outstanding by October 2011, after partial conversion to preference shares. Multi-Links became commercially unviable and unlikely to repay the loans. In October 2011, Telkom disposed of its equity interests and sold its loan claims to a third party for USD 100. In its financial statements Telkom reflected a foreign exchange gain, but in its 2012 income tax return it claimed a deduction of approximately R3.96 billion as a foreign exchange loss under s 24I of the Income Tax Act 58 of 1962. This converted a large taxable income into a tax loss and generated a refund claim. SARS disallowed the deduction and assessed a foreign exchange gain. Telkom also claimed deductions for cash incentive bonuses paid to a service provider, which SARS partially disallowed, and SARS imposed understatement penalties.

Telkom’s appeal on the foreign exchange deduction was dismissed with costs, including the costs of three counsel. SARS’ cross-appeal on the cash incentive bonus issue was upheld with costs. The Tax Court’s order was set aside and replaced with an order partially upholding Telkom’s appeal only to the extent that understatement penalties for the 2012 year of assessment were set aside.

The case is significant for clarifying the scope of s 24I of the Income Tax Act and confirming that it applies only to genuine foreign exchange gains or losses, not to commercial losses arising from bad investments or loan disposals. It provides authoritative guidance on the interpretation of fiscal statutes, reaffirming the Endumeni purposive approach, the limited role of commercial sensibility, and the residual application of the contra fiscum rule. The judgment is frequently cited in disputes involving foreign currency loans and connected-party transactions.