Bronwin Richards | Team Lead | Tax Technical | Tax Consulting SA | mail me |
Can a business claim a tax deduction for money it pays as a bribe or kickback? Under section 23(o) of the Income Tax Act, the answer is no. Kickbacks are not tax deductible.
The provision was introduced in 2005 to support South Africa’s anti-corruption efforts. It denies a tax deduction for any payment that amounts to corrupt activity under our main anti-corruption statute, the Prevention and Combating of Corrupt Activities Act 12 of 2004 (the PCCAA).
For more than a decade, section 23(o) was rarely used. However, the recent Tax Court judgment of Taxpayer LE (Pty) Ltd vs Commissioner for the South African Revenue Service (SARS), delivered on 10 April 2026, has now brought it firmly into the open.
The case in brief
At the heart of the appeal was a familiar pattern dressed in new clothing. A South African company, part of a foreign rail-equipment group, won contracts worth more than R25 billion to supply locomotives to a state-owned enterprise.
Roughly 20% of each contract’s value was paid away through a chain of related foreign companies. The money went to consultancy firms that did no real work. The payments were dressed up as “Business Development Services”.
SARS refused to allow those payments as tax deductions. It relied on the usual rules in sections 11(a) and 23(g) of the Income Tax Act. In addition, it relied on section 23(o). The Tax Court agreed on all three grounds.
What the judgment confirms
Two points stand out from the Court’s reasoning.
First, the taxpayer does not need to have been convicted, or even charged, with any crime before section 23(o) can apply. As SARS confirmed in its own Interpretation Note 54, the section operates on the civil standard. SARS only needs to show, on a balance of probabilities, that the payment was corrupt. It does not need to wait for a prosecutor to act.
Second, after making its section 23(o) finding, the court referred the matter to the National Director of Public Prosecutions for possible criminal investigation. Therefore, a tax disallowance is not the end of the matter for the taxpayer. It can be the start of a criminal one.
Why section 23(o) was enacted
Both of these consequences fit the reason section 23(o) was enacted in the first place. Before its introduction, South African tax law did not specifically deal with whether taxpayers could claim bribes, fines or penalties as deductions. The budget at the time made clear that this had to change, “as a matter of good governance and to reinforce South Africa’s anti-corruption drive”.
The reasoning was straightforward. If a company could claim a tax deduction for the cost of unlawful conduct, the state would effectively share the cost of that conduct. That outcome cannot be defended.
Section 23(o) was the answer. It bars any deduction where the payment itself amounts to corruption under the PCCAA. It also bars deductions where the payment constitutes a fine or penalty for unlawful conduct. The provision is a policy statement: the fiscus will not subsidise corruption. In practical terms, kickbacks are not tax deductible.
A warning to taxpayers
The judgment also shows how far SARS’ investigative capability has come. Its Illicit Economy Unit used formal information requests under the Tax Administration Act. It also used an exchange-of-information request to Hong Kong, forensic cash-flow tracing and independent expert evidence. Together, these tools helped build a detailed record of the payment flows.
The 20% pattern was not advanced as a theory. SARS proved it transaction by transaction against bank records, invoices and contemporaneous correspondence.
Against that backdrop, section 23(o) is a precise tool in SARS’ anti-corruption toolkit. It protects the tax base by ensuring that corrupt expenditure receives no support from the fiscus. It also sends a clear message to taxpayers that structure “advisory”, “facilitation” or “business development” fees in connection with public procurement.
SARS can expect to test those arrangements rigorously. It can assess them against the ordinary rule that an expense must be incurred to produce income. It can also assess them against the corruption ground in section 23(o). Taxpayers should therefore understand that kickbacks are not tax deductible, regardless of how they structure or describe the underlying payments.
Implications of the case
The provision has come alive. SARS has shown both the will and the skill to use it. This judgment also reminds taxpayers that cross-border arrangements face pressure from two sides at once. SARS operates on the tax side, while the South African Reserve Bank operates on the exchange-control side.
The two regulators increasingly share information with each other. As a result, structures that look fine at a glance can unravel under closer scrutiny.
Taxpayers must obtain proper professional advice on both the tax and exchange-control treatment of cross-border transactions. This includes related-party payments, transfer pricing, advisory and facilitation fee arrangements, and whether the deductions claimed will hold up under examination.
