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LG fights tax fraud charge

Jul 09 2010 09:58 Simon Dingle

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Johannesburg - LG Electronics South Africa says it is confident that it will be exonerated of any wrongdoing in a case of tax fraud levelled against it by the South African Revenue Service (Sars).

LG has been accused of evading tax by importing television components separately and assembling the final product in South Africa, avoiding duties on pre-assembled systems.

CEO Peet van Rooyen said this is not the first time such a claim has been brought before the courts.

In 2007, an application was brought before the High Court to determine the appropriate tariff heading for certain screens imported by LG, he said.

"On this occasion and again in front of the Supreme Court of Appeal, LG Electronics was exonerated with Sars being criticised about its approach towards this case. It was with some surprise that LG was served with papers filed by Sars before the Constitutional Court where Sars, once again, seeks to appeal against the two clear and unambiguous decisions in favour of LG.”

Analysts say that importing parts and manufacturing locally is common practice.

Said Steven Ambrose, MD of technology consulting firm WWW Strategy, "This has been going on since the beginning of TV in SA and, as far as I know, led to lots of local assembly of televisions, some even in Botswana."

Ambrose added that the practice has decreased due to a reduction in duties charged for electronics in recent years. He said the practice was regarded as an act of tax minimisation, not evasion, but that the final outcome will depend on Sars.

"Sars has final say, however, and usually decides in favour of the fiscus. Even if LG win in the courts, Sars can change the law using determinations for customs purposes," said Ambrose.

Arthur Goldstuck, MD of research and consulting firm World Wide Worx, said: "The high cost of electronic goods in South Africa relative to mature markets makes it incumbent on manufacturers and distributors to find ways of cutting costs out of the chain.

"If it means local assembly to avoid taxes legitimately, then it is not only a good idea, it should be actively pursued in the interests of lower costs," he said.

Local technology professionals told Fin24.com that a similar practice was common for computers sold in South Africa, but that it was no longer necessary as the ad valorem tax rule pertaining to IT products had been scrapped about five years ago.

Televisions are different, however, as they are not classed as IT. But if a monitor is imported separately from the television tuner component, it can be classed as IT and then the tuner can be installed locally to create the final product.

LG issued a statement on Friday, in which it said: "LG Electronics South Africa is confident that claims made in recent media reports that it is guilty of tax evasion will be met with the same rulings delivered by the High Court and Supreme Court of Appeal - rulings that exonerated LG Electronics of any wrongdoing in respect of South African Tax Law."

- Fin24.com

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