Newsletter No 23/24 June 2022
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Here be dragons: Sars win on underpriced clothing affirms the integrity of the tax system
By Dennis Davis
Clothing importers paid far less customs duty than they were legally required to
A recent decision by the Supreme Court of Appeal (SCA) in the case of the commissioner of the SA Revenue Service (Sars) versus Dragon Freight holds great importance for the integrity of the tax system in general and the collection of customs in particular.
It appears there have been numerous instances of clothing being imported into SA, in the main from China, in circumstances where the recipients of these imports have significantly underdeclared the transaction value of the consignment. This has enabled them to pay far less customs duty than they were lawfully required to do.
Dragon Freight is a clearing agent. The other respondents in the litigation all imported goods from China. Nineteen containers of clothing and textile goods arrived in SA. The goods were detained by Sars because it was suspected that all of these respondents had underdeclared their value.
The various respondents were requested to complete a standard trader questionnaire generated by Sars, in which they were asked, inter alia, to provide the following information: how the importer sourced this foreign supply and established a trading relationship; and details of travel abroad to negotiate trade, substantiated with copies of pages from the importer’s/buyer’s passport showing all trips overseas to meet the suppliers.
The respondents did not answer these questions. They simply replied that the importer acquired supplies during trips abroad and each was unable to obtain a copy of passport evidence at the time. In response to the general inquiries generated by Sars, they contended they had obtained clothing at reduced prices from factories in China that were closing down and selling stock at lower prices.
From information generated by the General Administration of Customs of the People’s Republic of China (GACC), Sars obtained export declarations submitted to GACC in respect of eight of the containers. These revealed that the invoice prices furnished by the respondents to Sars were “ridiculously low”. The prices stated in export declarations were 1,000 times more than the prices declared to Sars.
Understandably, Sars believed that Dragon Freight and the importers were liable for underpaid customs duty and VAT. After this decision, Sars sought to seize the goods in terms of section 88(1)(c) of the Customs & Excise Act of 1964.
Astonishingly, given the facts of this case, the high court set aside Sars’ decision not to return the 19 containers and ordered the immediate release of the containers and goods. To add insult to injury, Sars was required to petition the SCA after the high court refused leave to appeal, presumably on the basis that there were no realistic prospects of success.
That the judicial confidence in such an adverse decision against Sars was misplaced is evident from the following passage of the judgment of the SCA, finding that there was a significant basis for the decision made by Sars to seize the containers:
“There was no credible explanation for the unbelievably low prices charged by the suppliers of the goods. The initial explanation that an employee of the importers bought the goods at low prices at various markets in China is false. So too the importers’ assertions that the low prices were obtained because they were able to exploit the ‘trade war’ between the US and China; that the goods comprised old or ‘dead’ stock, or clothing not in demand in China; and that the goods could be purchased at ridiculously low prices on the Alibaba website.
“The evidence of the expert, Dr [Jaywant] Irkhede, and that of [the SA Apparel Association] and [Apparel & Textile Association of SA] makes it clear that the prices declared by the importers were unrealistic and unattainable.”
Had the high court decision been upheld, it would have presented devastating consequences for Sars in its attempt to enforce the customs regime and ensure clothing cannot simply be imported into SA at whatever arbitrary price the clearing agent or importer chooses.
Though the judgment was based on the facts of the case and did not make new law, it remains of considerable significance. Consider the following scenario, which is part of a scheme perpetrated by under-declarers of clothing and textile goods from China: instead of a suit being imported at, say, R2,000 and then being sold for R4,000, triggering a gross profit of R2,000 (which after various legitimate deductions would have reduced the taxable income on which tax was to be paid), the suit was imported at a price of R100.
Assume the suit sold on the open market for R4,000. The customs savings would be lost by way of an increased income tax liability. Inevitably, therefore, a form of transfer pricing would have been invoked to increase the deductible expenses in respect of the transaction and radically reduce the income tax liability of the importer.
It follows that this decision will greatly reduce the ability of the tax collector to impose lawful duty on imports and curb the possibility of a transfer pricing practice running rampant. It is disturbing that a case such as Dragon Freight was not only lost in the high court, but that a whole range of Stalingrad legal tactics were employed to subvert the clear purport of fiscal legislation.
This raises profound questions about the ethical quality of tax advice being given in the circumstances. This should prompt an earnest conversation about the contours of legitimate tax avoidance as opposed to tax evasion.
• Davis, a retired judge president of the Competition Appeal Court, is an adviser to the commissioner of the SA Revenue Service.
Fashion hasn’t been this fashionable since ‘Sex and the City’
By Andrea Felsted
Post-pandemic weddings and parties bring back elegant dressing
After years of prioritising casual over chic, fashion is back in fashion. But for how long?
The question is of more than sartorial importance. Many retailers mistakenly bet big on consumers continuing to slouch in their sweatpants; now they must decide whether the current revival of fancy dresses and smart suits is a post-pandemic flash in the pan or heralds a renewed trend that will last a few more seasons.
Rising inflation and looming recession fears have hit retail hard.
Chains including Target and Walmart, for example, are struggling with a glut of inventory as consumers have changed tastes or cut back. But amid the maelstrom, there is one bright spot: fashion.
On both sides of the Atlantic, shoppers are throwing off their loungewear and reaching for elegant dresses and blazers.
Ralph Lauren, Nordstrom and Macy’s have all reported an upswing in demand for dressier items.
Rent the Runway, the high-end clothing rental service, was one of the few consumer-facing companies this earnings season to beat estimates and raise its guidance, as it saw more women hiring bold outfits for special occasions.
“Black tie is to 2022 as sweatpants were to 2020,” Rent the Runway co-founder and CEO Jennifer Hyman told analysts last week.
It’s a similar picture in Europe. Inditex, which owns several retail brands including Zara and whose strength is interpreting catwalk trends for a mass audience, saw sales between May 1 and June 5 increase 17% compared with the same period in 2021.
So much for fast-fashion giant Shein Group killing off Zara. Indeed, more refined dressing tends to favour premium retailers over cheap chic.
It wouldn’t be surprising to see Prada and Kering’s Gucci and Saint Laurent benefit when they report next month, as they generate 20%-30% of revenue from apparel.
The pendulum swing toward nice clothing has a broader resonance, too. As silhouettes change, there is a need for new shoes — think high heels rather than sneakers. Even underwear gets an uplift.
“Proper clothes” need more structured lingerie. That might be giving Victoria’s Secret’s own turnaround efforts an extra boost. The retailer recently arrested a period of decline in its market share in bras, with a marginal increase.
The main force driving this pivot is that events have come back with a vengeance. People are socialising in the evenings and on weekends.
Some 2.5-million weddings are expected to take place in the US this year — the most since 1984, according to The Wedding Report. Add in long-delayed parties and vacations, and that’s a lot of new wardrobe outfits.
Many people hadn’t bought formal outfits for more than two years. With so many shoppers restocking at once — and posting on TikTok and Instagram — it has become a collective experience, creating the biggest buzz about fashion since 1998, when Carrie Bradshaw strutted out in her pinstripe knickerbocker pants in the original Sex and the City.
It helps that there are lots of wearable trends right now. The popularity of the dress has been building for several years, but it now comes in an array of variations, including a return of the wrap style, which enjoyed its last bout of popularity a decade ago.
Prints are also on display, and there’s a myriad to choose from, whether you want floaty florals or geometrics.
Bright colours have made a splashy comeback, perhaps reflecting our optimism about post-pandemic life. This works well for dresses, but also matching tailored jackets and trousers — another trend enlivening womenswear.
Men aren’t being left behind. Menswear was the best performing category for Nordstrom in the first quarter of its current fiscal year. Even the suit is showing renewed signs of life.
British high street stalwart Marks & Spencer Group’s suit sales rose 39% in May, compared with 2019, as its shoppers purchased outfits for the forthcoming wedding season.
Hugo Boss’s formalwear business is still below pre-pandemic levels but is recovering, also reflecting the return to offices.
The big question now is: how long will the good times last?
Christmas should be another clothes-buying opportunity, given that it is typically party season. This year could be even busier, following the disruption from Omicron in December 2021.
And the backlog of special events — The Wedding Report predicts another 2.2-million weddings in the US in 2023 — means there should be a tailwind into next year, too.
But beyond this, the outlook is uncertain.
Wealthier shoppers are leading the resurgence in clothes spending. They’re splurging on travel, another major driver of wardrobe refreshment.
But they are not immune from external pressures. US luxury is closely linked to the fortunes of the stock market, and the S&P 500 entering a bear market on Monday, as well as the sharp fall in cryptocurrencies, could sap high-end confidence.
Consumers also have more options for what to spend on. Declining interest in clothing over the past decade coincided with an explosion in new technology, restaurants and streaming services.
While Instagram was initially embraced by fashionistas, it also gave them competition, as it showcased travel, dining and beauty items.
Experiences will once again compete for a share of people’s wallets, but it is not clear whether the next few years will see the same level of innovation. If not, that could mean more spending on clothing, shoes and accessories.
A continuation of new fashion trends is essential too. After restocking their closets this year, consumers will need fresh impetus to buy.
Petah Marian, founder of consultancy Future Narrative, sees feel-good fashion giving way to darker, sexier styles, characterised by corsetry, sheers and leather, as the mood shifts to one of partying amid a grimmer economic and geopolitical backdrop.
Miu Miu’s micro miniskirt may be a taste of things to come. We’ll soon see whether these looks chime as well with shoppers as the raft of accessible and ageless garments that have characterised this year.
After the misplaced bet on sweatpants forever, retailers should be wary of another wardrobe malfunction. Bloomberg
Record numbers but where’s the market joy?
By Adele Shevel
Mr Price and TFG have both posted stellar results, but the two retailers have been unable to escape this year’s market mauling
Two of SA’s more acquisitive retailers released some record-breaking numbers last week, helped by a recent shopping spree. And both Mr Price Group and TFG look set to continue their respective expansion paths.
Yet, despite their strong performances, Mr Price and TFG’s shares have hardly followed suit. Year to date, Mr Price has lost about 5% in value, while TFG is up all of 3%. Over one year, Mr Price shares have fallen 10.7%, while TFG’s have lost more than 17%.
Still, both companies are intent on their big growth plans. Mr Price, which positions itself as a “growth-focused retailer” and TFG are approached regularly by parties interested in joining their businesses.
Mr Price CEO Mark Blair says the company is not pursuing acquisitions at the expense of everything else. Instead, it’s keen on big deals that will have high impact over a period of time. Despite a binge in which it snapped up Yuppiechef (for R400m), Power Fashion (R1.5bn) and Studio 88 for R3.3bn (this is awaiting competition approval) in under two years, Blair says “we’ve been very selective in the opportunities we’ve pursued”.
The year ahead will be about “bedding down the acquisitions we have made and testing new organic concepts”.
Mr Price’s operating profit moved past R4bn for the first time in the year to April 2, hitting R4.95bn. The group, which sells low-cost fashion and homeware, opened a record number of stores in one year (130) and would have opened more had it not had to rebuild 96 due to last year’s riots. The number of store openings is vastly higher than the 80 a year it has averaged over the past five years. Meanwhile, sales from organically launched departments brought in R1.2bn, contributing 4.5% of the total.
Blair says the biggest risk for the business is “fashion risk and not competitive risk” — though virtually every apparel retailer in SA is increasingly making a play for low-income earners.
As for the unexpected resignations of Yuppiechef founders Andrew Smith and Shane Dryden — who were expected to stay on with the business after it had been bought — Blair says it has kept “key technical skills”. Yuppiechef has been earnings accretive for financial 2022 and Mr Price sees an opportunity between apparel and homeware, an organic concept more skewed towards the apparel side, which they will trial later this year.
The group reported a 54% increase in credit applications and a 23.6% rise in credit sales to R3.7bn, but there are no plans to roll out credit options to Yuppiechef and Power Fashion — at least for now.
As for post year-end trade, Blair says he’s “finding it quite difficult to understand”. For one, not having the Covid distress grant payments in April and May has hurt sales.
TFG, meanwhile, which owns 29 brands including Foschini, Markham, Jet (a recent purchase) and @home — reported a record R2.9bn in net profit and group revenue of R46.2bn for the year to end-March, which it attributes to market share gains.
The group will spend R2.1bn on itself this financial year, of which at least 75% will be focused on expansionary projects for both stores and online retail.
CEO Anthony Thunstrom says TFG management is often asked why the group bothers with “theoretically risky” acquisitions, given its organic growth. “The simple answer to this is we are ambitious and we want to be able to add the returns that carefully selected and well-integrated acquisitions can deliver to our overall group results,” he says.
He points out that, unlike most of its local peers, TFG’s UK and Australian acquisitions have exceeded expectations. The UK is generating greater profit than before Covid, while the Australian business’s value has more than tripled since acquisitions five years ago.
But it’s not just about buying growth. TFG is building 10 new manufacturing business units in the coming year, mostly in Cape Town and Durban, which further entrenches the group’s commitment to quick-response local manufacturing. The number of jobs in the cut-make-trim factories is set to jump from 5,200 in financial 2022 to 11,200 by financial 2026. About 72% of TFG’s clothing is manufactured locally, which has softened the impact of supply-chain bottlenecks that continue to affect businesses around the world.
While TFG has increased the value contribution to group sales from 15% in 2018 to 28% now, CFO Bongiwe Ntuli says the perception that only deep value sales are growing strongly is inaccurate.
“Of course they are, but the mid to upper segments are growing equally strongly for us. The strategy of operating niche businesses in all consumer segments at different levels cannot be overstated at times such as these,” she says.
Ntuli says the past year has been a notable one for acquisitions by both TFG and competitors. However, stripped of acquisitions, TFG’s real growth was 22.7% up on the previous year.
TFG plans to spend more than R600m on opening a whacking 350 new stores in the next 12 months, which Thunstrom says are expected to generate slightly more than R3.9bn in sales after they’ve opened.
Ideally, TFG will get these stores cheaper than in the past. Ntuli says working with landlords is a strategic imperative. For example, of the 662 stores up for renewal, they managed to cut their rental bill by an average 14% — which translates to a cost saving of about R80m. The rental rate per square metre is down 17.4% compared with 2019 rates, and trading densities are up 7%.
On the innovation front, TFG’s MoreTyme product is being piloted in certain stores, allowing customers to buy their goods immediately, pay half upfront, and the remaining amount over the next two months, with no fees or interest. The TFG Money kiosk is due to be launched in 600 of its stores later this year, part of a greater suite of financial products.
Richard Cheesman, senior investment analyst at Protea Capital Management, says with all the acquisitions, Mr Price is starting to look a bit more like TFG than it did previously. “TFG has had a multiple brand strategy for some time.”
But, he says, “my preference will still be for Mr Price — its model works better, there’s more cash, it’s lower LSM and has a narrower brand portfolio”. He says TFG has done “some phenomenal acquisitions like Jet, but we are generally wary of acquisitions. These often disappoint, especially if they’re in a different geography.” FM
Truworths – resignation of director
Ms Cindy Hess advised of her resignation with immediate effect in order to take up a full-time management position with another listed company with effect from 18 July 2022. A further announcement will be made in due course regarding Ms Hess’ replacement on the audit committee.
The most talked about Oscars dresses of all time
Jennifer Lawrence, 2011
Jennifer would go on to cement herself in Oscars history (who could forget that fall?), but this Calvin Klein number attracted plenty of attention — and comparisons to Jessica Rabbit
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