Tax warning for businesses in South Africa after R800 million blow to SARS
Tax experts at consultancy PwC have warned businesses in South Africa to watch out for possible changes to the country’s tax laws after the South African Revenue Service’s (SARS’) loss against fund manager Coronation to the tune of R800 million.
Specifically, businesses with international operations should keep their eyes on the next move from National Treasury, which was waiting on the outcome of the SARS vs Coronation matter before looking at new laws around controlled foreign companies (CFCs) and foreign business establishments (FBEs).
In the Coronation case, SARS accused Coronation of underestimating the taxes owed from its Irish subsidiary.
The Supreme Court of Appeal (SCA) agreed with the taxman and ruled that the asset manager should pay nearly R800 million in taxes owed.
However, the case ultimately made its way to the Constitutional Court, which ruled in favour of Coronation in June, stating that the group correctly interpreted and applied the relevant tax legislation.
The key question
At the heart of the matter was the interpretation of a FBE in terms of the country’s tax laws, as well as specifics around the meaning of ‘business’ and ‘primary operations’.
Specifically, the case revolved around the interpretation and application of section 9D of the Income Tax Act, which deals with the taxation of amounts earned by CFCs of South African residents.
The main issue was whether the net income of Coronation Global Fund Managers (Coronation Ireland), a foreign subsidiary and CFC of Coronation Investment Management, was exempted from tax claims for the 2012 year of assessment.
SARS and the SCA posited that Coronation’s business model—which separated fund management from investment management and outsourced the latter to Ireland—was disqualified from the critical FBE tax exemption.
The Constitutional Court disagreed, however, noting critically that Coronation Ireland’s licence with authorities only permitted fund management, not investment management—an important distinction that SARS and the SCA did not take into consideration.
For tax purposes, the court said the meaning of ‘business’ and ‘primary operations’ for the FBE tax exemption must be determined by looking at what the CFC (in this case, Coronation Ireland) actually does (fund management) and not what it could potentially or theoretically do (investment management).
Thus, Coronation’s interpretation was correct.
Consequences and effect
According to PwC, the court case could have significant repercussions for all businesses in South Africa that have international operations—or, as the ConCourt put it, for South African-resident companies relying on the FBE exemption for CFCs they hold.
Specifically, the consultancy noted that the National Treasury has previously indicated that the definition of FBE would be amended to clarify that all important functions for which a CFC is compensated must be performed by the CFC (or certain other CFCs in the same jurisdiction) in order for the FBE to be created.
“This proposal subsequently met with criticism from commentators, as the proposed amendment introduced additional complexities in that the use of terms such as ‘important functions’ and ‘compensated’ were not defined,” it said.
The proposal was subsequently omitted from the Taxation Laws Amendment Bill, pending the outcome of the ConCourt Coronation case.
PwC said it remains to be seen whether the National Treasury will now seek to amend this definition after the ConCourt Coronation case, but flagged to important areas for businesses to keep an eye on:
The first is the actual content and wording of the previously proposed amendment, which was “fraught with vagueness and ambiguity”, so the detail of the proposal, if any, will require careful consideration, it said.
The second is that the proposal, if any, could potentially be made with retrospective effect.
“We note that there have been instances in the past where legislation has been amended with retrospective effect and in accordance with the rule of law,” it said.
“Stakeholders should, therefore, monitor National Treasury’s future announcements on this matter, as a proposed amendment may find its way into proposals for amendments to our tax laws.”
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