Closing the tax loopholes has always been a key focus of the South African Revenue Service (SARS) and now, with a ZAR 50 billion revenue shortfall, it is more critical than ever. I had the opportunity to attend the recent Webber Wentzel Tax Seminar 2018 in Sandton, Johannesburg recently where four current and significant tax topics were discussed.
Taking delegates through the topics were Brian Dennehy, Head of Webber Wentzel’s Tax Practice, who spoke on dividend stripping provisions; Des Kruger, Webber Wentzel Tax Consultant, who focused on debt forgiveness; Anne Bennett, Partner in Webber Wentzel’s Tax Practice, who looked at multilateral instruments and other treaty issues; and finally Karen Miller, also a Tax Consultant for Webber Wentzel, who took delegates through CBC reporting and complying with transfer pricing documentation.
What emerged was a sense of the complicated web of rules arising from SARS’ attempts to close tax loopholes. Here is just a taste of the insights shared on the day:
Dennehy kick-started the day by taking delegates through the amendments that impact the practice of subscription buy-backs. He expressed concerns around the clarity of the Taxation Laws Amendment Act, 2017, and also whether the amendments would inadvertently result in a double or cascading effect on taxation.
It is important to note, Dennehy stressed, that in terms of the wording in the final act, dividend stripping rules now override the corporate rules. He explained: “They wanted to amend the specific anti-avoidance rules in the corporate rules… to curb any abuse. This did not unfortunately happen. Instead what they did in the final amendment was to simply say that the corporate rules do not override paragraph 43A or section 22B. This is creating massive problems.”
Another issue of concern to Dennehy is that this new law may impact the legitimate winding up and disposal of company shares. Shareholders could be picking up income tax or capital gains tax through two assessments thus ending up with a double taxation charge.
Despite SARS cracking down on dividend stripping, Dennehy still believes that the use of dividend stripping can be an option when it comes to saving money. He said: “By applying choice principle and getting your facts right, you can still use buy-backs and have an optimised position, but it is very fact specific.” So through the right use of the tool, a company can save money even though maybe not at the same rate as previously.
The second amendment discussed on the day was that of debt forgiveness. Kruger noted that the amendments SARS has made have further complicated the position around debt restructuring.
Taking delegates through the new sets of rules, Kruger began with definitions around debt, concession or compromise, and how assets can be used to offset debt. One point he made strongly was around interest, noting: “There is something else that has been included which is very interesting, debt excludes any amount of interest. What comes to my mind is what about capitalised interest? So if someone owes R100, R20 may be interest. Why have they introduced this? Previously it would have been dealt with under old provisions.... so in my mind it is not clear why it was done.”
Another interesting issue that Kruger raised was how you deal with the allocation when there is a debt benefit. He gave an example of a company wanting to cherry pick which aspects of their debt the debt benefit relates to. SARS said the allocation needed to be based on the relative value of the assets acquired by the creditor. So the debtor is the first person who can allocate the expenditure, and then the creditor, and if there is no agreement between the debtor and the creditor then common law prevails.
Finally, Kruger warned delegates about companies dealing with the VAT element of their debt. If this is not handled correctly, he said that it could land a business into some expensive hot water.
Bennett took delegates through the new multilateral instrument that is now officially in place. This new global legislation, which falls under the ambit of the Organisation for Economic Co-operation and Development (OECD), is going to make international tax avoidance and the movement of profits between tax territories much harder.
Bennett discussed the processes of ratifying the instrument which is officially called the Multilateral Convention to Implement Tax Treaty Measures to Prevent Base Erosion and Profit Shifting, or MLI. To date nearly 80 countries have signed the MLI, with South Africa’s final ratification to be lodged with the OECD by mid-2019.
Bennett spoke about the tools at hand for the MLI to prevent treaty abuse. She outlined the Principal Purpose Test (PPT), the Limitations on Benefits (LOB), and how the MLI can make use of a combination of both these tools. She also spoke about their pros and cons.
One aspect she could not stress enough was the fact that SARS will always question the tax benefits a company will get by operating outside of South Africa’s borders. Given this need to prove that tax benefits are not your primary reason for a foreign office, Bennet urged delegates to be extremely vigilant with their paper trail, since this would ultimately support the reasons for their decision to do business from an offshore location. The company would need to prove tax benefits were an ancillary matter.
As the last speaker of the day, Miller spoke about country-by-country (CBC) reporting and explained the various rules and regulations around the new reporting standards. She explained that there has been a number of noteworthy clarifications issued on this topic in 2017.
Miller then took delegates through the necessary documentation needed for CBC reporting. The first item that must be submitted is the CBC report, followed by the accompanying Master File document.
When submitting confidential company information, Miller stressed that although it is very important that this documentation supplies the necessary information, it is important that the report contains just enough information, without providing too much information. The CBC report, and sometimes the Master File, can be shared by SARS with other jurisdictions.
Miller urged delegates to look at making all information supplied in these reports clear and easy to understand, she even suggested making use of tools like diagrams and flow charts. She also emphasized that it was important for a company to be able to support what is in the report.
Miller also commented on the approach adopted by SARS in current audits on transfer pricing documentation. SARS will confirm the functional profile of a company by interviewing relevant employees. Miller emphasized the importance of ensuring that interviewees are properly briefed in order that they understand the context of the SARS interviews.
The clear message coming out of the seminar is that SARS has not made the tax laws any easier to understand. If anything the complexity and paperwork has increased. It is, therefore, always advisable that individuals and corporations remain one step ahead of the tax man by seeking out sound legal and tax advice.
Make sure you fully understand the impact new tax legislation will have on your business, was a common thread. The advice was simple: It is advisable for companies to consult with qualified tax accountants and well-versed tax lawyers to ensure that they not only understand the new laws but ae also in a position to pay close attention to the details.