SARS gazettes new list of arrangements deemed reportable
22 September 2015
Posted by: Author: David Warneke
Author: David Warneke (BDO)
Observations on the new arrangements that are deemed to be reportable in terms of the recently published list
On 16 March 2015, the Commissioner of SARS listed arrangements which in terms of section 35(2) of the Tax Administration Act are deemed to be reportable. This list comprises an addition to section 35(1) of the Tax Administration Act.
Failure to report arrangements that are deemed to be reportable generally leads to penalties of a minimum of R50 000 per month for up to 12 months. Unfortunately, the new list gazetted in terms of section 35(2) contains numerous areas of uncertainty which may lead to the imposition of the penalties in circumstances where the arrangements are not reported.
Although the list is now ‘live’, no guidance has to date been forthcoming from SARS. This is unacceptable and guidance as to how SARS will interpret the list should be made available as soon as possible. Due to the severity of the penalties for non-compliance, this guidance should preferably take the form of a Binding General Ruling.
In this article I share some observations on the new arrangements that are deemed to be reportable in terms of the recently published list.
Reportable arrangements must be reported by every ‘participant’ (as defined below) within 45 business days from the date on which it qualifies as a reportable arrangement, or within 45 business days of becoming a participant. This is unless the participant obtains a written statement from any other participant that the other party has disclosed the arrangement.
A ‘participant’ is defined as either a promoter, or a person who directly or indirectly will derive, or assumes that it will derive, a ‘tax benefit’ or ‘financial benefit’ by virtue of an arrangement. A ‘promoter’ means a person who is principally responsible for organising, designing, selling, financing or managing that arrangement. The term ‘tax benefit’ is widely defined to mean the avoidance, postponement, reduction or evasion of a liability for tax and the term ‘financial benefit’ is rather narrowly defined to mean a reduction in the cost of finance, including interest, finance charges, costs, fees and discounts on a redemption amount.
It would appear that if no person is principally responsible for organising, designing, selling, financing or managing an arrangement and if no ‘tax benefit’ or ‘financial benefit’ (as defined) is derived by any person from the arrangement, then it does not have to be reported.
The new list
The new list replaces a list that was gazetted on 28 December 2012 and which contained only two categories of arrangements that were deemed to be reportable, namely:
- Instruments that would have qualified as ‘hybrid equity instruments’ in terms of section 8E of the Income Tax Act if the prescribed period had been 10 years; and
- Instruments that would have qualified as ‘hybrid debt instruments’ in terms of section 8F of the Income Tax Act if the prescribed period had been 10 years – other than debt instruments listed on the JSE.
The list of 28 December 2012 essentially replaced section 80M(2)(a) and (b) of the Income Tax Act due to the coming into effect of the Tax Administration Act. The wording of section 80M(2)(a) and (b) was substantially the same as that contained in the list above.
The above categories are included verbatim in the list of 16th March 2015, and in addition various other categories are added which are discussed below. Regarding the second category relating to ‘hybrid debt instruments’, section 8F no longer contains a 3 year prescribed period as it did when the previous list was issued. It may therefore be argued that this category only applies to instruments that were issued under the previous version of section 8F, in other words prior to 1 April 2014. Likewise, with effect from 1 April 2012 section 8E contains a category of ‘hybrid equity instrument’ which does not refer to a time limit. On a similar basis it may be argued that this category of ‘hybrid equity instrument’ need not be reported under the above category of ‘reportable arrangement’. It is also somewhat strange that there is no category specifically covering section 8EA ‘third party backed shares’ which, from a policy perspective, are also viewed as a type of hybrid instrument.
The new categories of ‘reportable arrangement’ in terms of the list of 16th March 2015 are as follows:
"Any arrangement in terms of which a company buys back shares on or after the date of publication of [the] notice from one or more shareholders for an aggregate amount exceeding R10 million; and that company issued or is required to issue any shares within 12 months of entering into the arrangement or of the date of any buy-back in terms of that arrangement.”
Points to note:
- The same company must buy back and issue the shares.
- The order in which the buy-back and share issue occurs is irrelevant. In other words, the share issue may occur prior to the share buy-back, except that the trigger is that the buy-back must occur ‘on or after the date of publication of the Notice’ in other words, 16 March 2015.
- The share buy-back must be connected to the share issue in the sense of constituting ‘an arrangement’. So if a buy-back occurs on or after the date of publication of the notice preceded or followed by the issue of shares within 12 months of the buy-back, there will be no ‘arrangement’ unless the buy-back and the share issue constitute an ‘arrangement’.
- In order to be reportable, the total amount for the buy-back must exceed R10 million in aggregate whereas the number or value of shares issued is irrelevant.
- Presumably the redemption of a redeemable share would not be regarded as a buy-back for purposes of this category.
- This category has retrospective effects in the sense that a share issue may have occurred prior to the date of publication of the Notice with a connected buy-back occurring on or after the date of publication of the Notice.
The second category is:
"An arrangement in terms of which-
(a) a person that is a resident makes any contribution or payment on or after the date of publication of [the] Notice to a trust that is not a resident and has or acquires a beneficial interest in that trust; and
(b) the amount of all contributions or payments, whether made before or after the date of publication of [the] notice, or the value of that interest exceeds or is reasonably expected to exceed R10 million, excluding any contributions or payments made to or beneficial interest acquired in any –
(i) portfolio comprised in any investment scheme contemplated in paragraph (e)(ii) of the definition of ‘company’ in section 1(1) of the Income Tax Act, 1962; or
(ii) foreign investment entity as defined in section 1(1) of the Income Tax Act, 1962.”
Points to note:
- Presumably the term ‘beneficial interest’ is intended to include a discretionary interest which has been held to be a mere ‘spes’ or expectation that may never be realised as well as a vested interest in the assets or income of the non-resident trust.
- From the fact that item (a) can refer to situations where a person already has a beneficial interest in the foreign trust and makes a contribution or payment on or after the date of publication of the notice it can be deduced that the acquisition of the beneficial interest need not be a quid pro quo for the contribution or payment.
- The trigger is the contribution or payment of any amount on or after the date of publication of the notice if combined with the total contributions or payments made (whether prior to or after the date of publication of the notice) the R10 million threshold is exceeded.
- Presumably the value of a purely discretionary interest in a foreign trust could be argued to be Rnil.
- On a strict reading, if the value of the contributions, payments or of the beneficial interest is likely to exceed R10 million at any point in the future then the arrangement is reportable. This is unacceptably broad in principle. Furthermore, the R10 million is a gross figure and not the present value of the contributions, payment or value of the beneficial interest.
- Presumably the contributions or payments all need to be made by the person who has or who acquires the beneficial interest. In other words the arrangement would not be reportable where say A has a beneficial interest in the foreign trust and makes a payment of R2 million on or after the date of publication of the notice with other residents having made contributions exceeding R8 million. However if this is correct then it is possible to circumvent the reporting requirement by having a wife make the payments or contributions with the husband and children as the only discretionary beneficiaries.
- The term ‘payment’ in terms of its ordinary meaning would appear to include the advancing of funds in return for a loan in a discretionary foreign trust.
The third category is:
‘Any arrangement in terms of which one or more persons acquire the controlling interest in a company on or after the date of publication of this notice, including by means of acquiring shares, voting rights or a combination of both, that –
(a)(i) has carried forward or reasonably expects to carry forward a balance of assessed loss exceeding R50 million from the year of assessment preceding the year of assessment in which the controlling interest is acquired; or
(ii) has or reasonably expects to have an assessed loss exceeding R50 million in respect of the year of assessment during which the controlling interest is acquired; or
(b) directly or indirectly holds a controlling interest in a company referred to in paragraph (a).’
Points to note:
- The term ‘controlling interest’ is not defined but presumably it envisages a threshold of more than 50 per cent rather than 70 per cent as in the concepts ‘controlled group company’ and ‘controlling group company’. It would appear that, especially because a ‘combination of both’ shares and voting rights is specifically referred to in addition to ‘shares’ and ‘voting rights’ in the description of how a controlling interest may be acquired the term ‘including’ is to be interpreted in an exhaustive manner – in other words that a change of control must, in order to qualify as a reportable arrangement, be brought about by the acquisition of shares, voting rights or a combination of both. This limits the concept of ‘control’ compared with that in, for example IFRS 10 where control may be established through complex rights, for example asembedded in contractual arrangements.
- Although the parties acquiring the controlling interest do not have to be ‘connected persons’ in relation to each other, they would have to be acting in concert for the acquisition to constitute an ‘arrangement’.
- The ‘reasonable expectation’ requirement with regard to the assessed loss of R50 million means from a practical perspective that tax forecasts should be carried out where the direct or indirect acquisition of a controlling interest in a company is contemplated. If it is concluded that the arrangement is not reportable then this evidence should be retained in case of dispute with SARS.
- It is submitted that the ‘reasonable expectation’ of the assessed loss exceeding R50 million must be determined at the date on which the controlling interests are acquired. So if thereafter circumstances change and the company appears reasonably likely to have an assessed loss exceeding R50 million in the year of acquisition of the controlling interest, the arrangement does not subsequently become reportable within 45 business days from the date on which it appears that the company will have an assessed loss exceeding R50 million.
- In a group context the indirect acquisition of a controlling interest in subsidiaries with an assessed loss in excess of the R50 million threshold can give rise to the reporting obligation. However, if for example A acquires a 60 per cent equity shareholding in B which in turn holds a 60 per cent shareholding in C (which has an assessed loss in excess of R50 million), then it is submitted that A does not hold a controlling interest in C.
- It is submitted that a ‘controlling interest’ would not be established where a party acquires in excess of 50 per cent of non-participating, non-voting shares.
The fourth and final category is:
"Any arrangement between a person that is a resident and a person that qualifies as an insurer in terms of any law of any country other than the Republic (hereinafter referred to as the foreign insurer) in terms of which –
(a) An aggregate amount that exceeds or is reasonably expected to exceed R5 million has been paid or becomes payable by the resident to the foreign insurer; and
(b) Any amount payable on or after the date of publication of this notice, in cash or otherwise, to any beneficiary in terms of that arrangement is to be determined mainly by reference to the value of particular assets or categories of assets that are held by or on behalf of the foreign insurer or by another person for purposes of the arrangement”.
Points to note:
- It would appear that this category is aimed primarily at premiums paid to captive insurance vehicles.
- Although the category is clearly aimed at premiums paid to non-resident insurers, the wording is open to the (presumably) unintendedly broad interpretation that even premiums paid to resident insurers who qualify as an insurer in terms of any foreign law would be subject to the reporting requirement.
- Payments exceeding R5 million may have been paid prior to the date of publication of the Notice: the trigger is however if amounts payable to any beneficiary on or after the date of the Notice are to be determined mainly by reference to the value of particular assets or categories of assets. The category therefore has retrospective effect in this sense.
- It is assumed that the term ‘beneficiary’ refers to a person who is a beneficiary in the context of a pay-out under a policy regardless of whether the beneficiary is also a shareholder in the captive.
- If amounts payable in terms of a policy are not determined with reference to the value of assets or categories of assets, for example if the amounts are determined solely with reference to a formula that does not refer to the value of underlying assets, the arrangement would not be reportable.
- The use of the term ‘mainly’, presumably indicating more than 50 per cent, implies that an amount payable may be determined partly by reference to the value of particular assets or categories of assets held by or on behalf of the foreign insurer without resulting in the arrangement becoming reportable. However, uncertainty may arise if amounts payable are determined with reference to a formula that partly refers to the value of underlying assets.
The Notice also excludes certain arrangements under section 36(4) of the Tax Administration Act. The exclusion applies to any arrangement referred to in section 35(1) of the Tax Administration Act if the aggregate tax benefit which is or may be derived from the arrangement by all participants to the arrangement does not exceed R5 million.
Points to note:
- The aggregate tax benefit as derived by all participants must not exceed R5 million for the arrangement not to be reportable.
- The R5 million is a gross figure and not the present value of the aggregate tax benefit.
- The exclusion only covers section 35(1) arrangements, in other words not the categories in the Notice as described above as the Notice is published in terms of section 35(2) of the Tax Administration Act and not section 35(1).
This article first appeared on the July/August 2015 edition on Tax Talk.
Please click here to complete the quiz.