Tax threat to empowerment deals
11 June 2011
Posted by: Sanchia Temkin (Business Day)
Cmpanies will be forced to return to the
drawing board to consider their black economic empowerment (BEE) transactions
to avoid facing adverse tax consequences in the wake of proposed draft tax
laws, tax analysts have warned.
Stephan van der Walt, head of corporate finance
at private equity group Bravura, says the proposed new tax laws place an immediate
moratorium on the intragroup rollover relief provision contained in the Income
Tax Act, which can also put a hold on many company acquisitions until further
clarity is obtained from the government.Last week, the national Treasury issued the draft
Taxation Laws Amendment Bill.
The bill gives effect to many of the tax
proposals contained in Finance Minister Pravin Gordhan’s February budget. The draft legislation is intended to broaden the
tax base and close loopholes by introducing a number of new anti-avoidance
measures, including the immediate suspension, until December next year , of
section 45 of the Income Tax Act, which has allowed for the intergroup transfer
of assets in a tax-neutral manner. However, the Treasury has indicated that
some companies have taken advantage of the provision in creating excessive
Keith Engel, chief director of legal tax design
at the national Treasury, explains that the common use of the section involves
"debt push-down structures" — the trigger for connecting excessive
debt and funnel schemes.Mr van der Walt says the ability to transfer
assets tax-free is fundamental in any tax system to enable corporate activity
to take place. For example, section 45 is the key to the implementation of BEE
It is the only provision of the Income Tax Act
that allows for the conclusion of sustainable empowerment transactions that are
not share-price dependent (unlike the typical share-funded models that were the
cause of so many failed empowerment transactions ).
He says section 45 is also used in many internal
restructurings and in the acquisition of businesses. "The immediate suspension will now force
companies to revert to unsustainable forms of empowerment. Many companies,
especially mining companies which have announced BEE transactions but await
approval from the Department of Mineral Resources, will now need to go back to
the drawing board or may face significant negative tax consequences.
"He also says it is likely that many companies
will put acquisitions on hold until further clarity is obtained on the matter.
"This is expected to have a significant impact on merger and acquisition
activity in SA."
Dirk Kotze, a tax partner at audit, tax and
advisory firm Mazars, says the hiatus on section 45 comes as a
"surprise" to tax advisers and taxpayers alike as there was no
mention in the finance minister’s speech that the provisions of section 45
would be substantially amended, let alone their use barred."What creates even more uncertainty is that
many taxpayers and groups have planned restructures and transactions involving
the use of section 45 and these will now have to be reconsidered in the light
of the proposed amendment and its effective date," says Mr Kotze.
One of the reasons provided by the Treasury for
the moratorium on the use of section 45 is the fact that taxpayers have
apparently abused the provisions in order to reduce overall group taxable
incomes. "Treasury indicated that the position is a suspension of section
45 as part of a larger investigation into the taxation of interconnected areas
and that more legislation can be expected in 2012," says Mr Kotze.
Mr van der Walt points out that another
amendment in the bill relates to preference shares. He says the use of
preference share funding is in many instances the only form of viable funding.
"We know that the South African Revenue Service is concerned about
transactions generating tax-free dividends on the one hand and interest
deductions on the other.
"Dividends on preference shares are generally not
subject to income tax. The proposed amendments, effective from next April, will
result in almost all preference share dividends now becoming taxable without a
corresponding deduction."This will have a detrimental effect on the
majority of BEE transactions, many of which are already distressed. The
amendment will result in an approximate 40% increase in the cost of funding for
BEE parties, leading to almost every share-funded BEE transaction being
unsustainable with a limited to no prospect of realising any value," says
Mr van der Walt.