Calls for more targeted approach to close tax loopholes-section 45
24 June 2011
Posted by: SAIT Technical
CAPE TOWN — The Treasury’s 18- month suspension of section 45 of the Income Tax Act and its proposed revision of rules on preference shares would effectively spell the death knell of sustainable black economic empowerment, Parliament’s finance committee was warned yesterday during a second day of public hearings on the proposals.
Presentations on the proposals in the Taxation Laws Amendment Bill were made by Business Unity SA, the Banking Association of SA, the South African Institute of Chartered Accountants, the South African Institute of Tax Practitioners, South African Venture Capital, the Private Equity Association and financial services company Bravura.
They all argued that the Treasury needed to adopt a far more targeted approach to the abuses it wanted to prevent rather than mixing the good with the bad. A study by Bravura showed that the suspension of section 45 could jeopardise certain previously announced or already existing empowerment transactions, including those by Aveng, African Bank, MTN, Altech, Palabora Mining and Sasol.
The Treasury justified the proposals on the grounds that widespread tax abuse was taking place at a significant loss to the fiscus, particularly with regard to excessive use of leveraged debt and the associated deduction of interest. However, tax experts said these concerns could be addressed using a number of the protection measures already available in tax law.
The Banking Association of SA’s representative, Marius van Blerck, urged the Treasury to limit the section 45 moratorium to no longer than three months, during which time it should come up with a very "surgical" amendment to address its valid concerns. If not, the restructuring under way in the insurance industry to comply with new rules would have to come to a halt.
Bravura’s head of corporate finance, Stephan van der Walt, said the suspension of section 45 as well as the proposed change to the tax treatment of preference shares in sections 8E and 8EA of the draft bill would force empowerment parties to rely on special purpose vehicles, raising the funding cost by about 40%. These sections proposed that the period within which preference shares can be sold be extended from three years to 10 years while dividends on third party-backed shares would be deemed to be interest in the hands of the recipient. He said the proposals would mean parties to empowerment transactions would be taxed three times: within the companies where the profits were generated; on receipt of dividends on ordinary shares subject to pre- emptive rights; and again on dividends in the hands of the funder.
Prof Matthew Lester told the committee the Treasury would have to act now that it had flagged the loopholes in section 45, otherwise people would be "selling tax schemes like supermarkets sell soap".