Section 45 Tax amendments threaten BEE transactions
24 June 2011
Posted by: SAIT Technical
Cyril Ramaphosa’s R1.3 billion acquisition of McDonald’s South Africa would suffer "significant harm” as a result of the suspension of section 45 of the Income Tax Act. Parliament’s standing committee on finance heard yesterday that the uncertainty that had been created by the Treasury’s unexpected and dramatic decision to suspend the tax benefits for corporate restructurings had placed Ramaphosa’s deal at risk. "This (the suspension) has placed the transaction at risk as the lenders to the transaction will not proceed with the funding if this uncertainty remains,” said Alton Netshivhungululu of the SA Institute of Tax Practitioners. He added that Ramaphosa had told the institute that he was very concerned about the implications of the suspension of section 45.
The suspension is the most controversial part of the draft Taxation Laws Amendment Bill, which is being considered by the committee. Last night a spokesperson for Ramaphosa confirmed that the deal was at risk and might not proceed because of the suspension, adding that the deal did not have the potential to erode South Africa’s tax base. Corporate advisers Bravura told the hearing that the suspension of section 45 and other proposed changes would increase the funding costs for black economic empowerment (BEE) parties by 40 percent. "If funding costs increase by 40 percent then there will be no real value in BEE transactions,” Bravura’s Stephen van der Walt told the committee. Van der Walt said that an analysis of the potential impact on some of the large BEE deals indicated that the changes could result in the BEE partners paying double or even triple tax charges. The BEE partners at Aveng, MTN and Sasol could be facing triple tax charges compared with the single tax charge they now faced. With regards to Altech, which announced two BEE transactions this year, on March 9 and April 18, that potentially involve utilisation of section 45, "if the sale of the business (to the BEE partners) has not been concluded before June 3, the transaction might require complete revision”, Van der Walt said.
During the second day of hearings before the committee a wide array of corporate advisers warned the committee members of considerable long-term adverse consequences from the proposed amendments to the Income Tax Act. Mathew Lester, a tax adviser, told the committee that unless action was taken immediately foreign financiers would take over the billions of rands of "section 45 financing activity” currently undertaken by South African banks. "In the past 48 hours I have heard more and more about the aggressive tax planning opportunity that has been created for foreign financiers,” Lester said.
The Banking Association of SA said the suspension of section 45 was likely to result in the halting of the corporate restructurings in the banking and insurance sectors that had been necessitated by financial regulation. The association urged the committee to shorten the suspension period to three months from the proposed 18 months.