If SARS has its way, the current list of arrangements deemed reportable to SARS in terms of section 35(2) of the Tax Administration Act will be widened considerably. This is apparent from the release on 10th June of a Draft Public Notice (‘the Notice’) listing arrangements that would be deemed to be reportable in terms of the above provision. The Notice has been released for a second round of public comments.
Arrangements that are reportable in terms of section 35(1) or (2) of the Tax Administration Act must be reported to SARS within 45 business days after an amount is first received by or accrues to, or is first paid by or actually incurred by, a ‘participant’. Failure to do so results in extremely severe penalties – of R100 000 for each month that goes by while the arrangement is unreported (up to a maximum of 12 months) in the case of failure by the ‘promoter’ to report the arrangement, and R50 000 for each month in the case of failure by a ‘participant’ other than the ‘promoter’. If the anticipated tax benefit for the participant exceeds R5 million the penalty is doubled and if the tax benefit exceeds R10 million the penalty is tripled. In the case of a first incidence of non-compliance or non-compliance that endures for less than 5 business days, up to R100 000 of the penalty may be remitted. Otherwise, it is only in exceptional circumstances that the penalty may be remitted.
In the first instance, the obligation to report the arrangement falls on the ‘promoter’. If there is no ‘promoter’ or if the ‘promoter’ is a non-resident, then all ‘participants’ must report the arrangement. However, if the ‘participant’ obtains a written statement from the ‘promoter’ or any other ‘participant’ to the effect that they have reported the arrangement, then the ‘participant’ need not report the arrangement. The information has to be disclosed in the prescribed form and must contain the details set out in section 38 of the Tax Administration Act.
A most important pitfall to be avoided by SARS is that if the list of what constitutes a reportable arrangement is too widely cast, taxpayers may inadvertently be subject to the draconian penalty regime for failure to report what they believed to be a normal business transaction. Unfortunately it appears that SARS has fallen into this trap in a number of instances. It is of vital importance that tax advisors are well versed in this aspect of our tax legislation.
A general exclusion is also proposed in the Notice, whereby any arrangement where the tax benefit to be derived from an arrangement does not exceed R5 million, will be deemed not to be reportable. Presumably this means the tax benefits derived by all parties to the arrangement must not exceed R5 million in total.
The list of reportable arrangements published in the Notice are as follows. Unfortunately there are numerous issues of uncertainty that remain.
- An arrangement in terms of which fees that are payable or that may become payable on or after the date of publication of the Notice, by a resident to a non-resident with regard to services rendered ‘to that resident in the Republic’, exceed or are likely to exceed R5 million.
- 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 of at least R10 million, if the 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.
- Any arrangement that is expected to give rise, on or after the date of publication of the Notice, to any foreign tax rebate, if the amount of the rebate exceeds or is reasonably expected to exceed an aggregate amount of R5 million, taking into account tax payable by any persons that are party to the arrangement.
- An arrangement in terms of which a resident makes contributions or payments, on or after the date of publication of the Notice, to a non-resident trust and ‘acquires a beneficial interest’ in that trust in circumstances where the contributions, payments or the value of the interest exceeds or is reasonably expected to exceed R10 million. Contributions, payments or a beneficial interest acquired in a foreign collective investment scheme in securities or participation bonds, or a ‘foreign investment entity’ as defined are excluded from the ambit of this category.
- An arrangement in terms of which a person or persons acquire the controlling interest in a company (by the acquisition of shares or voting rights on or after the date of publication of the Notice) that has carried forward or expects to carry forward a balance of assessed loss exceeding R20 million from the previous year of assessment to the year of assessment in which the controlling interest is acquired. Also included is the acquisition of the controlling interests in a company that expects to have an assessed loss exceeding R20 million in the year of assessment during which the controlling interest is acquired.
- An arrangement in terms of which an amount that exceeds or is likely to exceed R5 million is or becomes payable by a resident to an insurer that qualifies as such in terms of any foreign law, if any amount or amounts payable on or after the date of publication of this Notice, to any beneficiary in terms of that arrangement are to be determined mainly by reference to the value of particular assets or categories of assets held by or on behalf of the insurer or another person for purposes of the arrangement.
This represents a considerable change from the previous list which was gazetted in terms of section 35(2) on 28 December 2012 and which contained only two categories, namely:
- Instruments that would have qualified as ‘hybrid equity instrument[s]’ in terms of section 8E of the Income Tax Act if the prescribed period had been 10 years (and not 3 years); and
- Instruments that would have qualified as ‘hybrid debt instrument[s]’ in terms of section 8F of the Income Tax Act if the prescribed period had been 10 years (and not 3 years) – other than listed debt instruments.
A practical problem will arise in many instances where there is a ‘reasonable grounds’ requirement. In our view this should be tested when the arrangement is first entered into. If it is decided at that stage that it is not a reportable arrangement but circumstances change subsequently, it would appear that there is no reporting requirement at that later stage. However, this may well give rise to numerous fights with SARS as the circumstances were reasonably foreseeable at the time that the arrangement was entered into.
It should be noted that section 35(1) of the Tax Administration Act includes other types of arrangements that are reportable in addition to those listed above and section 36 contains a number of exclusions. The other types of arrangements included in section 35(1) are as follows.
Where a ‘tax benefit’ is or will be derived or is assumed to be derived by any ‘participant’ and the arrangement:
- contains provisions in terms of which the calculation of ‘interest’ as defined in section 24J of the Income Tax Act, finance cost, fees or any other charges is wholly or partly dependant of the assumptions relating to the tax treatment of that ‘arrangement’ (otherwise than reason of any change in the provisions of the Tax Act);
- has any of the characteristics contemplated in section 80C(2)(b) of the Income Tax Act, or substantially similar characteristics i.e. round trip financing per section 80D, an accommodating or tax indifferent party per section 80E or cancelling or offsetting elements;
- gives rise to an amount that is or will be disclosed by any ‘participant’ in any year of assessment or over the term of the ‘arrangement’ as-
- A deduction for purposes of the Income Tax Act but not as an expense for purposes of ‘financial reporting standards’; or
- Revenue for purposes of ‘financial reporting standards’ but not as gross income for purposes of the Income Tax Act;
- does not result in a reasonable expectation of a ‘pre-tax profit’ for any ‘participant’; or
- results in a reasonable expectation of a ‘pre-tax profit’ for any ‘participant’ that is less than the value of that ‘tax benefit’ to that ‘participant’ if both are discounted to a present value at the end of the first year of the assessment when that ‘tax benefit’ is or will be derived or is assumed to be derived, using consistent assumptions and a reasonable discount rate for that ‘participant’.If you are in any doubt as to whether or not you may be a ‘promoter’ or a ‘participant’ in a reportable arrangement, you are urged to contact us as soon as possible.