Reportable arrangements and retrospectivity

The South African Revenue Service (SARS) recently issued an updated Draft Notice listing transactions that constitute reportable arrangements for purposes of s35(2) of the Tax administration Act No 28 of 2011 (TAA).

The Draft Notice, once finalised, is intended to replace any previous notices issued in respect of reportable arrangements under s80M(2)(c) and s80N(4) of the Income Tax Act No 58 of 1962 (ITA).

The Draft Notice lists arrangements that may, in SARS’s view, give rise to an ‘undue tax benefit’. Excluded arrangements in terms of s36(2) of the TAA are also listed.

The reportable arrangements listed in the Draft Notice include the following:

• any arrangement in respect of services rendered to a non resident in excess of R5 million;
• share buy-backs for an aggregate amount of at least R10 million, if the company issued any shares within 12 months of entering into the buy-back agreement;
• any arrangement that is expected to or has given rise to a foreign tax credit exceeding an aggregate amount of R5 million;
• an arrangement in which a resident contributes to or acquires a beneficial interest in a non-resident trust, where the value of contributions or payments to the trust exceed R10 million, with certain exclusions;
• an arrangement where one or more persons acquire a controlling interest in a company that has or expects to carry forward an assessed loss exceeding R20 million from the preceding year of assessment or expects an assessed loss exceeding R20 million in the year of assessment in which the relevant shares are bought; and
• an arrangement involving payments by a resident to an insurer exceeding R5 million, if any amounts payable to any beneficiary are determined with reference to the value of particular assets or categories of assets held by or on behalf of the insurer or another person.

It is interesting to note that, in terms of paragraph 2.2 of the Draft Notice, the provisions are to have retrospective effect. That is, any of the listed arrangements have to be reported to SARS within 45 days of the date of publication of the final notice, whether or not the arrangements were entered into before publication of the notice.

In this regard taxpayers need to take into account the penalties that could be imposed under the TAA if a listed arrangement is not reported. In terms of s212 of the TAA, where a participant or promotor of a reportable arrangement fails to disclose or report the arrangement, a monthly penalty can be imposed, for up to 12 months. The monthly penalty is R50,000 in respect of a participant and R100,000 in the case of a promotor. Where the anticipated tax benefit exceeds R5 million, the penalty is doubled and in circumstances where the benefit exceeds R10 million, the penalty is tripled.

Fortunately the Draft Notice excludes all arrangements where the actual, potential or assumed tax benefit does not exceed R5 million.

The Draft Notice has not yet been finalised and as such does not have the effect of law. The period for the submission of comments has already closed on 23 June 2014, and it will be interesting to see whether SARS will insist on retrospectivity in the final notice.