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Buy-back of shares at a purchase price in excess of their market value

Author: Andrew Lewis (DLA Cliff Dekker Hofmeyer)  An interesting advance tax ruling was released by the South African Revenue Service (SARS) on 12 March 2014. Binding Private Ruling 164 (Ruling) deals with the buy-back of ordinary shares by a company at an amount in excess of the market value of the shares. The facts of the proposed transaction are relatively simple. As part of a Broad-Based Black Economic Empowerment (B-BBEE) transaction, a company (BEECo) acquired 40% of the ordinary shares (shares) in a South African incorporated and resident company (applicant). The acquisition of the shares was financed by the BEECo through the issue of cumulative redeemable preference shares to various investors, the majority of which were financial institutions.

Re-financing and buy-back of shares

Author: Heinrich Louw (DLA Cliff Dekker Hofmeyer) The South African Revenue Service (SARS) released Binding Private Ruling 163 (Ruling) on 12 March 2014. The Ruling deals with the tax consequences of a transaction involving the re-financing of various loans and the application of the proceeds for purposes of a share buy-back. The facts are briefly as follows. Company X owns 49.3% of the issued shares of company Y. The balance of the issued shares of company Y are held by various individuals, companies, trustees of trusts and executors of deceased estates (other shareholders).

Companies face onerous foreign tax rules

Author: Amanda Visser (BDlive) The challenges developing countries face from tax avoidance and tax evasion are not new, yet developed countries have suddenly woken up to these challenges, mainly due to the global financial crisis. They call it base erosion and profit shifting, or Beps. The Organisation for Economic Co-operation and Development has over the past two years looked at ways to strengthen international tax standards, and ways to identify and address loopholes in tax laws. The danger is that the developing world will have to adopt new rules, made by the developed world for problems they have been struggling with for many years.

Deductions for income tax and VAT

Broadly speaking, in their ordinary business operations, certain entities are entitled to claim certain deductions for income tax and value-added tax (VAT) purposes. In this article we discuss the tests used by South African courts and in practice, for income tax and VAT purposes, in order to determine whether a taxpayer will be entitled to such deductions. Consideration will be given specifically to the deduction of legal expenses incurred by a taxpayer in terms of section 11(c) of the Income Tax Act No. 58 of 1962 (the Act) and the deduction of input tax in respect thereof in terms of section 1 read with section 7 of the Value-Added Tax Act No. 89 of 1991 (the VAT Act).

Corporate Taxation – A group of companies for corporate rules

The Income Tax Act No. 58 of 1962 (the Act) contains a definition of a ‘group of companies’ in section 1 of the Act. However, a narrower definition of the term ‘group of companies’ is contained in section 41 of the Act, which applies to certain corporate tax roll-over rules and other provisions contained in the Act. It is important to identify which companies fall within the different definitions of a ‘group of companies’ in order to determine whether one qualifies for the applicable tax relief.

Tax allowances for tri-generation

Author: Ruaan van Eeden (Cliff Dekker Hofmeyer) The South African energy landscape has undergone significant changes over the last few years with the introduction of a number of private and public sector funded renewable energy projects, aimed at feeding power into the national grid and reducing reliance on coal-fired power stations for generating electricity. Further initiatives for energy efficiency (and not necessarily energy generation) have also been introduced to further assist taxpayers in reducing their energy footprint. The generation of electricity from renewable resources such as wind, solar, biomass or hydro is not only directed at feeding power into the national grid, but is also utilised by a wide array of corporate taxpayers for their own use.

Taxation on unrealised accounting profits

By Nico Theron, Senior Tax Consultant, Grant Thornton Johannesburg   In South Africa, income tax is usually payable on actual receipts and accruals, but for every rule, there are always exceptions. One exception to this rule applies to companies that deal in instruments, interest rate agreements, or option contracts. The exception allows them, if they so choose, to pay tax on a market-valuation basis. This means, irrespective of actual receipts and accruals, the interest and amounts payable or receivable on option contracts and interest rate agreements are taken into account for tax purposes, according to changes in the market value of the underlying instruments over a period.

International Financial Reporting Standards (IFRS) tax implication – Part II

Construction contracts The current practice for determining contract revenue by FIRS shall be sustained. Only costs attributable to certified work done shall be allowed for tax purposes in line with provisions of CITA. Other incomes in the nature of incentive payments would be taxed accordingly. The expected loss recognized as an expense shall be disallowed until the loss is actually incurred. Interest received on advanced payment placed in an interest yielding account shall be treated as other income and be subjected to tax at the time it is earned. Retention income shall be subjected to tax at the time it is earned. Future cost shall not be allowable as expense for tax purposes IAS 12 – Income taxes Taxpayers shall furnish FIRS with all deferred tax disclosures as contained in the standard.

Ethical taxpaying: how does a company ascertain the “right amount of tax”?

Author: Matthew Hodkin – Norton Rose Fulbright LLP Tax has been much in the news recently. This is not the first time that tax has risen to the top of the political agenda but now public mood has shifted towards the idea that people should be paying more tax. Historically, tax has caused all manner of protests, uprisings and even wars but there has also previously been sustained public outcry that people just aren’t paying as much tax as they ought. This developing perception of tax as a moral or ethical obligation creates difficulty with which existing corporate processes are not always well-equipped to cope.

Firms seeking tax benefits face legal repercussions

THE tax consequences of decisions made in the boardroom have been highlighted in some recent court cases, where judgments were made against parties who had entered into transactions that were motivated by the potential tax benefits it would bring rather than the profits they would generate. A judgment laid down in the case of ABC vs the South African Revenue Service (SARS) heard in the Western Cape Tax Court last year reiterated the importance of paying attention to the details of a transaction as reflected in the financial statements, including related taxes. ABC acquired land with a forest on it and carried on forestry activities on the land. It then sold the land together with the forest for a specific amount, of which R144.7m related to the forest. The question before the court was whether the R144.7m should be included in ABC’s gross income.