The list of reportable arrangements was extended by the South African Revenue Service in a notice (SARS Notice) published on 16 March 2015 in terms of s35(2) and s36(4) of the Tax Administration Act, No 28 of 2011 (TAA).
The SARS Notice has caused some consternation. However, if one considers the obligation to notify SARS of reportable arrangements, the effect of the SARS Notice is perhaps not as far-reaching as first appears.
In terms of s35(1) of the TAA an arrangement is a reportable arrangement if:
- a person is a participant in an arrangement and the arrangement has certain characteristics; or
- SARS has listed it in terms of a public notice under s35(2) of the TAA (the SARS Notice being the first and, so far, only such notice).
Notably, in the case of a reportable arrangement listed in a SARS notice under s35(2) of the TAA, it is not a requirement that a tax benefit is or will be derived or is assumed to be derived by a participant; it is merely a requirement that the transaction be listed in the public notice. Nevertheless, in many cases, while the relevant arrangement may technically be a reportable arrangement in terms of a notice, practically there will be no obligation on any person to actually report the arrangement.
The person who must report a reportable arrangement is a 'participant'. A 'participant' is defined in s34 of the TAA to mean, in relation to an arrangement:
- a promoter; or
- a person who directly or indirectly will derive or assumes that the person will derive a tax benefit or financial benefit by virtue of an arrangement.
A 'promoter', in relation to an arrangement, is a person who is 'principally responsible for organising, designing, selling, financing or managing the arrangement'.
'Tax benefit' is defined in s34 of the TAA to mean 'avoidance, postponement or reduction of a liability for tax'.
In terms of s34 of the TAA, 'financial benefit' means 'a reduction in the cost of finance, including interest, finance charges, costs, fees and discounts on a redemption amount'.
In terms of s37 of the TAA, the person who must report a reportable arrangement is the participant, that is, either the promoter or the person who derives a tax benefit.
In terms of paragraph 2.4 of the SARS Notice the following arrangement has been identified as a reportable arrangement:
"Any arrangement in terms of which one or more persons acquire the controlling interest in a company on or after the date of publication of this notice, including by means of acquiring shares, voting rights or a combination of both, that:
(a) (i) has carried forward or reasonably expects to carry forward a balance of assessed loss exceeding R50 million from the year of assessment immediately preceding the year of assessment in which the controlling interest is acquired; or
(ii) has or reasonably expects to have an assessed loss exceeding R50 million in respect of the year of assessment during which the controlling interest is acquired; or
(b) directly or indirectly holds a controlling interest in a company referred to in paragraph (a)"
Presumably, the provision is aimed at giving SARS early warning of arrangements that constitute the 'trafficking' in companies that have assessed losses.
Now, daily, shareholders sell shares in companies that have assessed losses, in some cases significant assessed losses. No doubt in most of these transactions, the intention of a person acquiring the shares in a company is, in good faith, to invest in a company that, for example, operates a viable business and that, coincidentally, has an assessed loss.
Consider the example where X is interested in acquiring a controlling stake in Company Y from shareholder Z. Company Y owns valuable intellectual property but has been battling to realise it to best effect. It has incurred actual losses and also has an assessed tax loss of R60 million. X pays cash for the shares. X identified the opportunity himself and, accordingly, there was no one who is 'principally responsible for organising, designing, selling, financing or managing the arrangement' between X and Z. Accordingly, there was no 'promoter' as defined in s34 of the TAA.
Clearly, the transaction falls within the provisions of paragraph 2.4 of the SARS Notice. But who is obliged to report the arrangement to SARS? As there is no promoter, the only person who in principle is obliged to report the arrangement is one who will directly or indirectly derive a tax benefit or financial benefit.
It is not apparent whether X, Company Y or Z is obtaining any financial benefit, that is, a 'reduction in the cost of finance'.
Is X, Company Y or Z a 'participant'? That is, is any of them directly or indirectly avoiding, postponing or reducing a liability for tax?
Conceivably, Z could be selling the shares at a loss and, in so doing, realise a capital loss which it may be able to set off against future capital gains for capital gains tax purposes and, accordingly, be reducing a liability for tax. But let's assume that there is no capital loss.
Is X realising a tax benefit? Company Y has an assessed loss and, if it keeps on operating, may be able to set off future taxable income against the assessed loss. Clearly, it may reduce tax in future. However, the reduction does not arise by virtue of the transaction between X and Z; it arose because of the losses it realised in the past.
Is X a 'participant'? In other words, is X directly or indirectly deriving or assuming that it will derive a tax benefit by virtue of the arrangement? X derives no direct tax benefit as a result of the assessed loss; the benefit (if any) accrues for the benefit of Company Y, as noted above. In other words, X is not avoiding, postponing or reducing X's liability for tax. Is X indirectly deriving a tax benefit? Again, while X may be deriving a benefit in the sense that it will hold a share in a company that has an assessed loss, it will not be deriving a tax benefit; the tax benefit is that of the company.
So, in the example above, the transaction may constitute a reportable arrangement, however, there is no promoter and, apparently, there is no one realising a tax benefit and thus none of the parties involved is obliged to report the arrangement.
What I have sought to point out is that while an arrangement may technically constitute a reportable arrangement, in the case where there is no 'promoter', there must be at least one party to the transaction who derives a tax benefit, otherwise there is no obligation on any one to report the arrangement. Before notifying SARS of an arrangement that, on the face of it, is reportable, parties should first determine whether there is actually an obligation on any one of them to report the arrangement.