Abstract

Section 80J of the Income Tax Act was introduced in 2006 as part of the then new General Anti-Avoidance Rule (GAAR). This section requires the Commissioner to notify a taxpayer at the point in an audit when he/she first comes to believe that the GAAR may be applicable to an arrangement entered into or carried out by the taxpayer. It was enacted in response to concerns that the new GAAR might be automatically relied upon by SARS as a ‘catch-all’ section of last resort without due and proper consideration. Commentators also expressed concerns about conduct of audits under former s 103, particularly with respect to delays they encountered and the time and expensed they incurred. Section 80J attempted to address these concerns by providing a logical framework for the timeous conduct of audits under the new GAAR. Subsection (1) requires the Commissioner to notify the taxpayer if he/she believes the GAAR may be applicable to an arrangement and state his/her reasons therefor; sub-s (2) gives the taxpayer an opportunity to respond to that notice; sub-s (3) requires the Commissioner to take further action within a specific statutory time frame; and sub-s (4) permits the Commissioner to revise or modify his reasons for applying the GAAR in light of any additional information that may come to his knowledge. Two recent judgments have raised concerns about the current approach being taken to s 80J by taxpayers and, to a certain extent, SARS itself. In particular, taxpayers appear to be taking the position that section 80J(1), read together with the statutory definition of ‘arrangement’, have imposed a burden upon the Commissioner to identify and describe a transaction, operation or scheme with an exacting degree of precision never before required under the former s 103 or its predecessors. This approach cannot be support by a textual, contextual and purposive interpretation of the provisions involved, and, in fact, would severely frustrate both the overriding purpose of the current GAAR and the specific purposes of s 80J itself.

Abstract

The judgment recently delivered by the Supreme Court of Appeal in the case of CSARS v Coronation Investment Management SA (Pty) Ltd, has caused significant uncertainty and concern amongst South African multinational enterprises which operate via subsidiaries in foreign countries. The judgment had to consider the requirements under section 9D of the Income Tax Act 58 of 1962 to qualify for the foreign business establishment (FBE) exemption from the controlled foreign company (CFC) rules, which may result in the imposition of South African normal tax on the South African parent company (‘Coronation SA’) of an amount equal to the net income of the CFC. In particular, the question was whether the CFC (‘Coronation Ireland’) may determine the scope of its primary business conducted in the foreign country or whether objective factors determine the potential scope of such business. The SCA considered the question with reference to the CFC’s Memorandum of Association and its business licence and concluded that the CFC was entitled to conduct the wider business of fund management and investment management and the fact that it decided to outsource its investment management functions implied that it did not conduct its primary business via the FBE in Ireland. Therefore, the SCA rejected the notion that the primary business is determined with reference to how the CFC chooses to operate, i e the choice of a business model cannot alter the primary operations of the CFC. The SCA thus held that the CFC did not qualify for the FBE exemption. With respect to the imposition of an understatement penalty and under-estimation of provisional tax penalty, the SCA found that the taxpayer relied on a legal opinion that it was entitled to the FBE exemption and there is nothing to suggest that the taxpayer’s tax returns were not submitted in the bona fide belief that it may be eligible for the FBE exemption. Therefore, the Court ruled that the claim for understatement penalties and under-estimation penalties must fail.

Abstract

Section 23M of the Income Tax Act 58 of 1962 seeks to limit the deduction of interest on debt arising between parties related to one another and in respect of which the interest is not subject to tax in the hands of the recipient of the interest.

Section 23M was amended in 2021 by the Tax Laws Amendment Act 20 of 2021 and is effective from years of assessment ending on or after 31 March 2023. The key amendments to the section deal with:

• Interest partially subject to tax.
• The amendment to the definition of ‘interest’, being the subject matter of the limitation rules in the section.

In respect of interest partially subject to tax, i e a tax rate say of 5% in terms of a double taxation agreement, the limitation rules will apply to that part which is not subject to tax, i e 10% in the example given (being the 15% withholding tax rate — 5% withholding tax limitation under the applicable double taxation agreement).

The definition of ‘interest’ is expanded. The relevance of the definition’s expansion is that all ‘interest’ payable to a related party (a ‘controlling relationship’ as defined) which is not subject to tax, could be limited in terms of its deductibility.

The amended interest defi nition includes:

• Interest as contemplated in s 24J of the Act: which includes common law interest and other charges of a similar nature;
• Amounts incurred or accrued in respect of ‘interest rate agreements as contemplated in section 24K of the Act;
• Any fi nance cost element recognised for purposes of IFRS in respect of any lease agreement that constitutes a finance lease as defined in IFRS16;
• Foreign exchange gains and losses; and
• Amounts deemed to be interest in terms of Sharia compliant financing arrangements.

Accordingly, finance arrangements between related parties where the ‘interest’, as defined, is not subject to tax or is partially subject to tax may be limited in terms of its deductibility.