Abstract

The legislative rules relating to ‘dividend-stripping’ are complex and everevolving. This article seeks to examine the more complex aspects of those rules, particularly as they relate to the anti-avoidance elements of the legislation. The simplest way to explain the application of these rules is to illustrate their application with concrete examples. Prior to the application of the dividend-stripping rules it was relatively easy to escape tax on share exits, whereby a purchaser subscribed for shares in a target company and the target company repurchased the sellers’ shares free of tax by way of a ‘return of capital’ and/or a dividend distribution. The article deals with the rules as they apply in relation to (a) deferral transactions; and (b) ‘clawback’ transactions. The former transactions are excluded from the dividend-stripping rules and the latter are brought into the dividendstripping rules. Deferral transactions escape the application of the dividend-stripping rules. These transactions include transactions covered by the roll-over relief provisions contained in sections 41 to 47 of the Income Tax Act, 1962 (‘the Act’). ‘Extraordinary dividends’ are recharacterized in the Act for tax purposes. These are dividends that arise within 18 months of a sale of shares transaction, or arise in respect of a sale of shares and exceed 15% of the value of shares at the date of sale or 18 months prior thereto, whichever is the higher. A distribution of shares by a company in anticipation of the liquidation of the company (section 47 of the Act) will escape the dividend stripping rules. The recipient company of distributions from the liquidating company will also escape the dividend-stripping rules, as distributions derived by section 47 (liquidation distributions) and section 46 (unbundling transactions) are excluded from ‘extraordinary dividends’. So too does section 47 of the Act exempt from tax the disposal by a company of shares in the liquidating company.

The ‘clawback’ rules work as follows:

• Dividends derived by a company that disposes of shares to another company in terms of the rollover relief rules, other than a section 46 unbundling, will form part of the proceeds for capital gains tax (‘CGT’) purposes in the hands of the company disposing of these shares to third parties.
• A similar provision will apply to dividends declared by one company to another company (‘old shares’) where the shares in the declaring company are sold under section 42 of the Act (asset-for-share transactions) to a new company which issues shares to the disposing company (‘new shares’) and the disposing company sells such new shares to a third person. The dividends declared on the old shares will form part of the proceeds for CGT purposes in the hands of the company disposing of these shares to third parties.

Abstract

The current general anti-avoidance rule (GAAR) was enacted in 2006. Its overriding goal was to provide a more consistent and effective determent to what the legislation termed ‘impermissible tax avoidance arrangements’. As the SARS Discussion Paper on Tax Avoidance and Section 103 made clear, a major problem facing the fiscus was the growth of a tax avoidance industry in which extremely complex tax shelter products were designed and marketed to taxpayers. This development reflected a shift from prior practice in which taxpayers approached advisors to obtain advice on specific problems to one in which promoters marketed carefully prearranged products to clients. These products were typically sold on a ‘black box’ basis, which hid the specific inner workings of those tax shelter products. Amongst other things, this approach enabled promoters the ability to protect their so-called intellectual property, while giving clients the opportunity to use ignorance or ‘plausible deniability’ as a defence against the GAAR. To counter this problem and to resolve inconsistent applications of former section 103, in which two taxpayers could enter into identical tax shelter products but obtain different results depending upon their subjective state of mind, Parliament introduced a hybrid test in which the subjective purpose of a taxpayer must be tested against all of the relevant facts and circumstances of the case, including the purpose of the avoidance arrangement in question. It is a hybrid approach, in which the relative weight of the objective and subjective components will depend upon the circumstances of the case. Tax shelter products are meticulously designed by their promoters for one purpose — to generate a tax benefit without having a significant impact upon a taxpayer’s business operations and to be as risk-free as humanly possible. It is in these situations that the objective purpose of an avoidance arrangement is of paramount importance, particularly where these tax shelter products have been added to otherwise straightforward commercial transactions. As a result, taxpayers should no longer be able to hide behind either their ignorance or the purpose of a larger arrangement into which a tax shelter product has been inserted, to defeat the GAAR.

Abstract

Although the South African Minister of Finance announced in the 2020 Budget speech that sweeping reforms would be enacted to relax the South African exchange control system, it is now three years later, and no meaningful relaxation of exchange control has occurred. Rather, investment into South Africa remains plagued by exchange control laws, which result in costly and time-consuming processes for foreign investors. In January 2021, a long-awaited change to the exchange control rules was enacted, with the relaxation of the so-called ‘loop structure’ rules. Many investors jumped at the opportunity to take advantage of this relaxation and restructured their existing South African assets so that they would be owned by approved foreign structures. The relevant parties then, in line with the prescribed rules, reported the transactions to the Financial Surveillance Department of the South African Reserve Bank (FinSurv), via their Authorised Dealers. The FinSurv did not simply acknowledge receipt of the reported information as expected under the law. Rather, the FinSurv elected to reject applications submitted under the respective circular, without withdrawing the circular, leading to much uncertainty in the market, especially for those investors who have already restructured their assets, triggered taxes on the restructure and paid the taxes. Further, it appears that South Africa’s negative rating and greylisting, by the Financial Action Task Force (FATF), has triggered a stricter application of the existing exchange control regime, with more frequent application of the penalty regime by the FinSurv to identified contraventions. In the past, South African corporates were able to regularise an exchange control contravention with the FinSurv without difficulty. The process was relatively straight forward. However, lately, the responses received from the FinSurv to requests for regularisation (including to standard commercial transactions) are vague with the result that the matter does not seem to reach finalisation. The responses provided suggest that the applicant may still be subject to further investigation and ultimately may be subject to financial penalties. This is only one of the challenges such applicants face.

Abstract

This article engages with the scourge of tax immorality, an unsavoury practice adversely affecting state resources which puts South Africa’s democracy and its social transformation programme at risk. This article argues that tax immorality must be combatted head-on. To this end, it is contended that the bilateral and multi-lateral co-operation agreements concluded by the government of South Africa with their counterparts in Africa and beyond are insufficient to effectively combat tax non-compliance in all their manifestations. This is because there is no single reason for taxpayers acting in breach of their duty to the fiscus. As a result, it is argued by the author that a multi-pronged approach is needed which demands of tax administrators that they be innovative in their thinking and creative in their strategies. The nub of the thesis advanced is that, in practice, there is a correlation between, on the one hand, failure by tax authorities to fulfil their tax administration obligations with integrity and, on the other, failure by some taxpayers to comply with their tax related duties. It is further argued that conduct un-associated with a dignified tax administrator, and which may well contribute to tax immorality, includes hostility towards taxpayers, disrespect for the law and the rule of law, abuse of power, coercion, partiality, bias, threats, unethical behaviour, maladministration, and corruption. Conduct of this nature is antithetical to the final Constitution, 1996 and its democratic values and principles, all of which apply in the realm of tax administration being a facet of public administration governed by the Constitution. Finally, the author concludes that the South African Revenue Service can promote tax compliance by ensuring that it operates efficiently as an institution and that its officials act in accordance with the law and without favour, and with fairness, honour, dignity, decency, responsiveness to taxpayers’ needs, and open-mindedness.

Abstract

Given South Africa’s present political and economic position, a significant number of wealthy taxpayers are either engaged in making contributions to foreign pension schemes or are contemplating doing so. As the heading to this article suggests, the South African tax implications that arise when a South African resident taxpayer embarks on this journey are complex and confusing. Whilst SARS has provided some guidance in terms of a binding class ruling, this guidance is limited to the position where the South African participants participate in the foreign pension scheme as vested beneficiaries — not the general position. The ruling nevertheless provides some indication of SARS’ views as regards the application of the law in these circumstances. However, SARS neatly side-stepped the real issue, namely that a strict application of the law results in double taxation in certain instances by declining to rule on the application of section 25B of, and paragraph 80 of the Eighth Schedule to, the Income Tax Act, 1962. This article explores the South African tax implications that are triggered for South African residents in consequence of their participation as discretionary beneficiaries in these foreign pension schemes. The next article will explore the position of South African residents that participate under a vested beneficiary regime — the situation addressed in SARS’ binding class ruling. The South African implications that arise are wholly dependent on the rights and obligations that are established under the foreign pension scheme rules. However, as a general proposition it may be said that under a discretionary scenario the South African participants are required to make regular contributions to the foreign pension scheme, although lump sum contributions are allowed in certain instances. The contributions are then accounted for in a bespoke account, as is any accretion in value. When the time comes for payment of the retirement benefits, the trustees have a discretion as to the nature and value of the payments — but the participant has a right to request the trustees to exercise their discretion in a specific manner. The article concludes in the first instance that the contributions made by the South African participants do not constitute a donation that is subject to donations tax. As regards accretions in value in the bespoke account, the article argues that until the trustees exercise their discretion to make payment of the retirement benefits, no amounts can be said to have been received or accrued to the South African participants. Once the trustees exercise their discretion to pay the South African participants either an annuity or a lump sum, South African income tax or capital gains tax is triggered. A possible double taxation conundrum arises should any income or capital derived by the foreign pension scheme have previously vested in the South African participant. On death, it is strongly arguable that the amount standing to the credit of the South African does not form part of the deceased South African participant’s estate for estate duty purposes, or an asset for capital gains tax purposes.

Abstract

The introduction of full residence-based taxation in 2001 brought with it the concept of a ‘Controlled Foreign Company’ (CFC), whose profits (calculated on SA income tax principles) would be attributed to qualifying South African shareholders (‘participants’) as taxable income. Exempted from attribution were those profits of a CFC which arose from a ‘business establishment’, a term which was tightly defined and relied in part upon the establishment displaying the hallmarks of a real operating business in the foreign country and not having been set up for the purpose of tax avoidance. Since those early days, the definition of what is now a ‘foreign business establishment’ (FBE) has undergone detail change. Today, and central to the definition, is the requirement that in order to qualify there must be a ‘fixed place of business’ located in the foreign country and ‘used for the carrying on of the business of the CFC , … where that fixed place of business is (inter alia) … suitably staffed with on-site managerial and operational employees … who conduct the primary operations of that business …’. Over the years there has been much comment in the tax specialist press dealing with the extent to which the operations of an FBE can be outsourced, before it is no longer ‘suitably staffed’ for conducting its primary operations. Silke and Income Tax South Africa took slightly different positions on this issue and now the SCA has handed down judgement in Commissioner for the South African Revenue Service v Coronation Investment Management SA (Pty) Ltd 2023 JDR 0295 (SCA), which sets out that court’s view on the point. In Volume 14, Issue 1 of this journal Wally Horak criticised elements of this judgment and in this edition David Clegg raises some additional concerns. These are whether the court was correct in its identification of the ‘primary operations’, and in finding that a ‘primary operation’ cannot, in principle, be outsourced. Clegg also addresses what he sees as a fundamental mistake made by the taxpayer, in setting up his foreign business.