Following extended consultations, new reportable transaction arrangements legislation
has been brought into force in South Africa.
The new legislation, contained in section 80M to 80T of the Income Tax Act,
1962, was brought into force on 1st April 2008 and is designed to strengthen reportable
arrangement laws that came into force in 2005.
The 2005 legislation provided for the reporting of two classes of arrangement.
The first related to arrangements that resulted in a tax benefit and were subject
to an agreement that provided for the variation of interest, fees, etc, if
their actual tax benefits differed from the anticipated tax benefits. The second
related to certain hybrid debt and equity instruments.
The legislation was intended to give the South African Revenue Service (SARS)
early warning of arrangements that were potentially tax driven.
SARS would then
be in a position to take appropriate action to counter abuse more quickly than
would otherwise have been the case.
However, according to the government, the number and nature of the transactions
disclosed to SARS proved disappointing. Fewer than 150 transactions, most of
them involving well known hybrid instruments, were reported in the 25 months
the legislation was in force.
Some taxpayers raised technical points to avoid
reporting, or restructured their transactions to avoid the triggers for reporting.
But more encouragingly for the government, some commentators indicated that they
had encountered fewer transactions that they believed would give rise to concern.
The adoption of a new General Anti-Avoidance Rule (GAAR) in 2006 provided the
opportunity to revise the reportable arrangements legislation, and to link it
to the factors that are indicative of a lack of commercial substance for GAAR
purposes.
The new reportable arrangements legislation is generally triggered where an
arrangement gives rise to a tax benefit and:
- Provides for interest, fees, etc. that are partly or wholly dependent on
the assumptions relating to the tax treatment of that arrangement (other than
a change in law);
- Has any of the characteristics of, or characteristics which are substantially
similar to, the indicators of a lack of commercial substance in terms of the
GAAR;
- Is or will be disclosed by any participant as a financial liability for
purposes of Generally Accepted Accounting Practice but not for income tax
purposes;
- Does not result in a reasonable expectation of a pre-tax profit for any
participant; or
- Results in a reasonable expectation of a pre-tax profit for any participant
that is less than the value of those tax benefits to that participant on a
present value basis.
Specific reporting of hybrid equity and debt instruments is retained, but the
five year redemption threshold previously set has been extended to ten years.
The change is intended to make restructuring these instruments to fall outside
the scope of the legislation more commercially challenging.
The Minister of
Finance’s authority to include or exclude arrangements for disclosure
by way of regulation has also been retained.
The previous exclusions for arrangements that are unlikely to be tax driven,
such as "plain vanilla" loans, leases, share transactions
and collective investment scheme investments have been retained.
Following consultations
between commentators and SARS, as well as a review of international experiences,
the Minister has also excluded any arrangement where the tax benefit from the
arrangement does not: exceed R1mn; or is not the main or one of the main
benefits of the arrangement.
The responsibility for disclosing a reportable arrangement is principally placed
on its promoter, as they are the person most likely to have full insight into
its operation.
In the absence of a promoter who is a resident, the responsibility
falls on all of the participants, although the responsibility falls away for participants
who have written confirmation that the required disclosure has been made by
another.
This approach ensures that disclosure is comprehensive, while minimising
duplication. Disclosure must be made within 60 days of funds flowing or liabilities
being incurred in terms of the arrangement.
It is the first flows or incurrals
that are most relevant for the purposes of the legislation, so arrangements
where they took place before 1st April, 2008 need not be reported in terms of the
new legislatio,n but may well be reportable in terms of the previous legislation.
The first disclosures in terms of the new legislation will thus be due by 31st
May, 2008.
The information to be disclosed is similar to that previously required, except
that a list of the arrangement’s agreements is required instead of a complete
set of agreements.
This will reduce the compliance cost with respect to the
initial disclosure of an arrangement. Once the required information has been
disclosed, SARS will issue a reportable arrangement number to each participant
in an arrangement for administrative purposes only. Additional information,
including agreements, may be requested if an arrangement is selected for further
analysis.
Finally, a clear penalty provision has been introduced to serve as a deterrent
for non-disclosure of reportable arrangements, which typically involve substantial
amounts.
A penalty of R1mn is imposed for non-disclosure but may be reduced
where: there are extenuating circumstances and the non-disclosure is remedied
within a reasonable time; or the penalty is disproportionate in relation to
the tax benefit from the arrangement.
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