At least R2-billion was being lost to the fiscus each year because of the abuse of Section 45 of the Income Tax Act, South African Revenue Service and treasury officials said this week.
The provision in the Act allows companies to make tax-neutral intra-group transfers, but Sars and the treasury believe it was being used to garner tax deductions that companies would not normally qualify for.
The concerns prompted the unexpected suspension of Section 45 — part of a suite of proposed amendments to tax laws currently before Parliament. According to the explanatory memorandum on the amendments, Section 45 has been used by companies to facilitate leveraged buy-outs involving significant debt that eliminates the profits of the target businesses for years.
A Sars official who did not want to be named said the cost to the fiscus was conservatively estimated at R2-billion. This figure was backed by Sars spokesperson Adrian Lackay, who said that the loss was understood to be about “several billion rands a year”.
But financial advisers and tax-law experts told the standing committee on finance in Parliament this week that the move could halt some black economic empowerment transactions, which had used this provision to create sustainably financed empowerment deals. It would also have a negative impact on ordinary company restructuring to gain efficiency and on mergers and acquisition activity.
Anne Bennet of law firm Webber Wentzel told the committee that the relief was needed for reorganisation, BEE transactions and mergers and acquisitions intended to increase efficiency, profits, growth and jobs.
The Palabora Mining Company’s BEE deal has been threatened by the announcement of the amendments made in early June. The company is majority owned by international mining giant Rio Tinto and the deal is required before the company can register new-order mining rights under South African law.
Keith Mathole, Palabora’s general manager for corporate affairs, said in Parliament that the deal did not result in the loss of tax to the country and removed the need for third-party funding and the dependence on strong growth in the listed share price or interest rates, seen in many other BEE deals. The suspension of Section 45 would result in the deal being subject to tax on a transaction valued at R6-billlion.
“The tax charge is not financially feasible for the company or its empowerment partners,” he said.
The treasury’s chief director for legal tax design, Keith Engel, said that the state had been forced to act when the extent of the revenue being “let out the door” became apparent following February’s budget.
Stephan van der Walt, the head of corporate finance at private equity company Bravura, said that a more targeted solution had to be found to address the state’s concerns. “They should be going after the transactions that make them uncomfortable, not target the corporations generating business,” he said.
Engel said that the treasury and Sars were open to discussion and wanted factual information to find a more suitable solution to the problem.