Sars’ exemption view ‘will harm residents’
The SA Revenue Service’s (Sars’) view of tax regulations regarding foreign subsidiaries’ exemption from income tax will “materially impede SA tax residents” from competing on a level playing field in foreign markets.
This was the argument made by asset management firm Coronation in the Constitutional Court on Tuesday. It appealed to the apex court after the Supreme Court of Appeal (SCA) ruled against it, resulting in it having to pay almost R800m in tax.
Coronation said its Irish subsidiary in Dublin fell into what tax law calls a “foreign business entity”. Such foreign entities, which are controlled entirely by a SA company, are exempt from adding to the income tax of the SA holding company.
However, in 2017, Sars viewed the Irish subsidiary as not falling within the exemption.
Advocate Michael Janisch, for Coronation, told the court the asset firm had operated under the “genuine” belief its Irish subsidiary was exempt because of, among other reasons, its internal auditors, PwC, and external auditors EY.
This did not save the asset firm from being issued a tax penalty for its “underestimation” for the tax years stretching back to 2012 because it had not calculated anything from its Irish subsidiary.
Coronation disputed this and the matter went through various courts, including the tax court and the SCA.
In 2023, the SCA ruled in Sars’ favour, finding the Irish subsidiary was not exempt. This was because, Sars successfully argued, the Irish subsidiary had delegated so many of its core investment functions to UK and SA companies (both Coronation companies). SA tax legislation allows foreign subsidiaries to outsource, but such outsourcing must be done within the same foreign country.
Sars argued if Coronation’s Irish subsidiary had outsourced to Irish businesses, Coronation would have be able to claim the exemption.
“It chose not to,” said advocate Renata Williams for Sars.
Coronation told investors in late 2023 it would have to foot an almost R800m tax bill, but it has now sought to overturn the SCA’s finding in the apex court.
Janisch, for Coronation, argued that the SCA confused various commercial and tax terms regarding Coronation and its subsidiary when it decided that the subsidiary did not qualify for exemption.
But these terms “define the commercial and legal landscape of the case”.
Justice Mbuyiseli Madlanga said he had a “conceptual difficulty” with the Irish subsidiary, which consisted of only a few people, being able to manage large investment operations. Janisch stressed that was why, like other Irish businesses, the subsidiary outsourced some of its functions.
Yet, Madlanga believed some of the functions, such as actual investment being outsourced, could not ever be done by the Irish subsidiary given the resources required.
“How do you outsource at all when [the function] does not lie with you?” Madlanga asked.
Janisch said businesses used that model all the time in Ireland.
Justice Leona Theron asked why Coronation was operating in Ireland in the first place.
Janisch stressed that Coronation could not manage an Irish investment scheme if it were not in Ireland and that there were commercial benefits to being in Ireland.
Justice Steven Majiedt found the SCA’s ruling “troubling”, agreeing with Janisch that the SCA seemed confused.
In response, advocate Renata Williams for Sars said all Sars wanted was for Coronation “to bring itself within the legislation”.
It was “clear to everyone” what Coronation should do to comply: either keep all business functions within the subsidiary or, if it outsources, it was compelled to outsource within Ireland. She noted that, almost by definition, with “four people in an office in Dublin”, the Irish subsidiary could never achieve its goals without outsourcing.
Despite this, Coronation outsourced to UK and SA, not Ireland.
Challenged by acting justice David Bilchitz on why the legislation made this restriction, given modern-day global trading, Williams said “the [law] says so”. Majiedt also challenged Williams on the point, noting that all the UK and SA companies did was choose where to invest, but they still operated “under parameters” set by the Irish subsidiary.
Williams disagreed, arguing that the evidence showed the companies were in fact running the “entire” investment function.
Closing the day, Janisch stressed that Sars’ views would have “profound implications”, not only for SA but also “all residents” that sought to set up offshore subsidiaries.
Judgment was reserved.