A tax­ing af­fair

Re­sults de­layed by com­plex cap­i­tal gains ques­tion

Finweek English Edition - - Companies & Markets - SIKONATHI MANTSHANTSHA sikonathim@fin­week.co.za

THE COM­PLEX­I­TIES OF OP­ER­AT­ING in 14 dif­fer­ent tax ju­ris­dic­tions were at play as mi­cro-lender Blue Fi­nan­cial Ser­vices’ an­nual re­sults for the year ended Fe­bru­ary 2009 were de­layed for more than a week by a tech­ni­cal tax ques­tion.

The is­sue de­lay­ing the re­sults last week was dif­fer­ent in­ter­pre­ta­tions of the tax laws be­tween Blue and its au­di­tors, KPMG, aris­ing from a cap­i­tal gain on a sale of shares in Blue’s Nige­rian sub­sidiary. Af­ter the for­ma­tion of Blue In­tercon­ti­nen­tal Mi­cro Fi­nance Bank (BIMFB) in 2008, the SA hold­ing com­pany de­cided to in­tro­duce lo­cal share­hold­ers and the Amer­i­can In­sur­ance Group as a strate­gic share­holder in that busi­ness.

The com­bined 45% stake net­ted Blue a R93m profit, on which a cap­i­tal gains tax (CGT) of R14m is due, ac­cord­ing to SA law. How­ever, Blue spent the en­tire profit on the re­cap­i­tal­i­sa­tion of BIMFB and there­fore be­lieved it didn’t at­tract any tax. Shortly be­fore the sched­uled release of re­sults in the sec­ond week of May, KPMG’s tech­ni­cal tax com­mit­tee ad­vised the profit was tax­able and would there­fore re­duce Blue’s net profit by R14m.

“We took the pru­dent ap­proach in this mat­ter and cur­rently we’ve pro­vided for CGT – al­though we have rea­son to be­lieve the trans­ac­tion may be tax ex­empt,” says Blue le­gal di­rec­tor Wes­sel Smit. He says Blue is seek­ing in­de­pen­dent tax ad­vice to claim the tax ex­emp­tion on the grounds that all the money was ploughed back into the busi­ness and never left Nige­ria.

Like all its other non-SA busi­nesses, the Nige­rian com­pany is wholly owned by Blue’s Mau­ri­tian sub­sidiary. But that seems to be one of the main com­pli­cat­ing fac­tors.

Bet­sie Stry­dom of Bow­man Gil­fil­lan at­tor­neys says para­graph 64B of the Eighth Sched­ule (con­tain­ing the cap­i­tal gains tax pro­vi­sions) to the In­come Tax Act ap­plies to the dis­posal of eq­uity in a for­eign com­pany. “This pro­vi­sion states that any cap­i­tal gain from the dis­posal of an in­ter­est in the eq­uity share cap­i­tal of a for­eign com­pany can be dis­re­garded if cer­tain con­di­tions are met,” says Stry­dom. “One of the con­di­tions is that the seller had to hold more than 20% of the shares in the for­eign com­pany. How­ever, all the pro­vi­sions of para­graph 64B have to be met be­fore one can con­clude that the cap­i­tal gain can be dis­re­garded.”

Blue In­tercon­ti­nen­tal Mi­cro Fi­nance Bank in Nige­ria.

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