Time to move on in struc­tured debt deals

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - NAZRIEN KADER

AVING iden­ti­fied about a decade ago that so-called struc­tured debt trans­ac­tions were de­fraud­ing the fis­cus, the Na­tional Trea­sury to­gether with the South African Rev­enue Ser­vice (SARS) (un­der the lead­er­ship of then­com­mis­sioner Pravin Gord­han), sys­tem­at­i­cally worked to en­sure that the tax leg­is­la­tion em­pow­ers the com­mis­sioner to col­lect its “dues”, de­spite the form of th­ese trans­ac­tions.

Es­sen­tially, the term “struc­tured fi­nance” has been used to loosely de­scribe those trans­ac­tions which achieve lower than mar­ket-re­lated in­ter­est rates to the bor­rower, usu­ally based on le­git­i­mate tax al­lowances se­cured by the lender.

Gord­han, as cur­rent fi­nance min­is­ter, echoed the sen­ti­ments he ex­pressed while he was com­mis­sioner — that his gripe is lim­ited to “so­phis­ti­cated tax loop­holes” — which we have taken to mean those that “push the en­ve­lope” to se­cure tax ben­e­fits.

Over the past five years banks have been com­pelled to dis­close the na­ture of all struc­tured debt (and the par­ties in­volved) to SARS, some­times go­ing back many years. (It is no­table that leg­is­la­tion de­mand­ing dis­clo­sure of th­ese trans­ac­tions only be­came ef­fec­tive on March 1 2005.) Th­ese dis­clo­sures bore the scru­tiny of SARS and the out­come of many re­main un­cer­tain. It is true to say that, in prin­ci­ple, the ba­sis of th­ese trans­ac­tions is not il­le­gal.

Given the over­haul in leg­is­la­tion and both SARS and the trea­sury’s in­ten­tions made clear, it would be prefer­able if we could leave the past be­hind. An “amnesty” with re­gard to past trans­ac­tions would not be in­ap­pro­pri­ate in the cir­cum­stances, given the com­mend­able man­ner in which the fi­nan­cial ser­vices in­dus­try and tax­pay­ers (who availed them­selves of th­ese “ben­e­fits”) have re­sponded to al­le­ga­tions of un­due tax ben­e­fits be­ing de­rived.

The time and re­sources that it takes to de­fend th­ese al­le­ga­tions (and the cost thereof) is some­times not worth the ef­fort for busi­ness, which should be fo­cused on trade. This re­sults in set­tle­ments with SARS on is­sues of prin­ci­ple that just do not set a good prece­dent. Need­less to say, while SARS col­lects its funds, the pub­lic is left won­der­ing what the fuss was all about with no cer­tainty ei­ther way.

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