The law should not op­er­ate ret­ro­spec­tively

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - Peter Dachs & Bernard du Plessis

It is im­por­tant to avoid an un­fair detri­men­tal im­pact on the rights of those whose transactions were le­gal at the time they were ar­ranged

THE draft Tax­a­tion Laws Amend­ment Bill 2012 con­tains var­i­ous pro­posed leg­isla­tive amend­ments to the In­come Tax Act which, if en­acted will have ret­ro­spec­tive ef­fect.

An ex­am­ple is sec­tion 8E of the Act, which was in­tro­duced pri­mar­ily to counter tax avoid­ance in­volv­ing pref­er­ence-share fi­nanc­ing ar­range­ments and op­er­ates to deem cer­tain div­i­dends re­ceived by or ac­crued to the holder of such shares as in­ter­est in the hands of the holder only. The ap­pli­ca­tion of sec­tion 8E would gen­er­ally re­sult in the holder be­ing sub­ject to tax on the in­ter­est, while not be­ing de­ductible in the hands of the is­suer.

Sec­tion 8E has been amended by the Tax­a­tion Laws Amend­ment Act 2011 with ef­fect from April 1 2012. How­ever, pur­suant to fur­ther dis­cus­sions with stake­hold­ers, Na­tional Trea­sury has in­di­cated that fur­ther ret­ro­spec­tive amend­ments to sec­tion 8E will be made. In par­tic­u­lar, the ver­sion of sec­tion 8E prior to the Tax­a­tion Laws Amend­ment Act 2011 will re­place the cur­rent pro­vi­sions. These ret­ro­spec­tive changes are con­tained in the draft Tax­a­tion Laws Amend­ment Bill 2012 which is expected to be pro­mul­gated dur­ing the last quar­ter of this year. As a re­sult, sec­tion 8E as amended by the Tax­a­tion Laws Amend­ment Act 2011 con­tin­ues to be the gov­ern­ing law un­til the draft Tax­a­tion Laws Amend­ment Bill 2012 is pro­mul­gated.

It is there­fore pos­si­ble for a tax­payer to re­ceive a div­i­dend in re­spect of, for ex­am­ple, a re­deemable pref­er­ence share that does not fall foul of the pro­vi­sions of sec­tion 8E as con­tained in the Act. How­ever, once the draft Tax­a­tion Laws Amend­ment Bill 2012 is en­acted and the pro­vi­sions of sec­tion 8E ret­ro­spec­tively amended, such div­i­dend may then fall foul of the ret­ro­spec­tive amend­ments so that it no longer con­sti­tutes a tax-ex­empt div­i­dend in the hands of the tax­payer, but rather tax­able in­ter­est as a con­se­quence of the ret­ro­spec­tive amend­ment.

In these cir­cum­stances, at the time that the div­i­dend is re­ceived, the tax­payer will treat this amount cor­rectly as a tax-ex­empt div­i­dend in its hands. How­ever, a few months later that same amount will be deemed, as at the date of its re­ceipt, to be tax­able in­ter­est in the hands of that tax­payer.

In­dian ex­pe­ri­ence In the In­dian case of Voda­fone In­ter­na­tional Hold­ings BV v Union of In­dia, a British Vir­gin Is­lands com­pany sold its shares in a Cay­man Is­lands com­pany to Voda­fone In­ter­na­tional, a Dutch Com­pany. The In­dian tax au­thor­i­ties ar­gued that the sale trig­gered cap­i­tal gains tax and is­sued a notice to Voda­fone hold­ing it li­able for its fail­ure to with­hold In­dian taxes on pay­ment of the sales con­sid­er­a­tion to the British Vir­gin Is­lands com­pany. The ba­sis of their ar­gu­ment was es­sen­tially that the Cay­man Is­lands com­pany in­di­rectly held im­mov­able prop­erty as­sets in In­dia.

The In­dian Supreme Court held that the trans­ac­tion in­volved the sale of shares in a Cay­man Is­lands com­pany, which was not sub­ject to In­dian tax (and did not in­volve the dis­posal of In­dian im­mov­able prop­erty). It also held that the In­dian anti-tax-avoid­ance rules and their sub­stance-over-form rules should only be ap­plied to sham transactions and not to gen­uine and strate­gic tax plan­ning. The court held that the trans­ac­tion was a bona fide for­eign in­vest­ment trans­ac­tion that did not fall foul of In­dia’s anti-tax-avoid­ance or sub­stance-over-form rules.

How­ever, in the re­cent In­dian bud­get speech the then In­dian fi­nance min­is­ter pro­posed cer­tain leg­isla­tive amend­ments aimed at dis­re­gard­ing the Supreme Court’s judg­ment in the Voda­fone case. He pro­posed that these changes ap­ply ret­ro­spec­tively from April 1 1962.

How­ever In­dia’s new fi­nance min­is­ter, P Chi­dambaran, has now or­dered a re­view of the re­cently pro­posed retroac­tive tax law amend­ments. He stated that the amend­ment needed to be re­viewed for fear of los­ing for­eign in­vest­ment due to a lack of in­vestor con­fi­dence given the ret­ro­spec­tive law changes.

UK ex­pe­ri­ence The UK au­thor­i­ties pre­vi­ously voiced their con­cern at the pro­posed ret­ro­spec­tive In­dian leg­isla­tive amend­ments. How­ever, sub­se­quent to voic­ing such con­cerns the UK tax au­thor­i­ties them­selves en­acted ret­ro­spec­tive leg­is­la­tion aimed at curb­ing a par­tic­u­lar trans­ac­tion that they had iden­ti­fied.

In terms of South African law there is a gen­eral pre­sump­tion that leg­is­la­tion is not in­tended to op­er­ate retroac­tively or with ret­ro­spec­tive ef­fect be­cause to do oth­er­wise may cause great in­jus­tice to the af­fected par­ties. The Ap­pel­late Division has pre­vi­ously stated that even where a statu­tory pro­vi­sion is ex­pressly stated to be ret­ro­spec­tive in its op­er­a­tion, in the ab­sence of con­trary in­ten­tion ap­pear­ing from the statute it is not treated as af­fect­ing com­pleted transactions.

In ad­di­tion, the Con­sti­tu­tional Court has pre­vi­ously held that any ex­er­cise of pub­lic power in­con­sis­tent with the rule of law is un­con­sti­tu­tional and open to re­view on this ba­sis. In the case Phar­ma­ceu­ti­cal Man­u­fac­tur­ers As­so­ci­a­tion of SA and an­other: In re ex parte Pres­i­dent of the Repub­lic of South Africa and oth­ers 2000 (2) SA 674 (CC), Chaskalson P quoted with ap­proval the fol­low­ing pas­sage which makes it clear that leg­is­la­tion should not be ret­ro­spec­tive in its op­er­a­tion:

“The scope of the rule of law is broad. … [It] em­braces some in­ter­nal qual­i­ties of all pub­lic law: that it should be cer­tain, that is as­cer­tain­able in ad­vance so as to be pre­dictable and not ret­ro­spec­tive in its op­er­a­tion; and that it be ap­plied equally, with­out un­jus­ti­fi­able dif­fer­en­ti­a­tion.” (em­pha­sis added)

One of the fun­da­men­tal prin­ci­ples of the rule of law is that it should not op­er­ate with ret­ro­spec­tive ef­fect be­cause such ret­ro­spec­tive ac­tion can have an un­fairly detri­men­tal im­pact on the vested rights and obli­ga­tions of per­sons who or­gan­ised their af­fairs and ar­ranged their transactions in ac­cor­dance with what the law re­quired at the time.

Peter Dachs and Bernard du Plessis are di­rec­tors in ENS’s tax division.

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