The law should not operate retrospectively
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.