Coronation bleeds after court rules it must pay tax bill
A recent judgment handed down by the Supreme Court of Appeal (SCA) on 7 February, 2012, found that South African Revenue Service (Sars) could tax all the income earned by the international operations of Coronation Investment Management SA (CIMSA) for the years 2012 to 2017. CIMSA is a subsidiary of Coronation Fund Managers Limited (CML), listed on the JSE.
CIMSA is the holding company for the Coronation Group and is registered and tax resident in South Africa. The company that gave rise to the tax dispute is Coronation Global Fund Managers (Ireland) Limited (CGFM) which is registered and tax resident in Ireland.
Sars had raised an additional tax assessment for the years 2012 to 2017, essentially imputing the income earned by CGFM for those years to CIMSA. The Tax Court ruled against Sars, finding that the international income was exempt under the controlled foreign company (CFC) rules contained in section 9D of the Income Tax Act (the Act).
Section 9D was inserted into the Act in 2001 to counteract a common tax avoidance scheme whereby South African residents could shift their income to a controlled foreign company located in a low or non-tax jurisdiction, in order to avoid or defer tax. Tax would be paid on the profits, if or when repatriated to South Africa.
Section 9D deems the profits made by the CFC to be taxable in South Africa as if the profits had been repatriated. However, it contains an exemption.
The exemption would apply if the CFC qualified as a “foreign business establishment”, for example, if it could show that it had commercial and economic substance, and conducted its primary operations in that jurisdiction.
CGFM had adopted an outsource business model, which raised the important question of whether the primary business of CGFM comprised investment (not conducted in Ireland), or that of maintaining its licence and managing its service providers (conducted in Ireland).
Coronation referred to Sars’s appeal against the Tax Court judgment in its annual report dated 30 September, 2022, and was very positive as to the outcome: “The Group awaits the judgment in this regard and management, supported by external legal advisers involved in the matter, remain confident of the Group’s position. An outflow is not considered probable”.
CIMSA had relied on a tax opinion procured from a “leading tax expert in the country” but did not make it available to Sars. Sars drew a negative inference from this.
The SCA however decided that: “Insofar as the tax opinion is concerned, it was not incumbent on CIMSA to disclose a tax opinion that it had obtained, any more than it would be on any other party which litigates on the basis of a procured legal opinion”.
Based on this, the SCA dismissed Sars’s claim for understatement penalties.
The SCA ordered CGFM to pay Sars’s additional assessment covering the years 2012 to 2017 dated 23 March, 2017, and awarded costs against CIMSA.
Coronation in its sens report dated 8 February gave notice that: “Given the material impact on earnings and cash flows, the company does not anticipate declaring an interim dividend”. No indication has been given as to what the financial impact will be.
Joon Chong, a partner of Webber Wentzel, commented that: “Armed with this judgment, Sars will be looking to audit South African multinationals that rely on the foreign business exemption for their CFCs.
Central to these audits would be determining what is the primary operation of a CFC and whether it has the required substance to carry out its key operations where it is tax resident.