The English poet John Donne famously stated that no man is an island entire of itself; while this statement was made hundreds of years ago, it is particularly applicable now if we look at the globalisation of business and how the world has become smaller through the growth of the internet.
It is very rare to find a company that has its activities limited to South Africa, particularly in the insurance industry. The global landscape has a significant impact on the South African industry as cross border business is increasing at a rapid rate.
But there are tax implications when doing business with international business partners. This is also changing as government wants to reform its tax regime in line with global markets.
Moving from the past
The South African Revenue Service (SARS) issued a public notice in the Government Gazette on 16 March, listing reportable arrangements and excluded arrangements for purposes of the reportable arrangement provisions of the Tax Administration Act. The public notice replaces all previous notices.
The provisions require certain arrangements to be reported to SARS within 45 business days by either the promoter of the arrangement or any person deriving a tax benefit or reduction in cost of finance from the arrangement.
An arrangement is reportable if it contains certain features stipulated in the legislation or if it is listed in a public notice issued by the Commissioner.
Certain arrangements are, however, not reportable despite meeting the criteria if they constitute an excluded arrangement as set out in the Tax Administration Act or if they are listed as an excluded arrangement in a public notice issued by the Commissioner.
The notice includes as reportable arrangements transactions relating to hybrid equity and hybrid debt instruments, company share buy-backs coupled with new issues of shares, South African residents making contributions to foreign trusts in which they are beneficiaries, the acquisition of companies with assessed losses in excess of R50 million and participations in foreign cell captive insurers.
Far reaching effects
The new reportable arrangement rules are likely to have far-reaching implications for many taxpayers and result in a significant increase in the volume of reportable arrangements, in some cases with retroactive effect.
Kyle Mandy, Head of National Tax Technical at Pricewaterhouse Coopers, points out that one of these cases relates to that of foreign cell captives. “In terms of the notice, transactions between South African residents and foreign insurers are reportable if amounts that exceed or are expected to exceed R5 million in aggregate have been paid or become payable to the foreign insurers and any amount payable to beneficiaries in terms of the arrangement after 16 March 2015 are determined mainly with reference to the value of particular assets or categories of assets that are held by the foreign insurer.”
He adds that the implications of the above are far reaching in that any existing participation by a South African resident in a foreign cell captive will be reportable if the premiums have exceeded R5 million, regardless of whether any premiums are paid from 16 March 2015. These would need to be reported within 45 business days of 16 March 2015. Failure to report timeously could lead to significant penalties.
No excluded arrangement
Another notable development in the notice is the removal of the excluded arrangement where the tax benefit was not the main or one of the main benefits of the arrangement.
“This exclusion provided relief from the obligation to report where the tax benefit associated with the arrangement was ancillary to any other benefits with the result that many transactions undertaken for purely commercial purposes were not reportable. The removal of this exclusion will substantially increase the scope of the reportable arrangement provisions and result in many transactions that are of no concern from a tax perspective being reportable,” says Mandy.
Are we open for business?
At the end of the day, we need to take a step back and ask if we are really creating the impression that South Africa is open for business. Government has set ambitious targets for growth which will depend on regular investment from foreign multinational companies.
What is surprising is that South Africa has one of the highest corporate tax rates in the world, yet corporate taxes contribute very little to the national fiscus. Are we being open minded when it comes to business? Over regulation and high corporate taxes are two of the main discouraging factors when companies look at possible markets to expand into. From an insurance point of view, this is counterproductive. Clients are looking for personalised products, and can benefit from the experience gained from companies doing business with international counterparts.
Editor’s Thoughts:
There is definitely no doubt that the South African tax regime does need to be looked at. But if it is a major contributor to the fiscus, we cannot paint ourselves into a corner whereby government is cutting its nose to spite its face. We need to widen our tax base. Is instituting more controls going to encourage or discourage this? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.
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