Reportable arrangements listed – implications for foreign cell captives: PwC Tax Services

The Commissioner for the South African Revenue Service (SARS) issued a public notice in the Government Gazette on 16 March 2015, listing reportable arrangements and excluded arrangements for purposes of the reportable arrangement provisions of the Tax Administration Act. The public notice is effective from the 16 March 2015 publication date and replaces all previous notices.

The reportable arrangement 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 purpose of the latest notice was to replace all previous notices relating to reportable arrangements and excluded arrangements.

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.

The only listed excluded arrangement is one where the aggregate tax benefit derived therefrom does not exceed R5 million.

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.

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.

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.

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.