Share buy-back transactions and loss utilisation structures set to become reportable arrangements
SARS issued a Draft Public Notice yesterday which proposes the inclusion of a number of transactions and arrangements which will require reporting in terms of the Reportable Arrangement provisions of the Tax Administration Act 28 of 2011 (‘the TAA’). Two of these proposals are likely to have an important impact on the manner in which transactions in the M&A arena are concluded going forward:
- Any arrangement in terms of which a company buys back shares from one or more shareholders for an aggregate amount of at least R10 million will be reportable if that company issued or is to issue any shares within 12 months of entering into that arrangement or of the date of any buy-back in terms of that arrangement.
- Any arrangement in terms of which a person or persons acquire the controlling interest in a company will be reportable if that company carries (or is expected to carry) forward a balance of assessed loss exceeding R20 million in the year preceding or the year during which the share purchase takes place.
Although it remains true that, given a good commercial pretext, a properly implemented share buy-back transaction or loss utilisation arrangement should withstand an attack from SARS, it certainly takes a brave transactor to volunteer the details of the transaction to the revenue authorities upfront. In this regard, although the Draft Public Notice is still subject to comment, taxpayers should proceed with caution when entering into arrangements of this nature going forward.
Given the relatively narrow ambit of the current buy-back proposal, it would seem that there are still a number of variations to the typical subscription and repurchase structure which may continue to escape the reporting requirements under the TAA. On the other hand, loss utilisation arrangements may become more challenging going forward. Other arrangements to be included relate to transactions concluded between South African tax residents and potential permanent establishments of non-residents, transactions which generate foreign tax credits, contributions to foreign trusts as well as certain payments to foreign insurers.
Taxpayers have been invited to submit comments to SARS by 10 April 2014 regarding the proposals contained in the Draft Public Notice.