LAW: South African National Treasury Lifts Moratorium Section 45
Recent Gauteng Business News
Hylton Cameron, Executive Tax Manager at Grant Thornton Johannesburg says that the majority of SA business executives will certainly be relieved that the suspension has been lifted because the moratorium halted some important M and A and restructuring activity in the country.
“Genuine transactions were being held up as a result of the suspension even if the main reason for the transaction was not to avoid tax but rather to stimulate corporate growth,” says Cameron. “However, companies need to be aware that this suspension of the moratorium may come at a price, If debt has been used to acquire assets , any interest deductions in respect of such debt may not be allowed anymore.”
Section 45 is an Income Tax provision that allows for groups of companies to transfer their assets during restructuring or similar processes, on a tax neutral basis.
“The South African National Treasury and the South African Revenue Service are particularly concerned with Section 45 transactions which introduce large amounts of debt and resultant tax deductions for the interest incurred, along with the possible receipt of advantageous tax-free dividends for another (often related) party,” says Hylton Cameron, Executive Tax Manager at Grant Thornton Johannesburg.
After broad consultation, the South African National Treasury has conceded that not all Section 45 transactions are tax aggressive and that the focus of amendments to this provision should rather be on transactions emanating from a small number of taxpayers and advisors.
Provisional Solution for the South African National Treasury
The South African National Treasury has now proposed an interim solution whereby Section 45 transactions will fall into two categories: Green channel transactions and Amber channel transactions. The main issue of concern relates to interest as opposed to Section 45.
“Whilst Green channel transactions will be automatically permissible, Amber channel transactions will require pre-approval,” says Cameron.
Green channel transactions are those that will not feature interest-bearing debt.
Amber channel transactions are those that will involve interest bearing debt and these will be divided into two further sub-categories.
“The Amber channel transactions provide some hope for the taxpayer because the South African National Treasury has not simply referred to such transactions as Red zone transactions that are immediately blocked,” says Cameron.
In the first sub-category, automatic pre-approval is expected when a loan is funded intra-group, as long as there is no revenue loss or possibility of loss.
The second sub-category sees the implementation of more of a discretionary process if the arrangement will result in a revenue loss.
“This process will assess the impact of the interest to be incurred or received, on the tax amount payable by the debtors and creditors who will be acting as parties to the debt,” says Cameron.
Proposition of the South African National Treasury
In order to assist with the above, the South African National Treasury has proposed that the pure intra-group transfers and group vendor financing should fall into the Green channel, whilst leveraged buyouts and securitisation transactions should fall into the Amber channel.
Cameron adds that while group vendor financing should fall into the Green channel, the reality is that BEE transactions would usually involve interest bearing debt and such transaction would then fall into the Amber channel and require pre-approval. This will certainly add unnecessary complexities and delays to the transaction.
The above proposals will be effective for interest-bearing transactions making use of Section 45 from 3 June 2011, the date from which the provision was originally suspended. Importantly, this proposed approach will be extended to Section 44 (amalgamation) and Section 47 (liquidation, winding up and deregistration) transactions from 3 August 2011.
Cameron has urged that before resuming any transaction which has been on hold, using the sections discussed above, it is recommended that companies review the actual draft legislation, with a small caution that such legislation is still in draft format and therefore it may be amended even further prior to finalisation by the South African National Treasury.
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