BUSA/SACOB

Comment on the Tax Avoidance & Section 103 Revised Proposals

1. Introduction
BUSA is a unified Business organization that represents the widest body of business interests in South Africa. The constituents belonging to BUSA are set out in Annexure 1. This memorandum provides comment on the proposed new general anti-avoidance rule (GAAR) that is provided for in clause 37 of the Draft Revenue Laws Amendment Bill that was recently released for public comment in September.

2. General Comments
2.1 BUSA reaffirms its stance regarding the shared responsibility of the tax administration and the taxpayer towards ensuring compliance with a tax system that is properly and efficiently administered. In furthering that position, it remains the intention of BUSA to engage constructively with the authorities to ensure that the tax system is understood, and that it works. From the performance of SARS in the recent past, no one can argue that the system is not working. Whether the system is understood is debatable and certainly BUSA has been, and remains, concerned over the introduction of new provisions that pose complexities for tax compliance.

2.2 The GAAR constitutes one important component in achieving those compliance and administrative goals. Any revisions to the GAAR clearly affect their achievement. In making that observation, it must be noted that while BUSA believes it to be the duty of taxpayers to comply with their tax obligations; it is their right to arrange their tax obligations in conformity with, and within the ambit permitted by, the law so as to achieve the best result for them.

2.3 BUSA acknowledges the efforts by SARS and the National Treasury to engage with the private sector in formulating what appears to be a simplified version of the original proposed anti-avoidance provisions. Indeed many of the proposed changes have addressed the concerns raised in BUSA’s original submission in January. Yet the revision introduces a fundamental, if novel, concept which surely increases rather than reduces uncertainty. That concept is the introduction of a form of codification into Section 103 that is foreign to South African law and over which there is understandable concern on the part of business.

2.4 To all intents Section 103 is intended to determine whether a transaction that is abnormal from the perspective of rights and obligations and business practice has been entered into with an avoidance intention. It is apparent that the proposed new GAAR goes much further and assigns an ‘avoidance badge’ to transactions that are normal, but nevertheless have an avoidance outcome. If this is the effect of the new GAAR, it is submitted that the revision of the South African GAAR regime would have gone too far. It could be argued that the required objective could be attained by way of interpretation notes that deal with problem issues rather than changing Section 103 itself. The fact is that the efficacy of the current Section 103 remains to be tested.

2.5 BUSA must express its concern that the proposed GAAR introduces an element of uncertainty that is generally inhibiting to the conduct of business. The current Section 103 contained in the Income Tax Act has been in the legislation for a significant number of years. It is a section with which business is familiar and has had the intended effect of ensuring that transactions are not blatantly tax driven. The proposed GAAR will introduce a new phase of uncertainty which, in the interests of fostering economic growth, should be carefully considered.

3. Impermissible Avoidance Arrangement
In the context of ‘Impermissible avoidance arrangements’, Section 80A(c)(ii) broadly declares such an arrangement to be one whose sole/main purpose ‘in any context’ would ‘frustrate the purpose of any provisions of this Act’. BUSA submits that this ‘catch all’ provision extends the power and related determinations of the tax authority beyond any recourse from the tax payer.

4. Commercial Substance and purpose
The revision proposes to introduce a definition that is intended to target avoidance arrangements that ‘lack commercial substance’. It is a refinement with which BUSA has difficulty in grappling with, possibly due to the concept being ill defined in the context of business operations. The concerns associated with the text in section 80C are set out under a separate heading to this memorandum. Suffice to say that BUSA is opposed to the codification of ‘commercial substance’.

5. Round Tripping
The perceived avoidance associated with round tripping of money constitutes a serious concern for business. Many commercial transactions require what would now be deemed to be round tripping. Certain transactions within the group relief provisions actually necessitate this practice. Furthermore, the use of this sophisticated cash management system by many corporate taxpayers would probably be disallowed as it might be considered to fall within the ambit of this provision.

6. Accommodating Tax Indifferent Parties
6.1 This element should be reconsidered for the following reasons:-
Firstly, a number of commercial transactions require tax-indifferent parties for pure commercial reasons. Its adoption will undoubtedly create uncertainty which is unnecessarily counterproductive to the business environment.

Secondly, as already proposed, this indicator should preferably form part of a comprehensive interpretation note. It would ensure that taxpayers are aware of how SARS views this element without legislating on the subject.

6.2 For purposes of illustration consider the following:-
Mining Co A and Mining Co B each own mineral rights on a portion of land. The parties enter into an agreement to exploit the minerals jointly. A decision is taken to corporatise the mineral rights in Mineral Rights Co. Mining Co A and Mining Co B each sell their mineral rights to Mineral Rights Co in exchange for shares. The parties lease the mineral rights from Mineral Rights Co. The lease payments are sufficient to cover the state royalty plus a small margin.

This example arguably falls within the proposed section 80E. Clearly, it creates an unacceptable degree of uncertainty. Why is the Mineral Rights Co formed – purely for purposes of addressing issues related to inter alia security of tenure on the mineral rights and other requirements of the Mineral & Petroleum Resources Development Act.

In addition to the above concern, the provisions of section 80H could further impact adversely this commercial transaction.

The issue at hand is clear, although the above transaction should not fall within section 80A, the provisions of section 80E and 80H could become problematic.

7. Treatment of Connected Persons et al
BUSA notes that the introduction of Section 80F will enable SARS to treat connected persons as one. It will enable them to disregard tax indifferent parties and accommodating parties. The effect of this provision on any accommodation of a system of group taxation should be evident. To the extent that BUSA believes that the issue of group taxation is an area still to be developed, it believes that it would be inadvisable to introduce a concept that has a bearing on Group Taxation into the GAAR. It merely generates further uncertainty.


8. Notice Requirement
BUSA believes that recent experiences over legislative notice periods, requires an adjustment. To that end the following proposal is submitted:-
a taxpayer must be afforded at least 180 days to revert to SARS as to why the section should not apply.
a statutory obligation should revert upon SARS to progress matters within 180 days, failing which the section 80A and section 80B challenge should lapse. The rationale for this is to promote certainty through expediting matters.

9. Text Commentary
The following text amendments are submitted.

9.1 Section 80A(1)(c)(ii) - Delete the section or replace the word "frustrate" – it is unclear what is intended and foreign to SA Tax legislation. Whose purpose does one test it against? The threshold is also too low. Frustrate seems to indicate some low level of tolerance. If such a concept is deemed necessary, the Canadian term "abuse" should be used, which connotes a greater degree of intolerance.

9.2 Section 80B(1) - Replace the word "may" with "must". No discretion should be given as to determining the tax consequences since it will inevitably lead to uncertainty.

9.3 Section 80B(1)(a) to (f) - The subsections should be available in the alternative.

9.4 Section 80B(1)(f) - Introduce, after the word ‘out’ and the wording ‘or in such other manner as in the circumstances of the case the Commissioner deems appropriate for the prevention or diminution of the relevant tax benefit.’ a proviso to the entire subsection 1 of section 80B.

9.5 Section 80B(2) - Replace the word "may" with "must". An obligation should be placed on SARS.

9.6 Section 80C(1) - This is a presumptive provision that must allow for a rebuttal opportunity.

9.7 Section 80C(1)(c)
Delete the concept "beneficial ownership" since it is uncertain as to what mischief the section is aimed at.

9.8 Section 80C(2) – The use of the term ‘indicative’ is absolute in nature and again constitutes a presumptive provision. It must accordingly allow for a rebuttal opportunity.

9.9 Section 80C(2)(a) - Delete the concept ’economic effect’ and replace with commercial effect. The introduction of IFRS creates significant disparities between legal effect and the economic accounting reality. A sale of assets in certain circumstances could be classified as an equity transaction in terms of IFRS. This clearly demonstrates the potential issues which could arise.

9.10 Section 80E(3)(a) - The introduction of this section could create international double taxation agreement (DTA) issues. BUSA recommends that a DTA should in the absence of CFC legislation prevail since the taxing rights are clearly afforded to one country.

As an aside, it appears that 1 January 2007 would be the effective date for these proposals. In other words, it would be only those transactions entered into after that date that would be affected. Some clarity on that might be useful.



10. Concluding comments
10.1 While BUSA acknowledges the value of the research that underlies the preparation of the proposed revisions to the GAAR and Section 103, there is an overwhelming sense of concern over the move towards a novel yet untested concept that assigns autocratic powers to the tax administration and the associated uncertainty that it imposes upon taxpayers. There can be no doubt that the tax system is working efficiently and there appears no justification for assigning autocratic powers to the tax authority under ill-defined descriptive phrases such as ‘commercial substance’ and ‘frustrate the purpose of’.

10.2 Therefore as an alternative to the untested proposal set out in the ‘September revision’ document, BUSA would argue in favour of maintaining the, as yet insufficiently tested existing, Section 103 provisions – with the proviso that the section be amended to permit its application to any step in the transaction. If the tax authority remains alarmed over the prospect of yet-to-be-conceived tax avoidance schemes, it is submitted that they should put greater emphasis on ‘disclosure requirements’. In other words force taxpayers to explain the scheme in their tax return submissions.

Johannesburg October 2006







Annexure 1. Business Unity South Africa (BUSA) Members

1. Agri SA
2. AHI
3. Association for the Advancement of Black Accountants of Southern Africa (ABASA)
4. Association of Black Securities and Investment Professionals (ABSIP)
5. Automotive Sector
Automobile Manufacturers Employers’ Organisation (AMEO)
National Association of Automotive Component and Allied Manufacturers (NAACAM)
National Association of Automobile Manufacturers of South Africa (NAAMSA)
Retail Motor Industry Organisation (RMI)
6. Banking Association
7. Black Business Executive Circle (BBEC)
8. Black Information Technology Forum (BITF)
9. Black Lawyers Association (BLA)
10. Black Management Forum (BMF)
11. Business Leadership South Africa
12. Casino Association of South Africa (CASA)
13. Chambers of Commerce and Industry South Africa (CHAMSA)
14. Chamber of Mines of South Africa (COM)
15. Chemical and Allied Industries’ Association (CAIA)
16. Confederation of Associations in the Private Employment Sector (CAPES)
17. Congress of Business and Economics (CBE)
18. Construction Sector
Master Builders South Africa (MBSA)
South African Federation of Civil Engineering Contractors (SAFCEC)
19. Insurance Sector
Insurance Institute of South Africa (IISA)
South African Insurance Association (SAIA)
20. Life Offices Association (LOA)
21. National Black Business Caucus (NBBC)
22. Private Healthcare Forum (PHF)
23. Retailers’ Association (RA)
24. Road Freight Employers Association (RFEA)
25. South African Black Technical and Allied Careers Organisation ` (SABTACO)
26. South African Chamber of Business (SACOB)
27. South African Communications Forum (SACF)
28. South African Institute of Black Property Practitioners (SAIBPP)
29. South African Leisure & Tourism Association (SALTA)
30. South African Petroleum Industry Association (SAPIA)
31. Steel and Engineering Industries Federation of South Africa (SEIFSA)