There and back again: To (f)be, or not to (f)be, that was the question
There and back again: To (f)be, or not to (f)be, that was the question
By Arisha Munilall, Manager and Hylton Cameron, Director
With a strapping alleged R794m tax payment on the line, the rigorous battle between Coronation Investment Management SA (Pty) Limited (CIMSA) and SARS has finally reached the end of the road with a sound judgment from the Constitutional Court in favour of CIMSA!
A trip down memory lane
Taking it back to 2017, SARS had determined that the net income of Coronation Global Fund Managers (Ireland) Limited (CGFM), a controlled foreign company (CFC) in relation to CIMSA, was to be imputed (included) in CIMSA’s income for the 2012 year of assessment and penalties and interest were levied.
CIMSA objected, arguing that CGFM qualified for the foreign business establishment (FBE) exemption – that CGFM’s net income was attributable to its FBE in Ireland - and that therefore, CGFM’s net income should not be included in CIMSA’s income, and by extension, the penalties and interest were not warranted.
SARS’ argument was that CGFM’s primary operations comprised of fund management activities and investment management activities and the latter were not conducted by the FBE of CGFM. Per the undisputed facts, the investment management activities were delegated to offshore entities: Coronation Asset Management (Pty) Limited (CAM) in South Africa and Coronation International Limited (CIL) in the UK. SARS’ further argument was that as neither of these entities were tax resident in the same jurisdiction of CGFM i.e., Ireland, the requirements of the proviso to the FBE definition, which would have permitted outsourcing or the utilisation of group company structures in the same country as CGFM’s (impugned) FBE were also not met.
In terms of the judgment in the Tax Court, CGFM’s primary operations were indeed that of fund management activities, for which it was suitably equipped and staffed in Ireland. The Tax Court thus ruled in CGFM’s favour, holding that the requirements of the FBE definition had been met and that CGFM subsequently qualified for the tax exemption. (CIMSA 1 SARS 0).
The Tax Court’s decision was subsequently overturned upon SARS’ appeal to the Supreme Court of Appeal (SCA), who sided with SARS in submitting that CGFM’s primary operations did not just comprise of fund management activities, but investment management activities as well. The full bench of five judges unanimously held that as the investment management functions were outsourced, CGFM did not meet the requirements of having an FBE. The SCA thus ruled in SARS’ favour, requiring that CIMSA pay tax on CGFM’s net income as well as the determined interest – however, SARS’s claim for the penalties were dismissed (an interesting SCA ruling on penalties which is arguably law as the issue was not considered in the Constitutional Court). (SARS 1 CIMSA close to nil, but a win for CIMSA on penalties).
Constitutional Court judgment
CIMSA not surprisingly appealed to the Constitutional Court (ConCourt), submitting that the SCA utilised a “notional-business interpretation” as opposed to the “actual-business interpretation” with regard to the FBE definition i.e., the primary operations of the company were determined based on the operations that CGFM could perform as opposed to the operations that CGFM actually does perform. CGFM was established as a fund management company and, per its license, was not authorised to perform investment management trading activities – these functions were thus outsourced to CAM and CIL, with CGFM purely acting thereon in a supervisory role.
In a unanimous judgment (in which nine judges concurred), the ConCourt stated that the SCA erred in not distinguishing between investment management in its wide sense and the narrower investment management trading. It held that CGFM had in fact met all the requirements of having an FBE, as its primary business under its license constituted that of fund management activities for which CGFM had a fixed place of business in Ireland that it was suitably staffed and equipped to conduct.
Further, the ConCourt noted that having such a restrictive interpretation would discourage legitimate business practices that contribute to the efficiency and competitiveness of South African companies on a global stage.
Therefore, CGFM had a FBE during its 2012 year of assessment to which its net income related and SARS was incorrect to include its net income in the income of CIMSA. (CIMSA 1 SARS 0).
The ConCourt judgment provides much needed relief for SA taxpayers in similar situations, and is applauded.
Where to from here?
Unfortunately, in last year’s draft tax amendments, various proposals were put forward seemingly to ensure the ruling of the SCA is achieved. Treasury did not proceed due to the SCA ruling in their favour but noted that depending on the ConCourt Ruling, there could indeed be changes to the CFC rules.
One hopes that the ConCourt ruling is not short lived due to taxpayer-unfriendly amendments, and that the comment that SA companies need to be able to be competitive in the Global Market is kept in mind.
All going well this is not the case for the Return of the King!
With a strapping alleged R794m tax payment on the line, the rigorous battle between Coronation Investment Management SA (Pty) Limited (CIMSA) and SARS has finally reached the end of the road with a sound judgment from the Constitutional Court in favour of CIMSA!
A trip down memory lane
Taking it back to 2017, SARS had determined that the net income of Coronation Global Fund Managers (Ireland) Limited (CGFM), a controlled foreign company (CFC) in relation to CIMSA, was to be imputed (included) in CIMSA’s income for the 2012 year of assessment and penalties and interest were levied.
CIMSA objected, arguing that CGFM qualified for the foreign business establishment (FBE) exemption – that CGFM’s net income was attributable to its FBE in Ireland - and that therefore, CGFM’s net income should not be included in CIMSA’s income, and by extension, the penalties and interest were not warranted.
SARS’ argument was that CGFM’s primary operations comprised of fund management activities and investment management activities and the latter were not conducted by the FBE of CGFM. Per the undisputed facts, the investment management activities were delegated to offshore entities: Coronation Asset Management (Pty) Limited (CAM) in South Africa and Coronation International Limited (CIL) in the UK. SARS’ further argument was that as neither of these entities were tax resident in the same jurisdiction of CGFM i.e., Ireland, the requirements of the proviso to the FBE definition, which would have permitted outsourcing or the utilisation of group company structures in the same country as CGFM’s (impugned) FBE were also not met.
In terms of the judgment in the Tax Court, CGFM’s primary operations were indeed that of fund management activities, for which it was suitably equipped and staffed in Ireland. The Tax Court thus ruled in CGFM’s favour, holding that the requirements of the FBE definition had been met and that CGFM subsequently qualified for the tax exemption. (CIMSA 1 SARS 0).
The Tax Court’s decision was subsequently overturned upon SARS’ appeal to the Supreme Court of Appeal (SCA), who sided with SARS in submitting that CGFM’s primary operations did not just comprise of fund management activities, but investment management activities as well. The full bench of five judges unanimously held that as the investment management functions were outsourced, CGFM did not meet the requirements of having an FBE. The SCA thus ruled in SARS’ favour, requiring that CIMSA pay tax on CGFM’s net income as well as the determined interest – however, SARS’s claim for the penalties were dismissed (an interesting SCA ruling on penalties which is arguably law as the issue was not considered in the Constitutional Court). (SARS 1 CIMSA close to nil, but a win for CIMSA on penalties).
Constitutional Court judgment
CIMSA not surprisingly appealed to the Constitutional Court (ConCourt), submitting that the SCA utilised a “notional-business interpretation” as opposed to the “actual-business interpretation” with regard to the FBE definition i.e., the primary operations of the company were determined based on the operations that CGFM could perform as opposed to the operations that CGFM actually does perform. CGFM was established as a fund management company and, per its license, was not authorised to perform investment management trading activities – these functions were thus outsourced to CAM and CIL, with CGFM purely acting thereon in a supervisory role.
In a unanimous judgment (in which nine judges concurred), the ConCourt stated that the SCA erred in not distinguishing between investment management in its wide sense and the narrower investment management trading. It held that CGFM had in fact met all the requirements of having an FBE, as its primary business under its license constituted that of fund management activities for which CGFM had a fixed place of business in Ireland that it was suitably staffed and equipped to conduct.
Further, the ConCourt noted that having such a restrictive interpretation would discourage legitimate business practices that contribute to the efficiency and competitiveness of South African companies on a global stage.
Therefore, CGFM had a FBE during its 2012 year of assessment to which its net income related and SARS was incorrect to include its net income in the income of CIMSA. (CIMSA 1 SARS 0).
The ConCourt judgment provides much needed relief for SA taxpayers in similar situations, and is applauded.
Where to from here?
Unfortunately, in last year’s draft tax amendments, various proposals were put forward seemingly to ensure the ruling of the SCA is achieved. Treasury did not proceed due to the SCA ruling in their favour but noted that depending on the ConCourt Ruling, there could indeed be changes to the CFC rules.
One hopes that the ConCourt ruling is not short lived due to taxpayer-unfriendly amendments, and that the comment that SA companies need to be able to be competitive in the Global Market is kept in mind.
All going well this is not the case for the Return of the King!