Reportable arrangements

Highlights
This section is aimed at uncovering ‘innovative’ corporate tax products that ‘effectively cost the tax system hundreds of millions (and even billions) of rands annually’. These provisions took effect on 1 March 2005.

Apart from the fact that the Minister of Finance can identify an arrangement to be reportable by way of proclamation in the Government Gazette, it is defined as an arrangement in terms of which the calculation of interest, finance costs, fees and other charges (‘relevant items’) is wholly or partly dependant on the tax treatment of the arrangement.

Disclosure
It should be noted that not all arrangements should be disclosed to the Commissioner, as the focus is on potential variations in the return of the financier. In this context:

• if there is a change in the relevant items as a result of a change in law, the arrangement
  oes not need to be reported. However, if there is a change in the official interpretation of a specific provision or a judgment to such an effect and it results in the tax treatment being changed, the arrangement should still be reported;
• a tax benefit is not only limited to income tax, but a benefit arising under any Act administered by the Commissioner, including STC, donations tax and CGT.

Should the arrangement not be reported any participant shall be liable for a penalty of R1 million.

Classification
Reportable arrangements are classified into 2 groups namely ‘specifically defined categories’ and ‘transactions with suspicious characteristics’.

Specifically defined reportable arrangements that are defined as reportable:

• Hybrid equity instruments (defined in section 8E of the Act) are transactions involving redeemable preference shares and normal shares where the rights attaching to such shares differ from the rights normally attached to ordinary shares.
• Hybrid debt instruments (defined in section 8F of the Act) are transactions aimed at convertible loan/debentures arrangements (excluding listed debt instruments). The conversion period to both section 8E and 8F.
• Any arrangement that has been gazetted which results in an undue tax benefit.

Reportable arrangements with suspicious characteristics should contain any of the following characteristics:

• The quantification of any finance costs/ other charges are partially/ fully dependent on the tax benefits derived by the arrangement.
• The transaction results in round tripping of funds, involving an accommodating or tax indifferent party or contains elements that have the effect of offsetting / cancelling each other.
• The transaction gives rise to a liability for generally accepted accounting purposes, but not for income tax purposes.
• The transaction does not result in a reasonable expectation of a pre-tax profit for any participant.
• The present value of the tax benefit exceeds the present value of the non-tax benefits derived by the participants.
  

The information to be submitted is wide ranging including details of the steps, features of the arrangement, tax benefits, names, tax reference numbers of all parties. The promoter, person principally responsible for organising, designing, selling, financing or managing the arrangement is responsible to report the arrangement. Where no promoter exists or the promoter is non resident, all participants are obliged to report the arrangement. The transactions must be reported within 60 days from the date that any amount has been received or accrued to a participant or is first paid or actually incurred.