Latest Tax Developments. January 2017

Transcription

1 Latest Tax Developments January 2017

2 Introduction Monthly webinar 1st of 11 webinars Recent developments: This one January 2017; Cannot cover all developments in detail; Relevance of developments; Some will roll over to next month - time; If we missed something that you would like us to cover, please let us know for inclusion in next webinar.

3 Overview Practical issues; General developments; Dispute resolution; Case study; ABC (PTY) LTD v C:SARS (IT14027); ABC HOLDINGS v C:SARS (IT13772); MR X v C:SARS (13791 & 13792); Binding Private Ruling (BPR) 258 Corporate Group Restructuring; Binding General Ruling (BGR) 38 The value-added tax treatment of the supply and importation of vegetables and fruit; Roll Overs; Topics not covered.

4 Practical Issues SARS put special stopper on taxpayer accounts. Taxpayer s then must go to a SARS branch to update and verify their bank details only to be found that the stopper is not removed later, the taxpayer then must to go to SARS again to verify the details; E-filing registrations are being rejected without any reasons, this happen especially with foreigners with passport numbers. In most cases, they have already left the country and to get their details updated is a very long process; Generally refund payments are slow; Practitioners struggle to get appointments with SARS and when they do, they only get 30min appointments, which is not enough for the number queries one has.

5 General Developments Interpretation Note 42 (Issue 2) The supply of goods or services by the travel and tourism industry; Draft Interpretation Note 50 (Issue 2) on deductions in respect of scientific or technological research and development; Interpretation Note 94 (IN94) Contingent liabilities assumed in the acquisition of a going concern; VAT 421 Guide for Short-Term Insurance; Tables A and B of the Average Exchange Rates have been updated; Regulations for purposes of paragraph (b) of the definition of international tax standard in section 1 of the Tax Administration Act, 2011; The following Amendment Acts were promulgated on 19 January 2017 Rates and Monetary Amounts and Amendment of Revenue Laws Act 13 of 2016;

6 General Developments Rates and Monetary Amounts and Amendment of Revenue Laws (Administration) Act 14 of 2016; Taxation Laws Amendment Act 15 of 2016; Tax Administration Laws Amendment Act 16 of 2016; Explanatory Memoranda on the Taxation Laws Amendment Bill 17B of 2016; Special Voluntary Disclosure Programme (SVDP) in respect of Offshore Assets and Income contained in Part II of the Rates and Monetary Amounts and Amendment of Revenue Laws Bill 19 of 2016 and Bill 20B of 2016; Final Response Documents on the Taxation Laws Amendments Bill, 2016 and Tax Administration Laws Amendment Bill, 2016; Rates and Monetary Amounts and Amendment of Revenue Laws Bill, 2016;

7 Dispute Resolution

8 Case Study Summary of Issue An assessment is raised by SARS; Taxpayer objects and an appeal is later lodged by the taxpayer; Before matter goes to the Tax Court or the Tax Court, SARS concedes to the appeal; Following the concession, a revised assessment is issued by SARS; Dispute appears to be finalised, but SARS later issues a new additional assessment which relates to the same issue in dispute; What options does the taxpayer have?

9 Case Study Options Available Begin the dispute resolution procedure again by objecting to the assessment. Such objection should specifically mention of section 99(1)(e) of the Tax Administration Act, 2011 ( TAA ). Section 99(1)(e) of the TAA: (1) An assessment may not be made in terms of this Chapter (e) in respect of a dispute that has been resolved under Chapter 9. (Chapter 9 of the TAA relates to Dispute Resolution)

10 ABC (PTY) LTD v C:SARS (IT14027) Issue in dispute: whether grounds of objection and appeal may amended. Facts: Appellant taxpayer (company ABC) is a provisional taxpayer who underestimated its taxable income for the 2010 YOA; SARS imposed an underestimation penalty ito the IT Act and in an assessment dated 1 November 2011; Objection lodged by taxpayer disallowed by SARS (no serious calculation) taxpayer then appealed to Tax Board (taxpayer no longer incurring finance charges as these renegotiated after year end and therefore income greater);

11 ABC (PTY) LTD v C:SARS (IT14027) Facts Contd.: Tax Board ruled in favour of taxpayer. However, SARS dissatisfied with ruling and therefore SARS appealed to Tax Court; SARS filed its Rule 31 Statement in order to proceed to Tax Court; In the taxpayer s grounds of appeal (in Rule 32 Statement), taxpayer abandoned all grounds raised in its objection and notice of appeal; Taxpayer sought only to rely upon a procedural ground raised by the Chairperson of the Tax Board;

12 ABC (PTY) LTD v C:SARS (IT14027) Facts Contd.: SARS filed notice of exception on basis that taxpayer cannot now, at a hearing de novo, rely upon a new ground not contained in grounds of objection; Taxpayer in turn filed an application for amendment of its grounds of objection; and Therefore, matter before Tax Court concerns the exception and the proposed amendment to grounds of objection.

13 ABC (PTY) LTD v C:SARS (IT14027) Arguments Raised by SARS: Hearing before Tax Court is hearing de novo on same issues placed before Tax Board therefore, not appeal against Tax Board judgment; Therefore, impossible to grant amendment now as this would introduce new grounds of objection after event; Also, Tax Board wrong in law and therefore amendment is not a valid defence to penalty imposed.

14 ABC (PTY) LTD v C:SARS (IT14027) Ruling by Court: The decision by the Tax Board is incorrect in law; On this basis, taxpayer s sole reliance upon decision by the Tax Board to appeal is unfounded; Court does not allow the taxpayer to amend its grounds of objection and appeal to again include its original grounds of objection and appeal; Therefore, as sole basis of the appeal (Tax Board s decision) is incorrect in law: SARS exception succeeds; and The taxpayer s appeal to the Tax Court is dismissed.

15 ABC HOLDINGS v C:SARS (IT13772) Judgment Date: 04 November 2016; Case is before court in terms of section 24C (future expenditure) deductions and an understatement penalty; Appellant deducted such and upon assessment by SARS, was penalised for understatement.

16 ABC HOLDINGS v C:SARS (IT13772) Facts ABC Holdings manages retirement villages and their frail care centres. Acquired 4 retirement villages under amalgamation transaction. Enters into agreement with current owners of units to provide a levy subsidy in exchange for 40% of enhancement value at time of resale of unit. Enters into a second agreement under same conditions for new owners.

17 Consequences: Levy subsidy obligation becomes due. Contract 1 Sale to Owner B ABC Contract 2 Sale to Owner C Guarantee of Enhancement fee to be paid (40%) against future sale Consequences: Levy subsidy obligation becomes due. Guarantee of Enhancement fee to be paid (40%) against future sale

18 Purchase price: R Contract 1 ABC Sale to Owner B Contract 1 income Selling Price R Enhancement fee R Purchase price: R Contract 2 Sale to Owner C Contract 2 income Selling Price R Enhancement fee R

19 ABC HOLDINGS v C:SARS (IT13772) Facts Appellant deducts levy subsidy as future expenditure as contemplated in section 24C of ITA. SARS raises assessment and disallows deduction. Assessment increases tax liability by R and imposes understatement penalty of R ,80 in terms of s222 of TAA. Objection filed by Appellant and disallowed by SARS.

20 ABC HOLDINGS v C:SARS (IT13772) Laws Considered Section 24C of Income Tax Act Section 1 of Income Tax Act (gross income and accrued) Section 222 of Tax Administration Act Section 223 of Tax Administration Act

21 ABC HOLDINGS v C:SARS (IT13772) In Casu Appellant contested that it had correctly deducted the future expenditure as contemplated in s 24C. Further, it contested that, if the deduction was incorrect, it should not have the penalty imposed as it was acting upon the advice of a tax practitioner and that the understatement was a result of a bona fide inadvertent error.

22 ABC HOLDINGS v C:SARS (IT13772) In Casu Appellant began by arguing that although two contracts existed in the agreement for the subsidy levy and enhancement value (old owner new owner purchaser) the two were so closely intertwined they should be viewed as one. The viewing of these contracts as a singular agreement would then mean that the enhancement value from each contract would accrue to the appellant at the conclusion of each contract. In doing so, the income from the enhancement value would be used to in part or wholly for future expenditure

23 ABC HOLDINGS v C:SARS (IT13772) In Casu The Appellant based its argument on the advice of Tax Practitioners and an opinion by one Prof T. This would then place the Appellant in the position so contemplated in section 24C and as a result, the future expenditure was correctly deducted.

24 ABC HOLDINGS v C:SARS (IT13772) SARS contentions SARS contended that no income had accrued to the Appellant and that the expenditure so claimed was not future expenditure as contemplated by section 24 C. SARS further contended that two contacts existed in the agreement and that the income accrued from the one contract could not be used as expenditure for the other in order to claim a s24c deduction SARS stood by its penalty as it was of the opinion that the Appellant had made an understatement

25 ABC HOLDINGS v C:SARS (IT13772) Findings Future Expenditure The court found that the future expenditure as deducted by the Appellant did not constitute future expenditure as contemplated by s 24C. The court agreed with SARS in that two contracts existed and in no way did the enhancement fee for contract 1 and the levy subsidy for contract 2 allow for a deduction as so contemplated. The court found that, in order for a Section 24C deduction to be valid in terms of income accrued in terms of a contract and future expenditure relating to such Income, the income and expenditure had to occur within the same contract

26 ABC HOLDINGS v C:SARS (IT13772) Findings Future Expenditure The courts second point was that income must precede expenditure in order for a section 24C deduction to be relevant. The court found that, with the contract for a levy subsidy in exchange for enhancement value, the expenditure would be incurred before the income would be received. As a result, no compliance in terms of s24c.

27 ABC HOLDINGS v C:SARS (IT13772) Findings Understatement Penalty The court considered the Appellants claim that the understatement was as a result of a bona fide inadvertent error and the it relied on the advice and opinion of Tax professionals. The court considered the wording of section 222(2) of the TAA in which a penalty should not be imposed in the instance of a bona fide inadvertent error. The court was not clear on the definition of a bona fide inadvertent error and chose to define it.

28 ABC HOLDINGS v C:SARS (IT13772) Findings Understatement Penalty The court found a definition for bona fide in the Oxford dictionary and quoted it as follows: bona fide a Latin phrase meaning with good faith. Similarly the court observed the definitions genuine, real or without intention to deceive. The court then defined inadvertent as: accidental, unintentional, unintended. Finally, the court defined error as a mistake.

29 ABC HOLDINGS v C:SARS (IT13772) Findings Understatement Penalty Accordingly the courts definition for a bona fide inadvertent error is: an innocent misstatement by the taxpayer resulting in an understatement while acting in good faith and without the intention to deceive This is the first instance in which the courts have chosen to define the term and will provide guidance in the future.

30 ABC HOLDINGS v C:SARS (IT13772) Findings Understatement Penalty The courts attention then turned to the Appellant being in possession of tax advice and an opinion upon which it based its opinion. The court found that the Appellant had acted on the opinion and contemplated s 223(3)(b) of the TAA in which SARS is required to remit a penalty imposed upon a Tax Payer who acted upon the advice of a Tax Professional. ABC Holdings was shown to be in possession of such advice as so contemplated

31 ABC HOLDINGS v C:SARS (IT13772) Findings Understatement Penalty The result is that the court had the option as to whether or not the penalty should never have been imposed (section 222 (2)- bona fide inadvertent error) or whether or not the penalty should be remitted (223(3)(b) acting upon the advice of a tax professional). The court ordered the penalty to be remitted. This suggests that, although a bona fide inadvertent error has been defined, its definition has no weight as yet as it was not used in application for this matter.

32 ABC HOLDINGS v C:SARS (IT13772) Summary For a 24C deduction to be permitted, both income and expenditure must fall within the same contract. Income must occur prior to the future expenditure as contemplated. A bona fide inadvertent error has been defined

33 MR X v C:SARS Issue in dispute: whether interest paid on mortgage constitutes expense incurred in production of interest income to which deduction is applicable. Facts: In terms of employment contract, taxpayer is required to contribute a predetermined amount to maintaining a credit balance on a loan account; Contribution by taxpayer is deducted from his monthly remuneration; When sufficient funds available, interest distributions are paid to taxpayer interest is part of taxpayer s taxable income; Taxpayer not allowed to withdraw the credit balance from loan account unless he resigns; Taxpayer later purchased house with mortgage bond later converted to access bond.

34 MR X v C:SARS Facts contd.: Using the access bond, taxpayer would withdraw funds to pay for any expenses; Outstanding amount on mortgage was at all times greater than amount owing ito loan account; Taxpayer claimed deductions for various YOA - interest incurred on mortgage loans (as being in production of income); SARS disallowed deductions and also objection by taxpayer. Arguments by Taxpayer Interest incurred on mortgage sufficiently close to interest income earned on loan account interest income on loan account was applied to repay mortgage loan as taxpayer incurred more interest on mortgage due to retention of remuneration for loan account - therefore in production of income

35 MR X v C:SARS Arguments by SARS Not in production of income for purposes of section 11(a) deduction therefore taxpayer must prove that was in production of income. Court Ruling Taxpayer acquired mortgage bond to purchase home proceeds of loan used to pay purchase price. No evidence of a change of intention; Therefore, interest paid on mortgage bond was interest incurred in acquisition of capital asset therefore expenditure of capital nature; Taxpayer failed to prove that purpose and effect of acquisition of mortgage bond was for purposes of production of interest income; SARS assessments confirmed (taxpayer s appeal dismissed).

36 Binding Ruling 258 Corporate Group Restructuring Ruling to determine the tax consequences resulting from a group restructuring involving multiple transactions to be undertaken in terms of the corporate roll-over rules and the consequences of the controlled foreign company rules in relation to the restructuring.

37 Binding Ruling 258 Corporate Group Restructuring Law Considered ITA: Section 1, 9D, 24BA, 41,42,45 Eighth Schedule Paragraph 1, 11(1)(g), 12(4), 24(1), 64B(4), 76B STT Act Section 2(1)(a)(ii)

38 Binding Ruling 258 Corporate Group Restructuring Facts The matter consists of 1 Applicant and 3 Co-Applicants. We refer to them as A, B, C, D respectively and they form a group of companies A A B A C is the ultimate holding company for the group. holds all of the ordinary shares in B. ( equity shares ) holds all of the ordinary shares in C and a portion in D. also holds a portion of the ordinary shares in D. holds the remainder of the shares in D

39 Binding Ruling 258 Corporate Group Restructuring Facts A is Resident in South Africa B is incorporated outside South Africa and is non resident. C is incorporated outside South Africa and is non resident D is incorporated outside South Africa but is resident in South Africa.

40 BINDING RULING 258 A 100%?% B 100%?% C?% D Portion

41 Binding Ruling 258 Corporate Group Restructuring Facts A intends on simplifying the shareholding structure of D so as to become a wholly-owned subsidiary of A. Proposed Transaction was placed before SARS to determine Tax implications of the Transaction.

42 Binding Ruling 258 Corporate Group Restructuring Proposed Transaction Step 1: B will dispose of entire shareholding in C to A on loan account A B Disposal performed in terms of intra-group transaction Contemplated in para. b as defined in section 45(1) 100% 100%?% C?% D

43 Binding Ruling 258 Corporate Group Restructuring Proposed Transaction Step 2: A 100% 100% A will subscribe for and C will issue ordinary shares to A B?% C?% D

44 Binding Ruling 258 Corporate Group Restructuring Proposed Transaction Step 3: A 100% 100% C will change its residence and become a resident of South Africa B?% C?% D

45 Binding Ruling 258 Corporate Group Restructuring Proposed Transaction Step 4: B will dispose of its shares in D to C. Asset-for-Share Transaction Section 42(1) para. a A 100% 100% B?% Occurs at Book value C will issue ordinary shares to B. Shares will total more than 10% in C. C?% D

46 Binding Ruling 258 Corporate Group Restructuring Proposed Transaction Step 5: A 100% 100% C will dispose of its shares in D to A. B?% This will occur as an intragroup transaction As contemplated in para a of section 45(1) on loan account at book value C?% D

47 Binding Ruling 258 Corporate Group Restructuring Proposed Transaction Step 6: C will reduce partially its share capital. A B Portion returned to shareholders to come out of contributed tax capital. Amount payable in respect of reduction attributable to A will be settled in Cash off set against loan account 100% 100% C?%?% Shareholders D

48 Binding Ruling 258 Corporate Group Restructuring Proposed Transaction Step 7: B will reduce partially its share capital. Out of contributed tax capital A B Portion to be returned to A will be determined by directors. Amount payable in respect of reduction attributable to A will be settled in Cash off set against loan account 100% 100% C?%?% Shareholders D

49 Binding Ruling 258 Corporate Group Restructuring Effects of Transaction Step 1: B s disposal to A = intragroup transaction Roll over relief applies as follows: A B B shares = capital assets A shares = capital assets Deemed disposal at base cost A and B not part of same group 100% 100%?% C?% D

50 Binding Ruling 258 Corporate Group Restructuring Effect of Transaction Step 2: A Issue of shares will not be a disposal as envisaged in para % 100% B?% C?% D

51 Binding Ruling 258 Corporate Group Restructuring Effect of Transaction Step 3: Exclusions in 9D(9A)(a)(iii) will not apply. C not considered to have disposed of then immediately reacquired assets Para. 24(1) will not apply A 100% 100% B?% C?% D

52 Binding Ruling 258 Corporate Group Restructuring Effect of Transaction Step 4: Asset for share transaction B disposal of D to C equal to base costs. B deemed to have acquired C shares on date it acquired D shares. Costs under para. 20 treated as expenditure. For CGT, B and C = same entity A 100% 100% B C?%?% D

53 Binding Ruling 258 Corporate Group Restructuring Effect of Transaction Step 5: C acquisition of shares in D acquired on Capital account A B Disposal of C in D to A = intra-group equal to base cost C and A considered same entity C acquires debt owing at base cost of Nil. Section 42 (7) will not apply 100% 100% C?%?% D

54 Binding Ruling 258 Corporate Group Restructuring Effect of Transaction Step 6: Amount payable by B to A = return of capital (s 1(1) defines) A 100% 100% B?% Set off against loan and discharges obligations. Reduction of base costs in terms of 76B(2) no CGT for A or B C?% Shareholders D

55 Binding Ruling 258 Corporate Group Restructuring Effect of Transaction Step 7: Amount payable by B to A = foreign return of capital (s 1(1) defines) Set off against loan and discharges obligations. Reduction of base costs in terms of 76B(2) no CGT for A. A 100% 100% B C?%?% Shareholders D

56 Binding Ruling 258 Corporate Group Restructuring Proposed Transaction Steps 1, 2, 4, 5: Disposals at book value for asset-for- share does not equal value shifting arrangement. No STT payable on: Disposal by B of C to A Issue of shares by C to A Disposal by B of D to C Disposal by C of D to A

57 BGR38 The VAT Treatment of Importing Fruit and Veg Issue date: 23 January Section 11(1)(j) and 13(3), par 7(a) of schedule 1, and items 12 and 13 in part B of schedule 2. Purpose This BGR sets out the VAT rate applicable to the supply and importation of vegetables and fruit, and withdraws BGR (VAT) 18 dated 27 March 2013 The Zero-Rating of Various Types of Dates. Zero rated supplies The supply of vegetables and fruit that have not been cooked or treated in any manner except for the purpose of preserving such vegetables and fruit in their natural state, is zero-rated under section 11(1)(j) read with Item 12 and Item 13 respectively.

58 BGR38 The VAT Treatment of Importing Fruit and Veg Zero rated supplies Fresh and frozen vegetables and fruit supplied in the following manner are regarded as not having been treated as envisaged in the said Item numbers, and therefore qualify for zero-rating: Cut (including vegetables and fruit cut into specific shapes) Diced Sliced Shredded Crushed Minced Pureed Peeled De-pitted Compressed

59 BGR38 The VAT Treatment of Importing Fruit and Veg Standard rated supplies Vegetables and fruit supplied in the following manner are specifically excluded from zero rating and is subject to VAT at the rate of 14%. (a) Cut, diced, sliced or peeled vegetables or fruit to which any other substance has been added whether or not separately packed in the same container (other than for purposes of preserving the vegetables or fruit in their natural state). Examples are (i) a sachet of spices added to sliced mushrooms; (ii) fruit juice added to sliced fruit or a mixture of vegetable and fruit; and (iii) salad dressing and/or cheese added to a green salad (for example, a mixture of slices of lettuce, cucumber and tomato). (b) Fresh or frozen vegetables and fruit that have been treated with an additive for the purpose of adding colour or flavour (for example, glucose, sugar or salt). (c) Dehydrated, dried, canned or bottled vegetables or fruit. (d) Vegetables or fruit smoothies or juices, and any similar products. Frozen vegetables in this ruling does not include frozen potato products as contemplated in BGR (VAT) 35 issued in 2016.

60 BGR38 The VAT Treatment of Importing Fruit and Veg Standard rated supplies The supply of vegetables and fruit in the course of carrying out any agreement for the furnishing or serving of any meal, refreshment, cooked or prepared food or any drink, so as to be ready for immediate consumption when supplied, is subject to VAT at the rate of 14% under section 7(1)(a). The supply of vegetables and fruit by a restaurant or providing catering services, is therefore subject to VAT, irrespective of whether they fall under 2.1. (zero rated supplies). Importation of fruit and vegetables The importation of vegetables and fruit listed under Zero rated supplies exempt from the VAT levied under section 7(1)(b). The importation of vegetables and fruit listed under Standard rated supplies is subject to VAT at the rate of 14%.

61 BGR38 The VAT Treatment of Importing Fruit and Veg Period for which ruling is valid This ruling applies from date of issue until it is withdrawn, amended or the relevant legislation is amended.

62 Roll Overs Binding Private Ruling (BPR) 257 Islamic financing arrangement.

63 Not covered None.

64 Thank you Thank you for listening; and Thanks to my technical team. Tax Consulting South Africa Nico Theron