Latest Tax Developments November 2016
Introduction Monthly webinar Last webinar 2016 Recent developments This one November 2016; Cannot cover all developments in detail; Relevance of developments; Some will roll over - time; If we missed something that you would like us to cover, please let us know for inclusion in next webinar.
Introduction Overview General developments; Practical issues; Topics not covered.
Overview Interpretation Note No. 91 ( IN91 ); BMW v SARS; Cannon vs SARS; Public Notice: Duty to Keep Records
General Developments SVDP can now be submitted at SARS branches in addition to efiling. VAT disputes can now be lodged via efiling. Special VDP at last in legislation. Taxation Laws Amendment Bill (Bill 17 2016) and Tax Administration Laws Amendment Bill (B18 2016) have been finalised.
Practical Issues In the past SARS send out notifications on assessments indicating the number of the assessment for that year, so the original assessment would have been number one and additional assessments will be 2, 3 or 4. In the past on notifications, the e-mail specified what kind of correspondence was issued, objection allowance or disallowance, verification etc., nowadays the notification e-mail only states that a letter was issued. VDP01 application form problematic on e-filing.
Issue date: 21 October 2016. Sections 19 and par. 2A of the 8 th Schedule. Purpose This note provides guidance on the interpretation and application of section 19 and par. 12A which deal with the reduction of debt. The Note does not address section 22 of the VAT Act dealing with irrecoverable debt. Background This new IN deals with scenarios where debt owed has been cancelled or reduced or waived. Different scenarios are dealt with depending on what the debt (cash received) was used to finance in the operations of the company. The general principle is that any previous deductions or allowances deducted from taxable income will be recouped or otherwise recovered to the extent the debt has been reduced.
Reduction amount A reduction amount in relation to a debt owed by a person means any amount by which that debt is reduced, less any amount that has been paid already by that debtor to the creditor as consideration for that reduction. The reference to that person in the definition of reduction amount is a reference to the debtor. Time of Reduction For purposes of section 19 and par 12A the time of reduction of the amount of a debt will depend on the facts of each case. A debt will be reduced when the event giving rise to the debt reduction takes place, for example, when a creditor decides not to enforce payment of a debt and informs the debtor accordingly.
Sequence of the application of the subsections of section 19 Any reduction amount in respect of trading stock must be applied in accordance with the sequence of the subsections of section 19. Thus, a debt that funded the acquisition of trading stock and which is partially reduced must first be allocated to trading stock that is held and not disposed of at the time of the debt reduction under section 19(3). Any remaining balance of the debt reduction must then be dealt with as a recoupment under section 19(4) or (5). Section 19(2) This subsection is the starting point and gives the scope of section 19. Section 19(3) This subsection tells us a debt that was used to finance trading stock that is still on hand at time of reduction we have to reduce the future cost of sale with the reduction amount.
Section 19(4) This subsection tells us a debt that funded expenditure that was incurred in respect of trading stock that is held and not disposed of at the time of the reduction of the debt. Section 19(4) provides that if the reduction amount of the debt exceeds the amount applied under section 19(3) to reduce the section 11(a), section 22(1) and section 22(2) amounts as appropriate, then the excess amount must, for the purposes of section 8(4)(a), be deemed to be an amount that has been recovered or recouped in the tax year.
Donations Tax Section 19(8)(b) and par. 12A(6)(b) do not require that the reduction amount of the debt be subject to donations tax. While a debt may be reduced by a donation as in section 55(1) and 58, the exclusions in section 19(8)(b) and paragraph 12A(6)(b) will apply even when the donation is exempt from donations tax under section 56. Not every reduction of a debt is motivated by pure liberality or disinterested benevolence. Only the reduction of a debt motivated by pure liberality or disinterested benevolence will be a debt reduced by way of a donation as defined in section 55(1).
Reduction in expenditure incurred under paragraph 20(1)(a) to (g) (paragraph 20(3)(b)) Double taxation could arise should both section 19 and par. 20(3)(b) apply to a reduction of debt. In this regard paragraph 20(3)(b) shall not apply to the extent that the amount was taken into account as a recoupment under section 8(4)(a) (it would have if section 19(4) or 19(6) applied); or the amount was applied to reduce an amount taken into account in respect of trading stock under section 19 (it would have if section 19(3) applied). This exclusion, therefore, ensures that the base cost of an asset must not be reduced under paragraph 20(3)(b) if section 19 has been applied to reduce an amount taken into account in respect of trading stock.
Summary Section 19 and par. 12A contain ordering rules for dealing with debt reduction and replace the previous rules that were contained in section 8(4)(m), the proviso to section 20(1)(a) and paragraph 12(5). The new ordering rules apply to trading stock, other deductible expenditure, allowance assets and capital assets financed by debt that is subsequently reduced. Briefly the rules provide as follows upon a reduction of such debt: Trading stock held and not disposed of Any section 11(a) deduction or the value of opening stock under section 22(2) as well as any closing stock under section 22(1) is reduced by the reduction amount of a debt under section 19(3). Any excess reduction amount is treated under section 19(4) as a recoupment for the purposes of section 8(4)(a). Trading stock not held and not disposed of at the time of the reduction of the debt and other deductible expenditure excluding allowance assets The reduction amount of a debt is deemed to be a recoupment under section 19(5) for the purposes of section 8(4)(a) to the extent that the expenditure that was funded by the debt was allowed as a deduction.
Summary (cont.) Allowance assets The reduction amount of a debt first reduces any base cost expenditure under paragraph 12A(3) after which any excess is deemed to be a recoupment under section 19(6) for the purposes of section 8(4)(a). Future capital allowances will be limited to the cost of the asset less the reduction amount and any previous allowances claimed on the asset, under section 19(7). Capital assets that are not allowance assets The base cost of the asset is reduced by the reduction amount of the debt under paragraph 12A(3). Any excess reduction amount reduces an assessed capital loss under paragraph 12A(4). The ordering rules do not apply to tax debt or debt that has been reduced by donation, bequest or by an employer (section 19(8) and paragraph 12A(6)(a), (b) and (c)).
BMW V CSARS Judgment date: 21 October 2016. Issue in dispute: Whether the Applicant was entitled to interest on the amount of penalties and interest paid by it under protest. Parties: Applicant: BMW South Africa The Respondent: Commissioner for the South Africa Revenue Services. Facts: Respondent had found that Applicant had not paid the value-added tax payable for the period October 2011 to February 2012 and therefore levied penalties and interest due. Applicant had made payment, which had not been properly allocated by the Respondent. Nevertheless, and despite proof of payment given to the Respondent by the Applicant, the Respondent continued to levy penalties and interest, and compelled payment thereof. Applicant did request suspension of payment, which request was not successful.
BMW V CSARS The Commissioner s finding of non-payment was corrected and the costs issue was dealt with, however repayment of the penalties and interest was still to be resolved. Applicant: Referred to Shuttleworth v South African Reserve Bank et al 2015 (1) SA 586 (SCA) and the Tax Administration Act of 2012. Said that they were entitled to interest on the amount of penalties and interest paid by it under protest. Respondent Referred to Commissioner for Inland Revenue v First National Industrial Bank Ltd. Said that no mora interest was payable on the amount relating to the penalties and interest.
BMW V CSARS Court found that the Shuttleworth judgment and the TAA were applicable. Applicant therefore entitled to interest on the amount paid in respect of penalties and interest levied by the Respondent. Respondent was ordered to pay back the provisional payment made to it by the Applicant, with interest a tempore morae.
Public Notice: Duty to Keep Records (Published in Government Gazette No. 40375, 28 October 2016) ( Public Notice ) Public Notice issued ito S29(1)(b) of the Tax Administration Act, 2011 ( TAA ). Public Notice applies to years of assessment commencing on/after 1 October 2016. Persons required to keep records, books of account or documents specified in this Public Notice: Persons who entered into potentially affected transaction (defined in S31 of Income Tax Act); and Aggregate of potentially affected transactions for YOA (without offsetting the transactions against each other) exceed R100 million.
Public Notice: Duty to Keep Records (Published in Government Gazette No. 40375, 28 October 2016) ( Public Notice ) Documents to be Kept iro Structure and Operations: Description of person s ownership structure; The name, address of the principal office, legal form and jurisdiction of tax residence of each of connected persons with which a potentially affected transaction has been entered into; Business operation summary, incl. Description of business and plans for principal trading operations; an organogram showing title and location of senior management team members; major economic and legal issues affecting profitability of person and industry;
Public Notice: Duty to Keep Records (Published in Government Gazette No. 40375, 28 October 2016) ( Public Notice ) Documents to be Kept iro Structure and Operations (contd.): Business operation summary, incl. (contd.) Description of any business restructurings or intangibles transfers that person has been affected by or involved in; Person s market share within industry, analysis of relevant market competition environment and key competitors; Key value drivers identified by available industry research findings or reports; Industry policy or industry incentives or restrictions affecting person s business; Role of person, as well as connected persons, in group s supply chain.
Public Notice: Duty to Keep Records (Published in Government Gazette No. 40375, 28 October 2016) ( Public Notice ) Documents to be Kept iro Transactions that exceed R5 million in value: Nature and terms (including pricing policy) of transactions; Contracts or agreements related to transactions; Any other governance and regulatory documents (e.g. complete board minutes and South African Reserve Bank applications and approvals); Indication and explanation of tested party, if applicable; Iro tested party (=selected for transfer pricing method) Detailed allocation of revenues, costs, expenses and profits between its connected person transactions and independent person transactions; or If the above cannot be directly allocated, an explanation and documents supporting the allocation rationale;
Public Notice: Duty to Keep Records (Published in Government Gazette No. 40375, 28 October 2016) ( Public Notice ) Documents to be Kept iro Transactions that exceed R5 million in value: (contd.) If tested party is tax resident outside RSA, documents evidencing the functional and risk classification of tested party, incl. Description of business; Contracts between tested party and its customers and suppliers; and Commercial invoices between tested party and its customers and suppliers. Description of functions, risks and assets; Description of intangible assets involved and their influence on classification of tested party;
Public Notice: Duty to Keep Records (Published in Government Gazette No. 40375, 28 October 2016) ( Public Notice ) Documents to be Kept iro Transactions that exceed R5 million in value: (contd.) Operational flows (incl. information flow, product flow, and cash flow); Data and methods used for determining arm s length return and transfer prices; Assumptions, policies and price negotiations, that influenced determination of the transfer prices or the allocations of profits or losses; Details of adjustments made to transfer prices to align them with the arm s length return; If potentially affected transactions = financial assistance transactions, the following records: Summary of financial forecasts; Analysis of financial strategy of business.
Public Notice: Duty to Keep Records (Published in Government Gazette No. 40375, 28 October 2016) ( Public Notice ) Documents to be Kept iro Transactions that exceed R5 million in value: (contd.) If potentially affected transactions = financial assistance transactions with a term exceeding 12 months, the following additional records: Description of funding structure in place; Group structure covering all relevant companies; Financial statements and management accounts. Existing unilateral, bilateral and multilateral advance pricing agreements and tax rulings. Documents to be kept where Transactions don t exceed R5 million: Documents that enable SRS to be satisfied that potentially affected transaction = arm s length.
Public Notice: Duty to Keep Records (Published in Government Gazette No. 40375, 28 October 2016) ( Public Notice ) Documents to be Kept by Connected Persons: Iro records to be kept iro structure and operations as well as transactions that exceed R5 million (discussed above) which are kept by connected person in ordinary course of business comply with requirements in S31 of TAA. Alternative Arrangements with SARS: If there are high volumes of potentially affected transactions which are also financial assistance transactions, SARS may agree to alternative records that may be kept re transaction being at arm s length.
CANNON SOUTH AFRICA v C:SARS (2671/2016P) [2016] ZAKZPHC 94 (7 October 2016) ( CANNON v SARS ) Cannon v SARS deals with review (ito HCR 48) of Taxing Master s disallowance of certain items on a bill of costs; Judgment Date: 7 October 2016. General Principals on Costs Depending on circumstances, taxpayer or SARS may be ordered by Tax Court to pay costs; Taxpayer may be awarded costs by Tax Court where SARS acts unreasonably;
General Principals on Costs Dispute Resolution Rules make no provision for payment of costs in the Tax Board; During ADR, parties can also agree to pay the other parties costs (this will form part of ADR agreement); Costs must be in accordance with fees prescribed by High Court Rules; If parties dispute amount of costs (as detailed in bill of costs document) Taxing Master (court official) may be called upon to tax the bill of costs;
General Principals on Costs For tax disputes, Registrar of Tax Court may perform functions of taxing master/ appoint someone to perform such functions; Taxing Master is granted a discretion as to which items in bill of costs to allow; Decisions by Taxing Master re bill of costs can be taken on review to High Court ito HCR 48.
Not covered Section 12l Tax Allowance Programme Changes made to rectify the implementation dates of decisions to approve or withdraw approval of applications received for the Tax Allowance programme in terms of section 12l (12)(a)(i) and (19)(d).
Thank you Thank you for listening Thanks to my technical team for assistance during the year: Matsika Vengesa; Rina Fourie; Craig Rocher; Marius Engelbrecht; Natasha Wilkinson; and Jessica Grobler. Tax Consulting South Africa Nico Theron nico@taxconsulting.co.za www.taxconsulting.co.za