[ technical ]
APB APPROVAL OF AMENDMENTS instruments, or components of instruments, standard-setter in South Africa: a body
AND REMOVAL OF AN ED which impose on the entity an obligation to corporate entitled the “Financial Reporting
deliver to another party a pro rata share of the Standards Council” (FRSC) or (Council). The
Accounting Pronouncement Approved net assets of the entity only on liquidation (for FRSC is not yet operational, and therefore
At a meeting held on 16 May 2008, the example, some partnership interests and some standard setting is still being carried out
Accounting Practices Board (APB) approved shares issued by limited life entities). under the auspices of the Accounting
the Amendments to IAS 32(AC 125) – Practices Board (APB).
The amendments are effective for annual
Financial Instruments: Presentation and The Preface to Statements of GAAP has
periods beginning on or after 1 January 2009,
IAS 1 (AC 101) – Presentation of Financial therefore been revised to include the
although entities are permitted to adopt
Statements: Puttable Financial Instruments objectives and membership of the APB and
and Obligations Arising on Liquidation for the amendments earlier. The documents are
available on the SAICA handbook-on-line . the FRSC and explains the process followed
issue as a Statement of Generally Accepted for exposure and approval of Statements of
Accounting Practice (GAAP). Exposure Draft Removed GAAP, followed by the APB, and as detailed in
The amendments classify the following the revised Companies Act for the FRSC.
ED 215 − Amendments to IAS 32 - Financial
types of financial instruments that meet the Instruments: Presentation and IAS 1 - IMPACT OF AMENDMENTS TO IAS 32
definition of financial liabilities, as equity Presentation of Financial Statements:
provided they have particular features and (AC125)
Financial Instruments Puttable at Fair Value
meet specific conditions: Previously we have communicated the
and Obligations Arising on Liquidation, has
puttable financial instruments (for example, been removed due to the issue of the above amendments to IAS 32(AC 125) – Financial
some shares issued by co-operative entities); and amendments. Instruments: Presentation and IAS 1(AC 101) –
Presentation of Financial Statements: Puttable
Financial Instruments and Obligations Arising
CONSULTATIVE DOCUMENTS ON THE information should possess if it is to provide on Liquidation. These amendments may be
CONCEPTUAL FRAMEWORK a useful basis for economic decisions. relevant for various industries such as co-
Preliminary views on the reporting entity operatives, clubs, partnerships and collective
The International Accounting Standards
concept investment schemes, private equity funds and
Board (IASB) and the US Financial Accounting
Standards Board (FASB) have published The second document, published as a
consultative documents that seek public discussion paper, sets out both boards’ Typically these are entities that report little or
comment on two of the eight phases of preliminary views on the reporting entity no equity in terms of IFRS, but disagree with
their joint project to develop an improved concept and related issues. This discussion the treatment of some of their instruments
conceptual framework. The objective of the paper has been issued in South Africa as as liabilities under IFRS, because they believe
project is to develop an improved conceptual ED 241 − Preliminary Views on an Improved them to be equity in substance. Accordingly,
framework that provides a sound foundation Conceptual Framework for Financial these entities would not have previously
for developing future accounting standards. Reporting: The Reporting Entity. shown any profit in terms of IFRS, when the
reality is that they are earning profits for
Exposure draft of Chapter 1 and Chapter 2 Although the reporting entity concept their investors. The amendments to IAS 32
of the Framework determines some important aspects of (AC 125) may change this.
financial reporting, the boards’ existing
The first document published is an exposure frameworks do not address it specifically. The An example is the collective investment
draft of Chapter 1 and Chapter 2 of the boards’ preliminary views are that: scheme industry where, historically, the
framework. This document has been issued financial statements have not been prepared
• a reporting entity is a circumscribed area
in South Africa as ED 240 − An Improved based on South African Statements of
of business activity, of interest to present
Conceptual Framework for Financial Generally Accepted Accounting Practice (SA
and potential equity investors, lenders and
Reporting: Chapter 1: The Objective of GAAP) or International Financial Reporting
other capital providers;
Financial Reporting and Chapter 2: Qualitative Standards (IFRS), because the Collective
Characteristics and Constraints of Decision- • control is the basis for determining the Investment Schemes Control Act, 2002
useful Financial Reporting Information. composition of a group reporting entity; and does not currently require one of these
• consolidated financial statements should frameworks. The basis of preparation has
It seeks views on an improved objective be prepared from the perspective of the
of financial reporting, the qualitative been aligned to the basis on which the funds
group reporting entity. are priced rather than one of the recognised
characteristics of information provided by
financial reporting and constraints on the The above EDs can be downloaded from the frameworks. There has, however, been a move
provision of that information. The draft SAICA Website and their SAICA comment by some funds to apply either SA GAAP or
reflects the board’s updated proposals in deadline is 1 September 2008. IFRS over the past few years, and the debt/
equity debate is particularly relevant in this
the light of comments received on an initial PREFACE REVISED FOR COMPANIES
consultation document published in July 2006. industry. Under the historical basis the unit
ACT CHANGES holders’ interest in the fund has always been
The exposure draft now proposes that the
objective of financial reporting is to provide The process followed for exposure and accounted for as equity, but under SA GAAP
financial information that is useful to present approval of Statements of Generally or IFRS there is a strong argument that the
and potential equity investors, lenders and Accepted Accounting Practice (GAAP) is unit holders’ interest should be accounted
other creditors in making decisions in their currently undergoing change. The Corporate for as debt because this interest is akin to a
capacity as capital providers. Laws Amendment Act No. 24 of 2006 puttable financial instrument. (The investor,
(CLAA) changed the Companies Act No. through the fund manager, can liquidate his/
It also presents an improved description 61 of 1973(CA) and came into effect on her investment in the fund as and when he/
of ‘faithful representation’, one of the 14 December 2007. Section 440P(1) of the she wishes, provided it is done in terms of the
qualitative characteristics that financial Companies Act establishes a new accounting fund’s trust deed.)
12 [ September 2008 ]
The recent amendments to IAS 32(AC 125)
have reopened the debt/equity debate, and
collective investment schemes should now
consider the impact of these amendments
and assess whether the unit holders’
interests should still be accounted for as
debt or whether they can be treated as
equity. The amendments allow only the
most subordinate class of instrument to be
classified as equity and, therefore, schemes
would need to consider whether all classes
of unit holders rank equally or whether there
may be one class that is more subordinate
REVISED AC 503 – ACCOUNTING FOR of service in addition to meeting certain EXTRACTIVE ACTIVITIES RESEARCH
BLACK ECONOMIC EMPOWERMENT performance targets, whereas this previously PROJECT
(BEE) TRANSACTIONS OPEN FOR was not the case. Vesting conditions are
defined under the amended IFRS 2(AC 139) At the June 2008 International Accounting
as “The conditions that determine whether Standards Board (IASB) meeting, the IASB
Introduction the entity receives the services that entitle considered the research presented by the
AC 503- Accounting for Black Economic the counterparty to receive cash, other assets project team on the initial recognition
Empowerment (BEE) Transactions has been or equity instruments of the entity, under a of minerals and oil and gas reserves and
revised in light of the amendments to IFRS share-based payment arrangement. Vesting resources. South Africa, Australia, Canada
2(AC 139) – Share-based Payment. The conditions are either service conditions or and Norway comprise the project team.
definition of vesting conditions has been performance conditions. Service conditions
amended and guidance on the accounting require the counterparty to complete a Basic approach
treatment of non-vesting conditions has specified period of service. Performance
been added. These amendments will become conditions require the counterparty to The research team applied the Framework’s
effective for annual periods beginning on or complete a specified period of service and asset definition and recognition criteria as
after 1 January 2009. SAICA has published specified performance targets to be met well as the Board’s current thinking in the
for public comment ED 242 – AC 503 – (such as a specified increase in the entity’s conceptual framework project. At present,
Accounting for Black Economic Empowerment profit over a specified period of time). A it is common for entities to capitalise costs
(BEE) Transactions, which incorporates these performance condition might include a or recognise them as expense according to
amendments to IFRS 2(AC 139). market condition.” the different phases of upstream extractive
Reasons for Revising AC 503 Prior to these amendments, no guidance was activities, such as exploration and evaluation,
AC 503 was initially issued by the APB to provided as how non-vesting conditions in a development and production.
provide guidance on how to account for share-based payment arrangement should be
Black Economic Empowerment Transactions accounted for and recognised. Paragraph 21A Asset definition and recognition
in the context of IFRS 2(AC 139) in 2006. In has been added to IFRS 2(AC 139) to serve this
The project team considered that the
January 2008, amendments to IFRS 2(AC 139) purpose. This paragraph states that “Similarly,
an entity shall take into account all non-vesting economic resource, which relates to minerals
– Vesting Conditions and Cancellations were
issued, and these amendments will become conditions when estimating the fair value of or oil and gas, could be identified as the
effective for annual periods beginning on or the equity instruments granted. Therefore, for following three types of assets:
after 1 January 2009. grants of equity instruments with non-vesting • Legal rights, such as exploration rights or
As a result of the amendments to IFRS 2(AC conditions, the entity shall recognize the goods
139), AC 503 has been revised to take into or services received from a counterparty that
account the amended definition of vesting satisfies all the vesting conditions that are • Information (or knowledge).
conditions and the accounting treatment not market conditions (e.g. services received
from an employee who remains in service for • The minerals or oil and gas deposit.
of non-vesting conditions. The definition of
vesting conditions prior to the amendments the specified period of service), irrespective It was noted that these assets can be viewed
stated that “The conditions that must be of whether those non-vesting conditions are
as forming a continuum representing the
satisfied for the counterparty to become satisfied.” (emphasis added)
maturing of upstream extractive activities
entitled to receive cash, other assets or The following sections and paragraphs of from early stage prospecting and exploration
equity instruments of the entity, under a AC 503 have been thus revised as a result of
share-based payment arrangement. Vesting activities through to the extraction of
the amendments to the definition of vesting
conditions include service conditions, which conditions and paragraph 21A, which were minerals or oil and gas from the ground.
require the other party to complete a specified brought about by IFRS 2(AC 139) – Amendments Which asset or assets should be recognised
period of service and performance conditions, to Vesting Conditions and Cancellations; would depend on where the extractive
which require specified performance targets • Issue 3 paragraphs 18 to 19. activities operation is along the continuum.
to be met (such as a specified increase in the
entity’s profit over a specified period of time).” • Illustrative Examples 4 and 5 from IASB members agreed that a legal rights
Under the amended definition of vesting paragraph IE9 to IE13. asset should be recognised when the rights
conditions, performance conditions require • Issue 3 in the Basis for Conclusions from are acquired. The information obtained from
that an entity completes a specified period paragraph BC41 to BC73. exploration and evaluation activities
[ September 2008 ] 13
[ technical ]
generates a better understanding of the development and extraction phases, the
economic resource that underlies the legal unit of account would be no greater than REGULATED INDUSTRIES
rights asset and is therefore an enhancement a contiguous area or areas for which the
of that asset, rather than a separate asset. legal rights are held and which is managed EXCHANGE CONTROL CIRCULARS
IASB members suggested that the asset separately and would generate largely
independent cash flows. The Exchange Control department of the
associated with a minerals or oil and gas
deposit is the right to extract the minerals or South African Reserve Bank (EXCON) has
IASB members also discussed infrastructure
oil and gas contained in the deposit. issued the following four Exchange Control
and equipment assets associated with a
Unit of account developed property and noted that the
components approach in IAS 16 may be No. 9/2008 – Foreign direct investments
IASB members concurred with the project useful in considering which assets should be outside the Common Monetary Area by
team’s view on limiting the geographical recognised separately from the legal rights. South African Companies.
size of the unit of account. For exploration
Next steps and discussion paper
activities, the unit of account would be Section B.2(B)(ii) of the Exchange Control
defined according to the exploration rights The project team was asked to bring an Rulings (the Rulings) has been amended
held and, as more exploration and evaluation analysis of disclosure issues, together with to accommodate the various issues raised
take place, the size of the unit of account an outline of the proposed discussion paper, relating to Exchange Control Circular No.
would contract to cover only the specific to a future meeting. The discussion paper is 6/2008 – Foreign direct investment outside
area(s) where detailed exploration and intended to be ready for publication by the the Common Monetary Area by South Africa
evaluation are taking place. During the end of 2008.
Companies. A definition of foreign direct
investment has also been added to Section
PUBLIC SECTOR A.1 of the Rulings.
IRBA No. 10/2008 – Inward foreign loans
ACCOUNTING STANDARDS BOARD Section I.3 of the Rulings has been amended.
The Auditing Profession Act
The Accounting Standard Board (ASB), during No. 11/2008 – Amendments to the
The Independent Regulatory Board its meeting on 20 June 2008, approved
for Auditors (IRBA) is in the process of Exchange Control Rulings
exposure draft ED 49 – Employee Benefits. Various sections of the Rulings have been
preparing amendments to the Auditing Comment on the ED is requested by 30
Profession Act. These proposed amendments amended.
will be submitted to the National Treasury No. 12/2008 – Securities Control
in the latter part of the year and will follow The standards, exposure drafts, discussion
– Authorised Bank/CSD Participant/
the standard legislative processes. SAICA papers and updates of the Board are available
will actively engage in the comment process on the Board’s website (www.asb.co.za).
Subsections G.(A)(iii)(j), (k) and (l) of the
through its Auditing Guidance Committee.
EFFECTIVE DATES OF GRAP STANDARDS Exchange Control Rulings (the Rulings) have
Accreditation of SAICA been amended to reflect changes contained
The Minister of Finance issued Government
in the list of names under the heading
The IRBA accredited the first Professional Gazette No 31021 on 9th of May 2008 that
of FirstRand Bank Limited. The name of
Institute in terms of the Accreditation Model prescribed the effective date of 17 Standards
as provided for by the Auditing Profession Act. FirstRand Treasury-Custody Services has been
of Generally Recognised Accounting Practice
Full accreditation has been granted to SAICA. deleted and substituted with FNB Custody
(GRAP) for public entities, constitutional
Previously, the IRBA recognised SAICA’s institutions, municipalities and municipal entities.
programmes in terms of the Public The ASB has issued a communication clarifying Please direct any specific queries regarding
Accountants’ and Auditors’ Act, 1991. the implementation dates of the Standards of the Exchange Control Circulars or Rulings to
GRAP. Both the Gazette and the communication firstname.lastname@example.org.
As an accredited institution, SAICA will now can be downloaded from the ASB website.
be subject to ongoing monitoring by the IRBA,
which allows the professional body and the for public comment. The public comment
IRBA the opportunity to co-operate with a view
to seeking improvements in the profession.
TAX process was accompanied by a consultation
process between SARS and the professional
associations that commented on the
WHAT’S NEW AT SARS? initial draft. SAICA provided comment and
recommendations on the initial draft.
JSE The latest updates can be viewed on the
SARS website (www.sars.gov.za). The most significant changes include the
SAICA SUBMISSION TO SARS following:
The JSE has amended its proposed changes • Tax practitioners that are under statutory
The following had been issued in June 2008:
to its Listing Requirements pertaining to the regulation by another relevant statutory
suggested “Auditor Register” and the need Call for Comment - Comprehensive Guide
to CGT. body (e.g. the Independent Regulatory
for IFRS advisors, incorporating comments Board for Auditors [IRBA]) or are regulated
received from third parties including SAICA. TAX PRACTITIONERS BILL by the High Court of South Africa (i.e.
The effective date of the amended Listing SARS issued the revised draft Regulation the legal profession) will only be required
Requirements is 1 September 2008. of Tax Practitioner Bill on 3 June 2008 to register with SARS in terms of the
14 [ September 2008 ]
revised draft Bill, but will be subject to the disciplinary and other
procedures of the other body.
• The concept of a reportable irregularity will not be pursued.
• The board size will be reduced and at least three of the seven board
members will be appointed by the Minister from nominations by
the tax practitioner community.
• The decriminalisation of the code of conduct.
The draft revised Bill makes provision for the Minister to exclude a
person whose profession is regulated by law through a statutory body
that is similar to the bodies and professions identified in the exclusion
clause, e.g. the IRBA.
Comment is invited from members for consideration by the National MacDonald’s Transport in existence since 1933, a leader
Tax Committee [NTC]. SAICA through members of the NTC provided
comment to SARS in this regard. SAICA’s submission is available on
in the area of mass transport and the supply of logistical
SAICA’s website. services, has the following position available:
SECURITIES TRANSFER TAX CHARTERED ACCOUNTANT (CA)SA -
From 1 July 2008, a new tax applies to the transfer of securities. The UPINGTON
Securities Transfer Tax Act (STTA) applies to the transfer of listed and
unlisted securities on or after 1 July 2008. The STTA replaces Stamp This company is seeking a highly qualified (CA)SA
Duties and Uncertificated Securities Tax on marketable securities. The accountant with a high level of financial and commercial
tax rate is 0,25%, to be applied to the taxable amount in respect of experience and the exposure of development and growth
any transfer of a security. of different transport divisions. The candidate must be
STT is a tax levied on every transfer of a security. bilingual, computer literate and knowledge of Accpac will
A security in essence means any – be a further recommendation.
share in a company;
member’s interest in a close corporation; or
right or entitlement to receive any distribution from a company or (CA)SA qualification and at least 5 years corporative
close corporation. financial experience, as well as proven 5 years
Only securities issued by: management experience, good business and commercial
companies incorporated, established or formed inside the Republic; intellect, outstanding interpersonal and communication
and skills. Must be a strong strategist with operational focus
companies incorporated, established or formed outside the Republic, and skills, must be prepared to travel national as required.
which are listed on a South African exchange, are taxable.
Further details are available on the SARS website. Responsibilities:
VAT REGISTRATION THRESHOLD: SARS ISSUES MEDIA Understanding business legislation and the law, financial
STATEMENT requirements and income tax-laws, operational and
SARS issued a media statement, which confirms that the VAT infrastructure experience, build relations with
registration threshold remains unchanged at R300 000. Due to public depot-managers and Exco-members with the effective
uncertainty and confusion, SAICA has requested that SARS issue a unrollment of company objectives and to facilitate
media statement to clarify the present position. strategies, recruitment, management and training of
SARS cites the following as the reason for not giving effect to the personnel, establish full financial departments in every
increase in the threshold registration: area where needed and interpretation and understanding
“The intention is that the increase will coincide with the introduction of business contracts.
of the simplified presumptive turnover tax for very small businesses
in 2009. Although some of the principles of the presumptive tax have Salary:
been announced, a number of matters remain to be dealt with and
refined after consultation with small business.” We offer an above average remuneration package.
SAICA therefore welcomes this media statement. The media statement
Send CV, with reference MMT, before
is available on the SARS website.
30 September 2008 to:
Edited by: Ewald Muller
M & T Personeeldienste,
Technical queries: email@example.com
Ethics and Discipline queries: P/Bag X5879, Post Net Suite #105,
firstname.lastname@example.org Upington, 8800
Fax: 086 675 2116
Information Centre: email@example.com Telephone: 011 621 6641
Telefax: 011 621 6819 | Website: E-mail: firstname.lastname@example.org
[ September 2008 ] 15
To discover the new BMW X6, call 083 9000 269.
ax havens are countries where minimal or no taxes are “avoidance arrangement”: any arrangement that, but for this Part,
levied on non-residents. The Economist defined a tax results in a tax benefit.
haven as having “a composite tax structure established
deliberately to take advantage of, and exploit, a worldwide demand “tax benefit”: any avoidance, postponement or reduction of any
for opportunities to engage in tax avoidance”1. A key feature of a liability for tax.
tax haven is a lack of transparency – some examples include secret According to s80A, an avoidance arrangement is an impermissible
rulings and negotiated tax rates. Although most dealings with tax avoidance arrangement if its sole or main purpose was to obtain a tax
havens are lawful, some taxpayers exploit the secrecy laws of those benefit and—
countries to conceal their assets or income. In so doing, they evade
the tax payable under the law. a) in the context of business—
The problem of tax evasion is as old as the “problem” of taxes i) it was entered into or carried out by means or in a manner
itself. Tax havens purportedly2 originated in ancient Greece, where which would not normally be employed for bona fide
neighbouring islands were used as a refuge where traders put their business purposes, other than obtaining a tax benefit; or
goods to avoid the 2% Athens tax on imports and exports. During
the early 18th century, American colonies avoided English taxes by ii) it lacks commercial substance, in whole or in part, taking into
trading from Latin America. Swiss banks have long been a capital account the provisions of section 80C;
haven for people fleeing the social upheavals in Russia and Germany. b) in a context other than business, it was entered into or carried out
Nowadays, tax havens have grown due to the internationalisation by means or in a manner which would not normally be employed
of businesses in a global economy. Whatever the reason, tax havens
for a bona fide purpose, other than obtaining a tax benefit; or
have always been an attractive tool used in tax planning, whether
legally or illegally. This legal grey area necessitates a closer look at the c) in any context—
difference between tax evasion and tax avoidance.
i) it has created rights or obligations that would not normally
According to Silke3, tax evasion refers to illegal activities deliberately be created between persons dealing at arm’s length; or
undertaken by a taxpayer to free himself from a tax burden, e.g.
omitting income received from a tax return. Tax avoidance, however, ii) it would result directly or indirectly in the misuse or abuse of
is where a taxpayer has arranged his affairs in a perfectly legal the provisions of this Act (including the provisions of this Part).
manner, with the result that he has reduced his taxable income. This article will only focus on business transactions that lack
Of course, although tax avoidance is legal, SARS has various anti- commercial substance [i.e. s80A(a)(ii)]. Section 80C provides a
avoidance rules in place. For some of the specific anti-avoidance rules general rule for determining whether an avoidance agreement lacks
(for example paragraph (c) of the gross income definition in s1 of the commercial substance:
Income Tax Act4) please refer to the flowchart on page 6 of the Act.
The general anti-avoidance rule previously contained in s103(1) was 1) For purposes of this Part, an avoidance arrangement lacks
replaced by s80A to s80L which are applicable to impermissible tax commercial substance if it would result in a significant tax benefit
avoidance agreements entered into on or after 2 November 2006. As for a party (but for the provisions of this Part) but does not have a
most transactions with a tax haven are entered into with the view significant effect upon either the business risks or net cash flows of
to avoiding tax, the requirements of “impermissible tax avoidance that party apart from any effect attributable to the tax benefit that
agreements” will briefly be explored. would be obtained but for the provisions of this Part.
The definitions in s80L relevant to this article are as follows: Section 80C(2) contains a non-exclusive set of characteristics that
serves as indicators of a lack of commercial substance:
“arrangement”: any transaction, operation, scheme, agreement
or understanding (whether enforceable or not), including all steps 2) For purposes of this Part, characteristics of an avoidance
therein or parts therof, and includes any of the foregoing involving the arrangement that are indicative of a lack of commercial substance
alienation of property. include but are not limited to—
18 [ September 2008 ]
HAVEN… OR HELL?
a) the legal substance or effect of the avoidance arrangement as a cc) constituted revenue in the hands of another party would
whole is inconsistent with, or differs significantly from, the legal be treated as capital by that other party; or
form of its individual steps; or
dd) given rise to taxable income to another party would either
b) the inclusion or presence of— not be included in gross income or be exempt from normal
i) round trip financing as described in section 80D; or
ii) the participation of that party directly or indirectly involves a
ii) an accommodating or tax-indifferent party as described in prepayment by any other party.
section 80E; or
2) A person may be an accommodating or tax-indifferent party whether
iii) elements that have the effect of offsetting or cancelling each or not that person is a connected person in relation to any party
S80E(3) contains safe-harbour rules that are necessary to ensure that
Essentially, a tax-indifferent party is a person who is not subject a foreign party is not automatically regarded as a tax-indifferent
to tax under the Income Tax Act or a person who participates party3. The safe-harbour rules are applicable if either:
in such a way that his income in connection with the scheme is
substantially matched or offset by expenditure. A tax haven is the a) the amounts derived by the party in question are cumulatively
ideal breeding-ground for tax-indifferent parties, as its financial, subject to income tax by one or more spheres of government
legal and tax systems all seek to attract foreign investment. A of countries other than the Republic which is equal to at least
company, for example, that is set up in a tax haven, can be regarded two-thirds of the amount of normal tax which would have
as an accommodating or tax-indifferent party [s80C(2)(b)(ii)], if the been payable in connection with those amounts had they been
requirements of s80E are met: subject to tax under this Act; or
1) A party to an avoidance arrangement is an accommodating or tax- b) the party in question continues to engage directly in substantive
indifferent party if— active trading activities in connection with the avoidance
arrangement for a period of at least 18 months: Provided these
a) any amount derived by the party in connection with the activities must be attributable to a place of business, place, site,
avoidance arrangement is either— agricultural land, vessel, vehicle, rolling stock or aircraft that
i) not subject to normal tax; or would constitute a foreign business establishment as defined
in section 9D(1) if it were located outside the Republic and the
ii) significantly offset either by any expenditure or loss incurred party in question were a controlled foreign company.
by the party in connection with that avoidance arrangement
or any assessed loss of that party; and 4 For the purposes of subsection (3)(a), the amount of tax imposed by
another country must be determined after taking into account any
b) either— applicable agreements for the prevention of double taxation and
i) as a direct or indirect result of the participation of that party any assessed loss, credit or rebate to which the party in question
an amount that would have— may be entitled or any other right of recovery to which that party or
any connected person in relation to that party may be entitled.
aa) been included in the gross income (including the
recoupment of any amount) or receipts or accruals of a It is not the purpose of this article to address and discuss the
capital nature of another party would be included in the requirements of s80E. The author merely intends to illustrate that a
gross income or receipts or accruals of a capital nature of transaction with a tax haven is potentially subject to the provisions
that party; or of s80A, unless the taxpayer can prove that the main purpose was
not to obtain a tax benefit. The flow-chart below provides a quick
bb) constituted a non-deductible expenditure or loss in the reference to check whether a business deal involving a tax haven
hands of another party would be treated as a deductible might be considered an impermissible tax avoidance agreement:
expenditure by that other party; or see Diagram 1 overleaf.
[ September 2008 ] 19
Diagram 1 c) deeming persons who are connected in relation to each other to
be one and the same person for purposes of determining the tax
treatment of any amount;
TAX EVASION d) re-allocating any gross income, receipt or accrual of a capital
nature, expenditure or rebate amongst the parties;
e) re-characterising any gross income, receipt or accrual of a
Anti-avoidance rules capital nature or expenditure; or
f) treating the impermissible avoidance arrangement as if it had not
General Section in been entered into or carried out, or in such other manner as in the
s80A Income Tax Act circumstances of the case the Commissioner deems appropriate
for the prevention or diminution of the relevant tax benefit.
• par(c) gross Agreement s80L
income 2) Subject to the time limits imposed by section 79, 79A(2)(a) and 81(2)
• s7 donations (b), the Commissioner must make compensating adjustments that
• s8E dividends he or she is satisfied are necessary and appropriate to ensure the
• s9D foreign consistent treatment of all parties to the impermissible avoidance
• s22(8) trading Sole/main
purpose to Still unsure whether you’re dealing with a tax haven? The Organisation
• s54-64 obtain tax for Economic Co-operation and Development (OECD) has identified the
donations tax benefit following four key factors5 used to determine whether a jurisdiction is
a tax haven:
In business s80A(a)
context 1. No or nominal taxes
This criterion is not in itself sufficient to prove a tax haven, as every
Lacks s80A(a)(ii) jurisdiction has the right to determine whether to impose taxes and
commercial s80C at what rate.
2. Lack of transparency
Tax-indifferent s80C(2)(b) This requires open and consistent application of tax laws and the
party (ii)s80E availability of information needed by tax authorities, for example,
No safe- s80E(3)
harbour 3. Ineffective exchange of information
Certain laws or administrative practices of countries prevent the
Impermissible effective exchange of information between authorities. The OECD
avoidance encourages countries to adopt information exchange on an “upon
agreement request” basis. Safeguards must, however, be in place to ensure
adequate protection of taxpayers’ rights and the confidentiality of
their tax affairs.
If all the above requirements are met, and a transaction with a 4. A lack of substantial activity
tax haven is considered to be an impermissible tax avoidance
A lack of such activities suggests a jurisdiction may be attempting to
arrangement, the Commissioner may invoke s80B. The tax attract investment and transactions that are purely tax driven.
consequences are as follows:
All these technical definitions and requirements might hinder more
1) The Commissioner may determine the tax consequences under this than help, so included below is a table6 of red flag arrangements based
Act of any impermissible avoidance arrangement for any party by— on the one compiled by the Australian Tax Office (ATO). The table
contains some practical examples of arrangements that will attract the
a) disregarding, combining, or re-characterising any steps in or
ATO’s attention (and probably our own SARS’ attention as well): see
parts of the impermissible avoidance arrangement; Table 1 opposite.
b disregarding any accommodating or tax-indifferent party or If none of the red flags are raised and a transaction with a tax haven
treating any accommodating or tax-indifferent party and any is completely above board, why still all the fuss? Not only are there the
other party as one and the same person; s80B implications with regard to impermissible avoidance agreements,
20 [ September 2008 ]
Table 1 Earlier this year, the OECD met in Cape Town where the emphasis was
on combating tax avoidance and evasion10. Manuel told the meeting
TABLE OF RED FLAG ARRANGEMENTS: that “up to R1.7bn was lost annually to the coffers of developing
Arrangement Risks countries through the minimising of global taxes”.
Anonymous offshore debit cards RSA resident must declare income Clearly, tax authorities around the world are shifting their focus to
Anonymous credit card received from worldwide sources. Non-
accounts compliance may lead to penalties or
address tax avoidance and evasion. Undoubtedly, tax havens will also
criminal prosecution. fall under the scrutinising spotlight of revenue offices, and the fine
Bank accounts in tax havens
grey line between avoidance and evasion might eventually disappear.
Where an RSA resident is the controller
International business Until then, the reader should bear in mind that no obligation rests on
of a company resident in a tax haven, the
company (companies resident a taxpayer to pay a greater tax than is legally due under the taxing Act3.
controlled foreign company (CFC) rules
in tax haven)
Where an RSA resident transfers property
As Lord Tomlin succinctly put it in his judgment in Duke of Westminster
or services to a trust set up in a tax haven, v IRC11: “Every man is entitled if he can to order his affairs so that the
Trusts based in tax haven
the income of the trust may be taxed as tax attaching under the appropriate Acts is less than it otherwise would
income of the RSA resident. be. If he succeeds in ordering them so as to secure this result, then,
Tax-free savings accounts Interest derived by RSA resident from however unappreciative the Commissioners of Inland Revenue or his
sources outside RSA (including a bank
Anonymous international and account or an investment in a tax haven) fellow-taxpayers may be of his ingenuity, he cannot be compelled to
investment trusts is subject to RSA tax. pay an increased tax.” So, if you can legally avoid tax, do so. But beware
An RSA resident who derives royalties if it looks too good to be true: your tax haven might in fact turn out to
from a source outside RSA (including from be a tax hell.
a tax haven) is generally assessable on the
gross amount of royalties. References
Re-invoicing (International 1. Doggart, C. 2002. “Tax Havens and their uses” (originally published 1970),
RSA has complicated transfer pricing rules
business company based in tax Economist Intelligence Unit, ISBN 0862181631.
and other international tax rules in place.
haven used as intermediary
Non-compliance may lead to penalties or 2. Wikipedia. 2008. “Tax haven” [On-line]. Accessed on 29/05/2008. Available:
between importers or
criminal prosecution. http://en.wikipedia.org/wiki/Tax_haven
exporters and their customers)
3. Jordaan, K., Koekemoer, A., Stighlingh, M., van Schalkwyk, L., Wassermann, M.,
Wilcocks, J. Silke: South African Income Tax 2008. Durban: LexisNexis.
but there are also moral, economical and social dilemmas associated 4. South Africa. 2008. The Income Tax Act, Act 58 of 1962. Pretoria: Government
with tax havens. Christian Aid stated that the extent of tax abuse “is so Printer.
widespread and damaging that it is tantamount to a new slavery”7. The
5. OECD. 2008. “Tax Haven Criteria.” [On-line]. Accessed on 03/06/2008.
organisation further claimed that a notable method is the use of tax
havens where “extreme secrecy encourages a more general criminality”. 447_1_1_1_37427,00.html
The Tax Justice Network has argued that the European Union (EU) has a 6. Australian Taxation Office. 2007. “Tax havens and tax administration” [On-
“slightly schizophrenic” attitude towards the problems posed by massive line]. Accessed on 04/06/2008. Available: http://www.ato.gov.au/content/
tax evasion and avoidance8. The Network stated that while the EU has downloads/LBI_46908_Tax_Havens_w.pdf.
been leading the world in taking initiatives against tax competition, 7. Business Report. 2008. “Tax-dodging is new slavery – charity” [On-line].
many of the world’s most notorious tax havens are located within the Accessed on 03/06/2008. Available: http://www.busrep.co.za/index.php?fSecti
EU (including Luxembourg, the Cayman Islands, Jersey and Guernsey). onId=&fArticleId=4400844.
During March of this year, Australia’s Tax Commissioner issued a 8. “EUROPE: Tax Havens Cheating the Poor” 2008. [On-line]. Accessed on
taxpayer alert9 warning people against hiding income or assets 05/06/2008. Available: http://www.amandlapublishers.co.za/content/
offshore. South Africans planning a prolonged stay in Australia would view/664/2/.
do well to take note of the Commissioner’s warning to be cautious 9. Moneywebtax. 2008. “Australian tax commissioner warns against hiding
when using offshore structures or tax havens. income and assets offshore” [On-line]. Accessed on 03/06/2008. Available:
Finance Minister, Trevor Manuel, clamped down on aggressive page269?oid=3007&sn=Detail.
tax planning schemes that involved structured finance deals and 10. Business Day. 2008. “Manuel to get tough on tax consultants” [On-line].
tax shelters by introducing s80M to s80T that govern reportable Accessed on 04/06/2008. Available: http://www.netassets.co.za/tax/tax.
arrangements (with effect from 1 April 2008). This article will not asp?websiteContentItemID=71308.
discuss the requirements of reportable arrangements, but please note
11. Duke of Westminster v IRC 51 TLR 467, 19 TC 490.
the similarity with impermissible avoidance agreements (possibly a
transaction with a tax haven), for example, a tax benefit that was Lee-Ann du Plessis, BAcc (Hons), is a tax lecturer at the University
obtained along with a lack of commercial substance. of Stellenbosch.
[ September 2008 ] 21