ACCOUNTING technical ACCOUNTING APB APPROVAL

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					       [ technical ]



ACCOUNTING
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
                                                                                                        hedge funds.
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
than others.

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
COMMENT
                                                     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
                                                                                                           mineral rights.
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
                                                                                                         Circulars:
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.
                                                  September 2008.
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
                                                                                                         Settlement Agent
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
                                                                                                         Services.
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           standards@saica.co.za.
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 ]
                                                                                                                 advertorial




  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;
                                                                                           Minimum requirements:
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: standards@saica.co.za
Ethics and Discipline queries:                                                          P/Bag X5879, Post Net Suite #105,
standards@saica.co.za                                                                           Upington, 8800
                                                                                               Fax: 086 675 2116
Information Centre: pelmag@saica.co.za Telephone: 011 621 6641
Telefax: 011 621 6819 | Website:                                                       E-mail: admin@mtpersoneel.co.za
http://www.saica.co.za

                                                  [ September 2008 ] 15
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  T
          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 ]
                                                                                                                                       cover




                                                                                                                                          CPD
                                                                                                                               45
                                                                                                                             min
                                                                                                                        VERIFIABLE ARTICLE




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
                                                                                           tax; or
      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
           other.
                                                                             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
            TAX AVOIDANCE
                                                                            nature, expenditure or rebate amongst the parties;
                (legal)                          (illegal)
                                                                         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
     Specific
                               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
                             Avoidance                  s80L
     • s8E dividends                                                     he or she is satisfied are necessary and appropriate to ensure the
                             agreement
     • s9D foreign                                                       consistent treatment of all parties to the impermissible avoidance
       income
                                                                         arrangement.
     • s22(8) trading        Sole/main
       stock
                                                       s80A
                             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.
                              substance
                                                                      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,
                                                                      accounting records.
                              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 ]
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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)
                                may apply.
                                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.
 Overseas licensing
                                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
                                                                                   Available: http://www.oecd.org/document/63/0,3343,en_2649_37427_30575
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:
                                                                                   http://www.moneywebtax.co.za/moneywebtax/view/moneywebtax/en/
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

				
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