Tax advisors, both external and in-house are used to the duty of “finding a way” to support a particular tax optimal outcome. It is generally accepted that a taxpayer is entitled to arrange her affairs in a manner that takes advantage of existing tax rules in a manner that achieves the most tax optimal outcome. This is important to note in today’s tax moralistic environment – nobody is obliged to pay more tax than they are legally required to (despite what the Archbishop of York may think!) So a taxpayer can arrange her affairs, within reason, to pay less tax, BUT such arrangements should not be simulated or disguised in such a way which conceals the true intention of the parties, nor should such arrangements be abnormal, lack commercial substance, or be mainly driven by a tax rationale.
So far so “clear”. And this principle can therefore present taxpayers with a number of options to a given commercial transaction; that is, in the context of a given commercial objective, tax advisors may get creative by rather structuring the proposed arrangement in a way that secures a better tax outcome. Then it becomes a matter of implementation, principally through carefully worded agreements, resolutions, and/or minutes of meetings but also through carefully crafted arguments or positions.
But what happens when the slow passing of time results in a gap between the implementation of the arrangement/transaction and when it is first challenged by the tax authorities? As was said in the oft-referred to Canadian case of R. v. Askov (1990), 49 C.R.R. 1, :
“There can be no doubt that memories fade with time. Witnesses are likely to be more reliable testifying to events in the immediate past as opposed to events that transpired many months or even years before the trial.”
Coupled with this reality is the problem that a well-reasoned position or argument relating to the tax transaction of a particular transaction may be clearly articulated and understood by the advisor and financial personnel, but poorly grasped by the people in the business actually dealing with the transaction, whether an executive, a secretary taking minutes or an operational employee. It is worth noting that very rarely does a tax authority cross-examine the tax advisor. Rather, it’s the key business personnel who are questioned. So if they do not understand what went on this can be problematic.
We noticed this predicament at play in the fairly recent Supreme Court of Appeal decision in Massmart Holdings Limited v The Commissioner for the South African Revenue Service (Case no 84/2020)  ZASCA 27 (26 March 2021). The question to be decided in this case was whether the Taxpayer was entitled to claim certain capital losses arising between the 2007 – 2012 tax period which were derived through a trust established to administer a share incentive scheme for key management personnel. We won’t plumb the depths of the tax technical arguments advanced but instead, draw attention to the exchange between the Senior Counsel for the SA Revenue and a certain executive of the Taxpayer which was significantly quoted in the judgment. A key question being probed was whether an asset was disposed of by the Taxpayer which could form the basis for incurring a capital loss for capital gains tax purposes. A part of the exchange was as follows:
Senior Counsel (SC): Mr. X, do you know what an asset is?
MR X: It is – do I know what the asset is, Sir?
SC: Do you know what an asset is?
MR X: Yes, I do, M’Lord.
SC: What is the, I’m talking about the loss; I know, and you know that I know what a loss is, I’m talking about what was the asset that was disposed of by [the Taxpayer] that gave rise to a capital loss.
MR X: M’Lord, sorry, I’m not trying to be difficult, the asset disposed of was in the books of the Trust, which was the closing out of the transaction of the beneficiary that gave rise to the loss.
SC: Let’s try and make it simple. Or make it easier. Do you know what was the basis upon which capital losses were claimed previously by [the Taxpayer] before the appeal?
MR X: I have, M’Lord, I have no recollection, I’m not clear on that.
SC: As the CEO, you don’t know the basis upon which they claimed substantial amounts. . . .
MR X: I do not know that personally.
SC: So [the Taxpayer] was claiming the losses in the share trust as an assessed loss in [the Taxpayer]. You see that? . . .
Needless to say, the Taxpayer, in this case, was unsuccessful with the court ultimately noting that “far from supporting the Taxpayer’s case, the evidence of the …witnesses rather appears to have bolstered SARS’ contention”
Beware therefore entering into a convoluted arrangement which the business does not fully understand, and the tax planning may come unstuck in the witness box!
How can we help?
How you structure your business is a critical question as you expand globally. The right structure will protect your assets, improve your currency position, support your business operations, facilitate future business expansion and changes, and optimise your overall tax rate. Trying to unscramble a sub-optimal structure entered into in haste or without full consideration of relevant facts is complex and expensive, so it’s important to plan upfront.
Structuring an international business is both a science and an art – this is our specialist area of expertise. Regan van Rooy is an international tax and structuring advisory firm focussing on Africa. We have offices in South Africa, Mauritius and Ireland and we can help you with any international tax or structuring query.