Confession ain’t just for Catholics – All you need to know about Reportable Arrangements in South Africa

You’ve read about GAAR and once you think you have that in the bag, here comes another wheel to the anti-avoidance wagon…Reportable Arrangements.

The South African Revenue Services (“SARS”) introduced the South African reportable arrangement provisions to the South African Tax Administration Act (“TAA”) in 2005 which essentially requires information on certain types of arrangements to be disclosed to SARS.

But what actually is a reportable arrangement, when should they be reported, to whom, and why? These are the key questions we unpack today.

So what is a reportable arrangement?

Before we put the proverbial wagon before the horse, we first need to cover some important definitions to understand what a reportable arrangement is. The first definition is a “participant”. A participant in relation to an arrangement is:

• A promoter who is responsible for organising, designing, selling, financing, or managing the reportable arrangement (arrangement being any transaction, operation, scheme, or understanding); or
• A company or trust which directly derives from is assumed to derive a tax benefit by virtue of the arrangement.

An arrangement will be classified as a reportable arrangement in two instances:

• The arrangement is listed as a reportable arrangement by SARS in the Public Notice (refer Government Notice 140, published on 3 February 2016, GG No 39650) provided that the arrangement leads to a tax benefit (i.e. an avoidance, postponement, or reduction of liability of tax); or
• A tax benefit will, is or is assumed to, be derived by a participant by virtue of the arrangement and the arrangement entered into either (the below is not a complete list):
  • Contains provisions in terms of which the calculation of interest or finance charges are wholly or partly dependent on assumptions relating to the tax treatment of that arrangement;
  • Contains characteristics or similar characteristics of section 80C (i.e. round trip financing, accommodating or tax- indifferent party or offsetting elements commercial substance, see  previous GAAR newsletter)
  • Gives rise to an amount that will be a SA tax deduction but not an expense for financial reporting purposes or an income for financial reporting purposes but not gross income for SA tax purposes (unless a tax benefit is not the main or one of the main benefits, per the Public Notice);
  • Does not result in a reasonable pre-tax profit for any participant, or the present value of the pre-tax profit is less than the present value of the tax benefit.

What happens if my plans comprise a reportable arrangement?

Once an arrangement is classified as a reportable arrangement (and sits in the naughty corner) the participant must disclose the following information in the prescribed manner to SARS within 45 business days after the arrangement qualified as a reportable arrangement:

• A detailed description of all of the arrangement’s steps and features;
• A detailed description of the assumed ‘tax benefits’ for all participants included, but not limited to tax deductions and deferred income;
• The names, registration numbers, and registered addresses of all participants to the arrangement
• A list of all its agreements; and
• Any financial model that embodies its projected tax treatment.

That’s a lot of information to be given to SARS on a platter.  So the general guidance is, if what you’re planning is a reportable arrangement, make a different plan.

Anything else?

As with almost every SA tax concept, there are exclusions (and sometimes exclusions to those exclusions) to reportable arrangement rules, referred to as excluded arrangements:

Some of these are listed below and will only be considered an excluded arrangement to the extent that the arrangement is undertaken on a standalone basis and not directly or indirectly linked to any other arrangement, and it was not entered into in order to enhance a tax benefit.

• A loan where a borrower receives or will receive an amount of cash or a fungible asset and agrees to repay at least the same amount received or return an asset of the same kind of quality and quantity to the lender at a determinable future date;
• A lease agreement.

So the biggest question remains, what is the reasoning behind reportable arrangements and why is it required?

The simple answer to that is the infamous SA anti-avoidance rules…you guessed it, GAAR! The reportable arrangement system is an important mechanism in playing detective and identifying impermissible tax avoidance transactions (in collecting the valuable information) whereby SARS can employ the GAAR.

Contact us to discuss if reportable arrangements could be relevant for your business.