Tax disputes: suspension of payment

Tax , ,

With the 2020 tax filing season in full swing, many taxpayers are likely to engage in dispute proceedings as their income tax assessments are issued by SARS. This will particularly be the case where errors are contained on the so-called “auto-assessments” (which in itself is a misnomer). But what happens to the disputed tax amount until the process is finalised?

Pay now, argue later

The basic premise is that even though you disagree with an amount of tax, once you have been assessed by SARS, the amount becomes due. Neither your obligation to pay the tax, nor SARS’s right to recover the tax, is suspended by any objections or appeals against the assessment or pending court proceedings (i.e. you have to pay the tax, and then dispute it).

Taxpayers do however have some remedy, in that they may request a senior SARS official to suspend the payment of the tax (or a portion thereof), pending the outcome of a dispute against an assessment. It is necessary for a taxpayer to dispute (or at least communicate their intent to dispute) the amount of tax allegedly due before a request to suspend the payment can be made.

When?

Recently, there has been an increasing trend for SARS to issue letters of “final demand” shortly after assessments have been issued. In these cases, SARS has, for all practical purposes, commence with collection proceedings. Taxpayers should, therefore, apply for the suspension of payment as soon as they know that they will object to the amount.

How does it work?

Requests for suspension of payment is done on the eFiling system as part of the dispute section of a taxpayer’s profile. When the system prompts taxpayers for the required information required, it is important to provide as much relevant information as possible for the SARS official to consider the request. Irrelevant information (or a lack of information) merely prolongs the dispute process.

Who is responsible?

SARS will not automatically suspend the payment of a tax amount once the dispute process has commenced. Taxpayers will need to actively take steps to initiate the suspension. A request for suspension of payment is a vital part of the dispute resolution process and should be submitted as soon as possible for an assessment that a taxpayer intends to dispute.

Possible abuse?

Taxpayers should not look to abuse the suspension system as a means to buy time. Not only are SARS officials well within their rights to revoke a decision to suspend payment with immediate effect it is not in the good administration of the tax system to allow such abuses.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Beware of scams during filing season

Tax , ,

In late August 2020, a large credit bureau in South Africa was the target of a data breach where millions of private individual and company data records were compromised. This data leakage, coupled with the tax filing season, makes for the perfect opportunity for taxpayers’ information to be abused, subjecting taxpayers to potential financial loss.

Scammers thrive on the inherent vulnerability of taxpayers during the tax season and know how to capitalise on the taxpayers’ struggles in dealing with SARS and their fear of the tax process. In Augusts 2020 alone, many correspondence scams that contain links to phishing websites have already been identified:

Fraudsters are also capitalising on the filing season by posing as tax practitioners to obtain sensitive information, including banking details. Remember that any tax practitioner who charges you for their services, must by be registered with a regulated controlling body. (You can easily verify your practitioner’s details here: https://secure.sarsefiling.co.za/TaxPractitionerQuery.aspx).

SARS provides the following guidelines when dealing with correspondence that purports to be from them:

  • Do not open or respond to emails from unknown sources;
  • Beware of emails that ask for personal, tax, banking, and eFiling details (login credentials, passwords, pins, credit/debit card information, etc.);
  • SARS will never request your banking details in any communication that you receive via post, email, or SMS. However, for telephonic engagement and authentication purposes, SARS will verify your information. Importantly, SARS will not send you any hyperlinks to other websites – even those of banks;
  • Beware of false SMSes;
  • SARS does not send *.htm or *.html attachments;
  • SARS will never ask for your credit card details.

SARS has also made a facility available where scams or phishing can be reported. Taxpayers can either email phishing@sars.gov.za or call the Fraud and Anti-Corruption Hotline on 0800 00 2870.

All taxpayers are urged to remain vigilant this filing season and ensure that their data is protected.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Setting your business up for expansion

Finance News , ,

When businesses expand, they often look beyond national borders. With such an expansion, there are several added advantages for establishing a holding company, which then owns the various group operating companies in different jurisdictions. Various aspects contribute to considering an ideal holding company location, and a brief discussion is outlined below.

Political stability
Political instability and constant political upheavals cause uncertainty within the jurisdiction and foreign countries that do business with that jurisdiction.

Ease of doing business
This does not specifically refer to actual business done by the company but relates to the associated (support) industries that one may encounter within the jurisdiction. Reputable banking institutions are required for transferring funds and investing capital; and competent service providers who know the industries, laws and practices.

Robust legislative framework
Laws and legal frameworks that allow the broader business plan and its associated structures to function are non-negotiables and the protection of property rights is essential. Beyond this, it is commonplace for many countries to implement (especially tax) laws to the detriment of citizens and resident retroactively. These jurisdictions could be harmful to an estate planning structure.

Ease of doing business with other jurisdictions
Considerations relating to tax- and trade treaty networks, business councils/chambers and foreign-owned company presence is important to ensure that a jurisdiction does not become isolated, and ceases to serve its intended purpose.

Structures and mechanisms to remove risk from the client
Some jurisdictions cater for structures such as trusts or foundations that may remove the inheritance- or capital gains tax burden or forced heirship rules from the business owner’s estate. This minimises tax liability on death, allows for the smooth succession of high-value assets, and ensures that management and control of assets remain central with professionals. Essential estate planning goes hand-in-hand with global expansion.

Substance requirements (laws)
As a requirement of meeting the “compliant” status that is issued by the OECD, jurisdictions have been required to reform and implement “substance laws”. To lay these out shortly, they are essentially a set of laws that ensure that no fraudulent money laundering activities take place through fictitious entities with fictitious members. In terms hereof, any structures that are established are required to meet the substance requirements as follows:

Carry out core income-generating activities in the jurisdiction (depending on which jurisdiction is chosen);
Ensuring that a ‘warm body’ is available to manage structures and that the “post box” effect is eliminated; and
At least a level of expenditure that is proportionate with the investing and management activities of the entity.

Advantageous tax and exchange control laws
A consideration in global expansion is choosing a tax-efficient jurisdiction that has easy-to-comply-with or no exchange control restrictions. These allow for ease in capital deployment, and benefits the owners when profits are derived. Taking advantage of tax-friendly countries to serve global expansion should, however, not be the only consideration.

The above provides only some of the primary considerations for a choice of headquarter location when expanding. It may also be that as part of an expansion, one jurisdiction is more suitable from an estate planning perspective, and another for business purposes, which tends to complicate matters. What is important, though, is a robust framework for the choice of jurisdiction, to ensure that ease of business and expansion efficiency may be possible.

SARS helping businesses lessen the tax load

Finance News , ,

The last few months have been extremely tough for small business owners as a result of the global COVID-19 pandemic, and various lockdown measures that have created a challenging trading environment. The South African Revenue Service (“SARS”) has identified this hardship, and as a result, the National Treasury recently tabled the Disaster Management Tax Relief Administration Bill, which would assist micro, small and medium businesses should they seek to utilise this relief.

Although many of these measures have applied in practise, they have not officially been included in a tax bill and will soon have the necessary legislative effect (once promulgated).

To be a candidate to claim relief, a small business must:

  • Have a tax compliant status;
  • Conduct a trade during the year of assessment ending after 1 April 2020 to 31 March 2021, and earn gross income of R100 million or less; and
  • Not more than 20% in aggregate of the gross income can come from interest, dividends, royalties, rental payments, annuities, or remuneration received from an employer (generally aimed at passive income).

The relief offered by the Bill covers the following:

Pay-As-You-Earn (“PAYE”) deferral

Employers can claim a four-month deferral relief from 1 April 2020. To claim, two options are available;

  • Employers are still required to submit full PAYE returns (EMP201). SARS will issue a statement of account reflecting the relief; or
  • Calculate the total payable at 65% of the total.

After 7 August 2020, SARS will determine an amount payable in six equal payments to cover the outstanding (deferred) liability.

Employment Tax Incentive (“ETI”)

This programme runs from April 2020 to July 2020 and is claimed in the monthly EMP201. To claim, an employer is required to calculate the total ETI and 65% of the PAYE. The employer then utilises the lessor of the total ETI, or 65% of the PAYE liability to claim relief.

Provisional tax deferral

The period runs from 1 April 2020 to 30 September 2020 for the first payment period, and from 1 April 2020 to 31 March 2021 for the second provisional payment period. The gist of this assistance is that companies are required to pay only 15% of the first provisional payments and 65% (after deducting the first 15%) of the second payment. The remaining 35% will be payable on the third provisional payment date to avoid interest charges on late payment.

Accelerated value-added tax (“VAT”) refunds

From 1 May 2020, VAT vendors can file monthly VAT claims as opposed to every 2 months. Category A vendors can claim this relief from April 2020 to July 2020, and vendors registered under category B from May 2020 to August 2020.

The above relief measures contained in the Disaster Management Tax Relief Administration Bill are bound to bring some welcome cash flow and liquidity relief to struggling SMMEs in South Africa.

For more information on these relief measures, visit www.sars.gov.za/media/pages/tax-relief-measures.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Clearing loan accounts through dividends

Finance News , ,

In terms of the Tax Administration Act, the South African Revenue Service (“SARS”) can issue, in response to an application, Binding Private Rulings (“BPR”) and clarifies how the Commissioner would interpret and apply the provisions of the tax laws relating to a specific proposed transaction.

BPR 346 determines the income tax and dividends tax consequences of the redemption of intra-group loans by way of set-off against dividends payable. The ruling was made in connection with the interpretation and application of section 19 and section 64F(1)(a) of the Income Tax Act, dealing with debt waivers and dividends tax.

The below-mentioned companies belong to the same “group of companies” and are the parties to the ruling:

  • The applicant: A private company and a tax resident in South Africa;
  • Co-applicant A: A private company and a tax resident in South Africa;
  • Co-applicant B: A private company and a tax resident in South Africa; and
  • Co-applicant C: A private company and a tax resident in South Africa.

Description of the proposed transaction 

The applicant is an investment holding company that owns all the equity shares in co-applicant A and co-applicant B. Co-applicant B holds 100% of the share capital of co-applicant C.  The following loan accounts exist between the applicants –

  • Loan 1 receivable by co-applicant A from the applicant;
  • Loan 2 receivable by co-applicant A from co-applicant B;
  • Loan 3 receivable by co-applicant C from the applicant;
  • Loan 4 receivable by co-applicant C from co-applicant A; and
  • Loan 5 receivable by co-applicant B from the applicant.

The loans had their origin in ongoing advances between the group companies to one another to fund day-to-day operations. None of the funds were used to fund the acquisition of assets. The group wishes to eliminate the intra-group loans as far as possible.

The steps to implement the proposed transactions are as follows:

Step 1

  • Co-applicant A will declare a dividend to the applicant equal to the balance of loan 1, which will be left outstanding on the loan account.
  • Co-applicant A and the applicant will agree to set off the dividend payable by co-applicant A against loan 1 payable by the applicant to co-applicant A, resulting in the full settlement of both loans.

Step 2

  • Co-applicant C will declare a dividend to co-applicant B equal to the balance owing in respect of loan 3, which will be left outstanding on the loan account. Co-applicant C will cede loan 3 to co-applicant B in settlement of the dividend.
  • Co-applicant B will cede loan 3 and loan 5 to co-applicant A in part payment of loan 2.

Step 3 

  • Co-applicant C will declare a dividend to co-applicant B for an amount equal to the balance in respect of loan 4, which will be left outstanding on loan account. Co-applicant C will cede loan 4 to co-applicant B in settlement of the dividend.
  • Loan 2 and loan 4 will be set-off against each other. The net balance will be an amount owed by co-applicant B to co-applicant A in respect of loan 2.

Step 4 

  • Co-applicant A will declare a dividend to the applicant for an amount equal to the sum of the balances of loan 2, 3 and 5, which will be left outstanding on loan account.
  • Loan 3 and loan 5 will be set off against the dividend.
  • Co-applicant A will cede loan 2 to the applicant in settlement of the dividend.

Ruling by SARS 

The ruling made by SARS is as follows:

  1. No dividends tax will apply to the declaration of dividends in the various steps.
  2. The redemptions of loans 1, 3 and 5 by way of the set-off arrangements in step 1 and step 4 will, in each instance, constitute a “concession or compromise”. However, the set-off arrangements will in none of those cases amount to a “debt benefit” – therefore, none of the “debt waiver” provisions applies.

SARS further held that the ruling did not cover any general or special anti-avoidance provisions in the Act, which has been a condition on which they have recently issued rulings.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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