By: Shaun Jacobs – Daily Investor

In June, the Constitutional Court ruled in favour of Coronation in its legal battle against SARS regarding the profits earned by its Irish-based subsidiary, Coronation Global Fund Managers (CGFM). 

The South African tax authority initially included the profits earned by this subsidiary in its assessment of Coronation’s taxable income. 

The asset manager subsequently appealed this to the Western Cape Tax Court, which ruled in its favour and set aside the assessment. 

SARS appealed this ruling to the Supreme Court of Appeal (SCA), which ruled in its favour and reinstated the assessment. 

The matter ended before the Constitutional Court after Coronation decided to appeal the SCA’s ruling. However, the SCA’s ruling was considered an obligating event. Therefore, the company was obligated to pay the additional taxes and interest. 

This included all the years of assessments from 2012 to 31 March 2024, totalling R716 million. 

The key question in this case was whether Coronation’s Irish subsidiary was a controlled foreign company (CFC) or a foreign business establishment (FBE). 

Experts at PwC said SARS had effectively accused Coronation of underestimating the taxes owed by the Irish subsidiary by exempting its net income from tax claims. 

FBEs have a critical tax exemption under section 9D of the Income Tax Act, which Coronation claimed applied to its Irish subsidiary. 

SARS said that Coronation’s business model – which separated fund management from investment management and outsourced the latter to Ireland – was disqualified from this exemption.

To be classified as an FBE, the ‘primary operations’ of the business have to be conducted outside of South Africa. 

SARS had argued that fund management formed the primary operations of Coronation’s subsidiary, and this activity occurred in South Africa, while investment management was outsourced to Ireland. 

This interpretation would result in the company paying tax on the net income of CGFM to SARS. 

However, the Constitutional Court disagreed and said the Irish subsidiary’s licence only permitted fund management, not investment management. Thus, Coronation’s interpretation was correct, and its net income was exempt. 

Consequences

Tax experts at PwC said the Coronation case could have major implications for South African businesses with international operations. 

The experts noted that the National Treasury indicated it would amend the definition of an FBE to clarify that all important company functions must be performed within the same jurisdiction for the FBE exemption to apply. 

“This proposal subsequently met with criticism from commentators, as the proposed amendment introduced additional complexities in that the use of terms such as ‘important functions’ and ‘compensated’ were not defined,” PwC’s experts said. 

PwC said it remains to be seen whether the National Treasury will now seek to amend this definition after the ConCourt Coronation case, but flagged two important areas for businesses to keep an eye on.

The first is the actual content and wording of the previously proposed amendment, which was “fraught with vagueness and ambiguity”, so the detail of the proposal, if any, will require careful consideration, it said.

The second is that the proposal, if any, could potentially be made with retrospective effect.

“We note that there have been instances in the past where legislation has been amended with retrospective effect and in accordance with the rule of law,” it said.

“Stakeholders should, therefore, monitor National Treasury’s future announcements on this matter, as a proposed amendment may find its way into proposals for amendments to our tax laws.”