The share price of Coronation Fund Managers slumped after the asset manager said it would probably suspend interim dividends after a Supreme Court of Appeal (SCA) ruling ordered it to pay additional taxes related to profits earned by its offshore operations.
The Cape Town-headquartered firm’s share price dropped as much as 11.8%, the steepest intraday fall since April 2020, before closing 11.05% down at R31.80. The loss came after Coronation issued a statement saying it had lost an appeal by the SA Revenue Service (Sars) over a tax dispute going back to 2012, which centred on whether the profits of its Irish subsidiary should have been included in the taxable income of the group’s SA holding company.
“The company is in the process of quantifying the exact financial affect of the ruling and will update shareholders in due course,” Coronation said in a statement to the stock exchange news service (Sens) on Wednesday. “Given the material affect on earnings and cash flows, the company does not anticipate declaring an interim dividend.”
The tax dispute between Sars and Coronation over the group’s earnings from international operations was first raised by the tax authority in 2017, though it pertained to prior years going back to 2012. Sars subsequently raised a tax assessment for the firm pertaining to the 2012 to 2017 tax years, which Coronation objected to after consulting with external legal counsel.
The matter ultimately ended up in the Western Cape High Court, which sat as a tax court and heard the case in 2021. The tax court ruled in favour of Coronation on September 17 2021, setting aside the revenue authority’s tax claim.
Sars subsequently took that judgment to the SCA, which heard the matter on November 17 2022 before handing down its judgment on Tuesday that ultimately set aside the tax court’s decision with costs.
The SCA ruling means that Coronation is now liable for additional taxes on profits earned by its international operations, though the court dismissed the tax authority’s claim for tax understatement penalties with interest. Coronation said it was considering taking the matter to the Constitutional Court.
The central issue in the SCA ruling was whether the net income of Coronation Global Fund Managers (CGFM), an Irish subsidiary, should have been included in the taxable income of Coronation Investment Management SA (CIMSA), the group holding company and registered tax entity in SA.
The SCA had to determine whether a tax exemption in line with the Income Tax Act was applicable to the income earned by CGFM, a decision that hinged on whether the entity’s primary operations were indeed conducted in Ireland.
CGFM had adopted an outsource business model in which its investment management function was conducted by Coronation Asset Management in SA and UK subsidiary Coronation International.
Sars initially included the entire net income of CGFM in its 2012 tax assessment of CIMSA.
The tax court upheld CIMSA’s objection against the Sars tax assessment and found that CGFM was a foreign business establishment, meaning it qualified for a tax exemption as per the act. That decision consequently set aside Sars’s tax claim against CIMSA for the 2012 to 2017 financial years, with the court also ordering the tax authority to issue the company with a reduced tax assessment.
Sars appealed against that decision on the basis that the group’s Irish subsidiary, CGFM, was not actually a foreign business establishment in the true sense. The key issue in deciding this was the location of CGFM’s primary operations.
Sars argued that to qualify as a foreign business establishment — and by extension a tax exemption — CGFM’s primary operations had to be present in its fixed place of business. However, using an October 2007 licence application by CGFM to the Irish financial regulator, in which its business plan was attached, it was determined that the Irish subsidiary presented itself as a product provider while all noncore operations, such as investment, administration and custodial functions, were outsourced.
Claim failed
Though CIMSA argued that the functions outsourced by CGFM were not part of the daily business it conducted in Ireland, the SCA ultimately held that it was common cause that the subsidiary’s investment function was not located in Ireland. That meant that if its primary business was investment, its net income as a controlled foreign company should be imputable to CIMSA.
Nevertheless, Sars failed in its claim against CIMSA for “substantial understatement” of its 2012 tax bill, an amount that would have equated to 10% of the tax that would otherwise have been paid. CIMSA argued that it relied on the tax opinion of a leading tax expert when submitting its disputed tax return though it did not make that opinion available to Sars.
The SCA held that CIMSA was not obliged to disclose the contents of the tax opinion to Sars and that this did not constitute bad faith.
“As a responsible corporate citizen, we take tax compliance very seriously and believe we are compliant in all jurisdictions in which we operate,” Coronation said in its Sens statement.
“The company maintains, based upon consistent professional advice, that its tax treatment has been appropriate, and is therefore naturally disappointed by this judgment.”
It said it was considering an appeal against the judgment to the Constitutional Court.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.