Coronation believes all but two of the JSE’s 50 biggest companies stand to have their global competitiveness eroded should the Constitutional Court rule against it in a dispute with the SA Revenue Service (Sars).
The dispute centres on a Supreme Court of Appeal (SCA) ruling that, as an Irish company in the Coronation group, which has about R630bn in total assets under management, was not conducting its primary business operations in Ireland, it is liable for SA taxes.
Sars is demanding R716m from Coronation — almost half of the R1.6bn profit it earned from fund management it reported in the year ended September 2023.
The basis of the SCA judgment is that the Irish entity’s primary operation is fund management, including investment management, and that these operations are not conducted there.
The crux of the dispute is the interpretation and application of the rules for controlled foreign companies, which aim to tax SA residents on the net income of these companies.
However, an exemption is available through being recognised as a “foreign business establishment”, which is intended to promote the international competitiveness of SA’s multinationals.
Sars says that Coronation’s Irish business doesn’t qualify for the exemption because, as it outsourced its investment management functions, it does not conduct its primary business through the Ireland office, but rather from SA and the UK.
The SCA agreed with this argument, prompting Coronation’s appeal to the Constitutional Court.
Coronation CFO Mary-Anne Musekiwa said the SCA’s ruling is fatal, it will hurt SA multinationals, and that it goes beyond the fund management industry.
“Coronation reviewed the 50 largest tax resident companies listed on the JSE and identified those that would have [controlled foreign companies], based on our knowledge of their operations. That encompassed 48 of the 50 companies. It stands to reason that many of these would rely on [foreign business establishment] exemption,” Musekiwa said in written submissions before the apex court.
Especially harsh
“All of this is plainly likely to discourage SA entities from expanding offshore and seeking to compete on a level tax playing field with their foreign rivals, particularly where they employ a delegation model. That, in turn, is likely to retard growth of SA-based multinationals, to the obvious detriment of the SA economy,” the affidavit reads.
Musekiwa added that the impact on fund managers will be especially harsh.
There are “numerous other SA financial industry participants that have established fund management companies in foreign jurisdictions (including Ireland) and that provide services to collective investment funds or schemes in those jurisdictions. These all follow the common industry model of delegating services including investment management services,” the affidavit reads.
“Based on publicly available information (including that published by the Financial Sector Conduct Authority and the Association for Savings and Investment SA), there are more than 50 [collective investment funds or schemes] and their sub-funds, with reported assets under management exceeding R400bn. All would be directly affected by the SCA judgment.”
Musekiwa said that as a matter of Irish law, an SA entity is not permitted to manage Irish-domiciled collective investment funds or schemes.
A collective investment fund or scheme is also known as a “unit trust”. It receives and pools money from external investors for investment in terms of the prospectus of the fund.
Musekiwa said it was necessary to set up and appoint an Irish fund management company, and to this end the group established the Irish business. The decision was not motivated by tax issues.
Circumventing proviso
In its opposing affidavit, Sars argues that Coronation’s delegation model falls outside the tax protection of the exemption.
“[The] Coronation Investment Management SA approach has the effect of circumventing the proviso that requires that outsourcing of the primary operation (investment management) must be done in the same country where the [controlled foreign company] is located (Ireland) whereas Coronation Global Fund Managers (the Irish business) outsourced this function to Coronation International in the UK and Coronation Asset Management in SA,” the submission reads.
“Had Coronation International and Coronation Asset Management been based in Ireland, there would be no difficulty with the outsourcing.”
In draft legislation published last year, Sars said that the foreign business establishment definition will be amended to read that all important functions of the business for which the controlled foreign companies is compensated must effectively be insourced and performed in-country.
The result is that companies relying on outsourced operating models in which primary functions are outsourced and performed in other countries will be unable to access an foreign business establishment exemption.
Experts have warned that, if implemented in its current form, the legislation could have a major impact on the cost of doing business when expanding offshore because certain functions cannot be centralised.
The tax agency also has launched a cross-appeal with the apex court, arguing that the SCA was wrong to set aside the penalties it imposed on Coronation.
“The setting aside of the penalties by the SCA effectively deprives Sars of achieving its constitutional and statutory mandates. The imposition of penalties has been legislatively entrenched for good reason and is aimed at discouraging taxpayers from engaging in conduct that prejudices the fiscus,” it says in its papers.
“The setting aside of the penalties by the SCA has far-reaching consequences not only for the commissioner but everyone dependent on the National Revenue Fund ... this is but one matter where the commissioner stands to lose millions of rand wrongly.”
Coronation is opposing the cross-appeal.
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.