A tax expert has hailed a Constitutional Court ruling in favour of Coronation Fund Managers in its R800m tax dispute with the South African Revenue Service.
Financial services leader and tax partner at ForvisMazars, Graham Molyneux, said Friday's ruling brings immense relief to South Africa’s third-largest fund manager and its stakeholders, as well as other JSE-listed groups operating beyond South Africa.
“Despite the legal back-and-forth resembling a tennis match, common sense has ultimately prevailed. The complexity lay not in tax law or factual [issues], which were largely undisputed, but in applying those facts to the law,” said Molyneux.
The Constitutional Court found that Sars and the Supreme Court of Appeal had failed to differentiate between investment management and fund management functions in the R800m tax liability claim that the revenue service brought against Coronation Fund Managers. The case involved Coronation’s Irish subsidiary.
The decision could affect all South African companies with foreign businesses in determining how their tax is calculated. According to Coronation, almost all the top 50 tax-resident companies listed on the JSE would have been affected.
The SCA last year upheld Sars’s claim that Coronation had severely underestimated taxes involving its Irish subsidiary, and set the amount owing at about R800m. Coronation then appealed to the Constitutional Court.
Since Coronation’s Irish income stemmed from active fund management abroad, the exemption should indeed apply. Game, set, and match to the taxpayer
— Graham Molyneux
Coronation, which has R627bn in assets under management, established an Irish subsidiary in 1997. Called Coronation Global Fund Managers (Ireland) Ltd (CGFM), it is controlled entirely by Coronation.
The central dispute was whether the Irish subsidiary is a “foreign business establishment”, a specific term in South African tax law.
“Sars is not permitted to take into account … any amount which is attributable to a ‘foreign business establishment’,” Coronation argued in the Constitutional Court. In other words, its Irish subsidiary was exempt.
Sars has argued that various aspects of the subsidiary fell outside the exemption parameters. For example, Sars said, the Irish subsidiary outsourced its investment management function to the South African and UK companies, which “are not subject to tax in Ireland and … the employees [are] not located in Ireland”. This meant it did not meet the requirements.
Molyneux said Coronation had sought exemption from tax attribution in South Africa for its Irish profits, contingent upon demonstrating substance in Ireland.
“Specifically, it needed to prove that its ‘primary operations’ occurred there. The critical distinction between fund management and investment management played a pivotal role. While the Irish entity outsourced investment management, it actively performed fund management tasks — decision-making, compliance, risk management, and supervision of delegates — in Ireland.
“The Constitutional Court rightly recognised that ‘controlled foreign company’ legislation aims to balance anti-deferral and international competitiveness,” Molyneux said. “Since Coronation’s Irish income stemmed from active fund management abroad, the exemption should indeed apply. Game, set, and match to the taxpayer.”
The apex court said Sars and the SCA had “fundamentally misconceived” the distinction between fund management and investment management, which led to what it referred to as the appeal court’s “fallacious conclusions”.
“Sars misconceives the distinction between fund management and investment management... and the SCA made the same error,” the Constitutional Court found.
The court said Coronation had to set up offshore in the late 1990s to take advantage of relaxed exchange controls at the time. The judges did not accept the notion that the office in Dublin was set up to evade taxes in South Africa.
“This was not income derived from royalties, dividends or interest — so it was not passive income. And it was certainly not mobile income derived from a shell business with a postbox,” the court ruled.
“The company was adequately staffed to perform the functions which it sought to do. The fact that the separation of fund management and investment trading is standard practice in the industry fortifies the view that [Coronation’s] contentions in respect of CGFM as a qualifying foreign business establishment are sound. The income earned by CGFM in Ireland is therefore not diversionary, passive or mobile that can erode the South African tax base.”
Coronation announced in a stock exchange notice on Friday that it was withdrawing advice that shareholders exercise caution when trading its shares, which it issued shortly after the SCA ruling.
“Coronation welcomes the judgment of the Constitutional Court, which confirms that Coronation Investment Management SA’s interpretation and application of the relevant tax legislation has been correct and appropriate,” the asset manager said in its stock exchange filing.
Its share price, which traded as high as R36.32 on Friday, closed at R35.99.
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