Cape town - In a victory for the Commissioner of the SA Revenue Service (Sars), the Supreme Court of Appeal (SCA) ordered that Coronation Investment Management SA (CIMSA) is liable for the underpayment of tax and interest.
The SCA this week upheld, with costs, an appeal by Sars on whether a “controlled foreign company” is a “foreign business establishment” in terms of the Tax Administration Act.
The issue was whether the net income of Coronation Global Fund Managers (CGFM) – based in Dublin, Ireland managing foreign investments, should be included in the taxable income of its South African holding company, Cimsa, or whether a tax exemption in terms of the Income Tax Act was applicable to CGFM’s income.
The SCA found the primary operations of CGFM’s business (and, therefore, the business of the controlled foreign company) was that of fund management, comprising investment management.
These are not conducted in Ireland, said the SCA. Therefore, CGFM did not meet the requirements for a foreign business establishment (FBE).
The SCA held CGFM’s net income for the 2012 tax year was the financial responsibility of Cimsa. As a result, there was an underpayment on the normal tax and, thus interest was payable.
Sars spokesperson, Anton Fisher, said: “We welcome the judgment.” Sars had assessed the tax liability of Cimsa for the 2012 tax year to include in its income an amount equal to the entire net income of CGFM.
The Tax Court previously upheld Cimsa’s objection, and found CGFM – with four staff members operating at its Ireland offices – was an FBE and accordingly, qualified for a tax exemption. Sars appealed against the decision.
“The tax court found that the reason for creating CGFM was to generate opportunities for its investors which it could not provide in South Africa.
“The tax court was satisfied that CGFM has ‘economic substance and does not merely exist on paper’, on the basis that its conduct did not amount to housing its activities in a foreign company to avoid tax in the home country on the income it produced,” the judgment read.
The SCA had to determine whether the nature of CGFM’s business in Ireland was that of an investment company or a management company.
The SCA held that it was common cause that the investment function was not located in Ireland.
Therefore, if its primary business is that of investment, then its net income as a controlled foreign company is the financial liability of Cimsa.
Coronation said it was disappointed by the judgment and would be appealing. “The dispute rests on a matter of interpretation in the context of a taxpayer adopting an outsourced business model.
It has significant implications for the global competitiveness of many South African businesses.”
“Following the ruling in favour of Sars by the SCA on Tuesday, Coronation is engaging with legal counsel and advisers. The group maintains, based upon consistent professional advice, that its tax treatment has been appropriate and is therefore considering an appeal against the judgment to the Constitutional Court.”
Cape Times