The GAAR Proposal: National Treasury Closing Remarks

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The GAAR Proposal National Treasury Closing
Remarks

• Keith Engel Chief Director
• Tax Legislative Oversight

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As discussed, were talking about the spirit
versus the letter of the law . . .
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Commerciality

• Taxpayers should be entitled only to the tax
  consequences that match commercial (economic)
  substance
• Business risks, and
• Business rewards
• The substance doctrine is no stranger to SA,
  having been fully employed in SA contract and
  other business law
• However, substance has never been fully imported
  into SA tax law (other than Ladysmith)

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Unfortunate Dominance of Form

• The tax law begins with form
• SA courts often favour the letter of the law
• Purposive intent secondary
• Explanatory memorandums ignored
• Substance is harder to draft than label driven
  form
• Yet, more recent provisions have begun to take
  the shift
• Group relief (sales and dividends)
• Securities lending
• Specific anti-avoidance (e.g. debt/equity)

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The Current GAAR No Deterrent!

• Ongoing abundance of schemes shows the need for
  anti-avoidance rules (SARS presentation)
• While a growing culture of compliance exists,
• A small (but expensive few) continue generating
  high fees from the same old game
• Aggressive opinions are still taken too seriously
• Some aggressive planners even demand SARS rulings
  as an endorsement

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Simple Mismatch

• The GAAR did not even apply to the simple
  offshore washing machine structure of 2000
• In that structuring, money was shifted offshore
  to a tax haven via deductible interest payments
  and returned tax-free via dividends

Activity Substance Tax
SA pays R100 Interest - R100 -R100
Foreign receives interest R100 Zero
Foreign pays dividends -R100 Zero
SA receives dividends R100 Zero
Net Effect Zero -R100
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At Least 3 Years Too Late

• Time Line
• Scheme undertaken
• Return submitted
• Audit risk identified
• Information cat mouse
• Objection appeal
• Court decision
• Hence, GAAR must stop schemes in the cradle

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How to define a wolf in sheeps clothing?

• At what point is a wolf a wolf?
• Is it the fur, the size of the paws, the eyes,
  etc.?

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The comments . . .
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Some Rock-Throwing

• We love the concept BUT .
• Youre killing BEE!
• Its all SARSs fault that the law is too
  complicated
• Were living in a police state
• We love the English robes
• Dont you know basic grammar?
• Taxpayers have a right to plan

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Battle Over the Telltale Signs

• The telltale signs are key to the new GAAR
  because they act as red flags
• Taxpayers fear these signs can be overstated
• While SARS notes these are merely factors

• Does the form match the substance?
• Are the steps momentary?
• How does the legal result differ if the excess
  artifices are removed?
• Does the money flow in a circular fashion?
• Are there any special purpose vehicles?
• Do steps fully cancel or offset one another?
• Do different parties treat the same transaction
  differently for tax purposes?
• Is their a failure to operate at arms length in
  terms of price or form?
• Does the financial accounting treatment remain
  neutral despite the alleged tax restructuring?
• Do the parties have a reasonable chance of
  generating any pre-tax profit?
• Do the tax benefits outweigh the non-tax
  benefits?

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Taxpayer Examples

• SPVs (tax indifferent parties)
• Foreign residents
• PBOs
• Government

• Profit motive Airline losses
• Inconsistency
• Sale of machine, treated as inventory for
  seller/capital asset for purchaser
• Cross-border instruments
• Circular flows
• Intra-group cross cancellation of loans
• Leases (sale-leasebacks, vehicle financing, etc)

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Worries of the Saints

• Rogue auditors satisfying targets
• Following labels provides a quick sense of
  security (i.e. certainty)
• Can we really separate the good from the bad
  without an intensive case-by-case review?

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Further Comments Needed

• The doors are not closed
• More than a year for comments
• Preliminary Parliamentary hearing
• Engagement will continue (at least one more
  draft)
• Most importantly, we need a more detailed
  description of the facts, especially for
• BEE, and
• Corporate finance

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To be continued . . .