BPR268 deals with the tax implications of an arrangement that is aimed at correcting previous errors by a taxpayer. On the face of it, the transaction appears relatively simple but further consideration of the possible uncertainty that warranted requesting a ruling reveals some of the complexities of it in light of the specific requirements of the tax law. The ruling should serve as a reminder to taxpayers not to underestimate the tax complexities that even the simplest transaction may hold.
It is unavoidable where people are involved in a process that errors will occur from time to time. A recent ruling issued by the South African Revenue Service (SARS), Binding Private Ruling 268 (BPR268), highlights the importance of not assuming that the correction of an error does not have any tax implications.
The taxpayer that applied for the ruling forms part of a multinational group of companies. A foreign company within the group charged the South African operations (applicant and a branch of a group entity) a fee for certain support services.
Initially, the group charge was invoiced to a foreign entity, which then subsequently on-charged it to the applicant (60%) and the South African branch (40%). From 2011, the arrangement changed and the foreign entity that rendered the support services charged its fees to the applicant directly or via the branch entity. The applicant mistakenly believed that it was under an obligation to recharge 40% of all its charges to the branch, which it did for the period between 2011 and 2015. The applicant only claim a tax deduction for the net amount of the support service charges (i.e. 60% of the charge from the foreign entity).
This error was only discovered in 2016. The proposed transaction in respect of which the ruling is requested relates to the correction of the above errors. The applicant and the branch (co-applicant) will enter into an arrangement in terms whereof the applicant will issue credit notes and reimburse the branch for the fees erroneously charged to it.
The ruling confirms that the reimbursive payments to be made by the applicant will be deductible under s 11(a) of the Income Tax Act. A recoupment of the previously deducted expenditure will arise in the hands of the branch.
Analysis and practical implication
The effect of the corrective payments received by the branch seem quite obvious as it will recover an amount that it previously claimed a tax deduction for. It is submitted that the reason for requesting the ruling probably relates to some uncertainty around the deductibility of the corrective payments. There reasons for this uncertainty may have been:
- Firstly, that the connection between the expenditure (corrective payment) and the production of income by the applicant is not clear. The outcome would suggest that the payment were viewed as sufficiently closely connected to the activities that generate income, even though no income flowed to the applicant as a result of the corrective payments.
- Secondly, if one considers the effect of the corrective payments more closely, the taxpayer will only now, when making the corrective payments, deduct expenditure that relates to support services rendered to it between 2011 and 2015. This may cast doubt as to whether the deduction may still be claimed now (when payment takes place) as opposed to when the obligation to pay for the services arose.
The ruling and brief analysis above highlight that a simple transaction, such as the one in question, may involve certain tax considerations that are rather complex. Proper consideration of all the tax effects is required to avoid surprises when the tax authorities take a closer look at the affairs of a taxpayer or to be able to limit exposure to penalties, should a difference of opinion arise. (April 2017)
Pieter van der Zwan, the author of this article,
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