Circular Cash Flows: A PRIMER

• Jurisdiction: South Africa
• DOI: 10.10520/ejc-btclq_v15_n2_a3
• Author: Ed Liptak
• Pages: 15-23
• Date: 01 July 2024
• Published date: 01 July 2024
• Published By: Siber Ink

15

© Juta and Company (Pty) Ltd

Circular Cash Flows:

A PRIMER

ED LIPTAK*

ABSTRACT

Tax shelter schemes based upon circular cash f‌l ows presented a signif‌i cant

problem when the current general anti-avoidance rule (‘GAAR’) was enacted in

2006. It was hoped that by including a non-exclusive list of the most common

characteristics of these schemes in the GAAR itself it would give the South

African Revenue Service (‘SARS‘) the tools to identify and stop these arrange-

ments and, more importantly, to deter taxpayers from entering into them in

the f‌i rst place. Unfortunately, experience has shown that practitioners and

commentators — and even SARS from time to time — continue to overlook or

ignore the telltale signs of circular cash f‌l ows. This article is intended to be a

primer on that score.

Introduction

The one major innovation of the current GAAR was the introduction of

provisions to address arrangements that lack ‘commercial substance in

whole or in part’.1 To assist both SARS and the tax community in identi-

fying the core arrangements targeted by these provisions, the legislation

also included a non-exclusive list of their most common characteristics

or building blocks. These characteristics include round trip f‌i nancing, tax-

indifferent or accommodating parties, and offsetting or self-cancelling

elements. When all of these characteristics are present, it is virtually certain

that an arrangement lacks commercial substance and that its sole or main

purpose is tax avoidance, whether it is entered into or carried out on a

stand-alone basis or is added to a traditional commercial transaction.

These characteristics are objective in nature. Courtroom pyrotechnics

cannot change the facts and numbers. It is not surprising, then, that some

commentators have derided SARS ‘penchant’ for them.

Circular cash f‌l ows are the most obvious of these characteristics. The

extent to which this characteristic has been overlooked or ignored since

the enactment of the current GAAR is therefore surprising.2

1

* Independent Consultant.

Section 80A of the Income Tax Act, 1962. All statutory references are to the Income

Tax Act unless otherwise indicated.

2

See, e g, Davis Tax Committee, ‘Addressing Base Erosion and Prof‌i t Shifting in South

Africa: Action 2: Neutralise the Effects of Hybrid Mismatch Arrangements,’ First

Interim Report § 6.4 (2014); SARS Binding Private Ruling 124 (2012) (‘Repayment