Commissioner for the South African Revenue Services v Coronation Investment Management SA (Pty) Ltd
| Jurisdiction | http://justis.com/jurisdiction/166,South Africa |
| Judge | Makgoka JA, Nicholls JA, Nhlangulela AJA, Salie AJA and Mali AJA |
| Judgment Date | 07 February 2023 |
| Citation | 2023 JDR 0295 (SCA) |
| Docket Number | 1269/2021 |
| Hearing Date | 17 November 2022 |
| Court | Supreme Court of Appeal |
Nicholls JA (Makgoka JA and Nhlangulela, Salie and Mali AJJA concurring):
The Coronation Group is one of South Africa's most successful investment companies. It has subsidiaries across the globe. Its ultimate holding company, Coronation Fund Managers Limited, is listed on the Johannesburg Stock Exchange (JSE) securities exchange in South Africa. It describes itself as 'an active investment manager following a long term valuation-driven investment philosophy'. [1]
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Nicholls JA (Makgoka JA and Nhlangulela, Salie and Mali AJJA concurring)
The respondent, Coronation Investment Management SA (Pty) Ltd (CIMSA) is the holding company for the Coronation Group. It is registered and tax resident in South Africa. During 2012, CIMSA was a 90% subsidiary of Coronation Fund Managers Limited and the 100% holding company of Coronation Management Company and Coronation Asset Management (Pty) Ltd (CAM), both registered for tax in South Africa. CIMSA was also the 100% holding company of CFM (Isle of Man) Ltd, tax resident in Isle of Man. CFM (Isle of Man) Ltd, in turn, was the 100% owner of Coronation Global Fund Managers (Ireland) Limited (CGFM) and Coronation International Ltd (CIL), which were registered and tax resident in Ireland and the United Kingdom respectively. CFM has since been de-registered in Isle of Man.
The issue in this appeal is whether the net income of CGFM should be included in the taxable income of its South African holding company, CIMSA, or whether a tax exemption in terms of s 9D of the Income Tax Act 58 of 1962 (the Act) is applicable to the income earned by CGFM. This depends on what the primary functions of CGFM in Dublin, Ireland are. If the primary operations are conducted in Ireland, then the s 9D exemption applies. Of particular significance is that CGFM has adopted an outsource business model and the attendant ramifications that may have for its tax status. Aligned to this is whether the primary business of CGFM is that of investment (which is not conducted in Ireland), or that of maintaining its licence and managing its service providers (which is conducted in Ireland).
The appellant, the Commissioner for the South African Revenue Service (SARS), 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, Cape Town (the tax court) upheld CIMSA's objection and found that CGFM was a 'foreign business establishment' (FBE) as defined in s 9D(1) of the Act and,
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Nicholls JA (Makgoka JA and Nhlangulela, Salie and Mali AJJA concurring)
accordingly, qualified for a tax exemption. It set aside SARS's additional assessment against CIMSA and ordered it to issue a reduced tax assessment, in which no amount was included in CIMSA's income under s 9D of the Act pertaining to CGFM's income. Consequently, SARS was not entitled to claim (a) understatement penalties in terms of s 222 of the Tax Administration Act 28 of 2011 (the TAA); (b) understatement penalties for provisional tax under paragraph 20 of the Fourth Schedule to the Act; and (c) interest in terms of s 89(2) of the Act. SARS appeals this decision with the leave of the tax court.
Section 9D of the Income Tax Act 58 of 1962
Prior to 2001, the South African tax regime was a source-based one. The Revenue Laws Amendment Act 59 of 2000 changed this to a resident-based system. Section 9D was introduced to address how South African tax payers should be taxed on their income earned abroad, especially income earned by South African owned foreign entities. A pure anti-deferral regime would immediately deem back all the South African owned foreign company income. As a result, no foreign income would receive any advantage over domestic income. However, international law only allows South Africa to tax foreign residents on their South African source income, not on their foreign source income, even if the entity is completely owned by South African residents. To address this, s 9D imposes tax on South African owners on the income earned by their foreign entities as if those entities immediately repatriated their foreign income when earned. [2]
The section also provides for exemptions which allow certain foreign companies to operate free from tax to the extent that an objective rationale exists for maintaining operations abroad, and when such operations pose no threat to
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Nicholls JA (Makgoka JA and Nhlangulela, Salie and Mali AJJA concurring)
the South African tax base. The purpose of the exemption was to balance the desire for horizontal equity (equity among South Africans earning income at home versus those earning income abroad) against international competitiveness (allowing South African owned subsidiaries to operate on the same level tax fields as foreign owned rivals operating in the same low-taxed foreign countries). The s 9D exemptions were, therefore, introduced as a balancing mechanism between two competing interests: tax avoidance and competitiveness. [3]
The exemption only applies to foreign entities that qualify as a 'controlled foreign company', which is defined as:
'[A]ny foreign company where more than 50 per cent of the total participation rights in that foreign company are directly or indirectly held, or more than 50 per cent of the voting rights in that foreign company are directly or indirectly exercisable, by one or more persons that are residents other than persons that are headquarter companies . . .' [4]
Section 9D(2) of the Act provides for the imputation of the 'net income' of a controlled foreign company to a South African resident company holding participation rights in that controlled foreign company, unless it falls within the ambit of the FBE exemption. This provides that in determining such net income, any amount 'which is attributable to a foreign business establishment' of that controlled foreign company must not be taken into account.
It is common cause that in the 2012 tax year of assessment CGFM was a controlled foreign company as envisaged. Therefore, the income of CGFM would be imputable to CIMSA, unless it fell within the ambit of the FBE exemption. This, in turn, depends on whether CGFM is an FBE as defined.
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Nicholls JA (Makgoka JA and Nhlangulela, Salie and Mali AJJA concurring)
Section 9D(1) of the Act sets out the requirements of a FBE:
'[F]oreign business establishment, in relation to a controlled foreign company, means –
a fixed place of business located in a country other than the Republic that is used or will continue to be used for the carrying on of the business of that controlled foreign company for a period of not less than one year, where –
that business is conducted through one or more offices, shops, factories, warehouses or other structures;
that fixed place of business is suitably staffed with on-site managerial and operational employees of that controlled foreign company who conduct primary operations of that business;
that fixed place of business is suitably equipped for conducting the primary operations of that business;
that fixed place of business has suitable facilities for conducting the primary operations of that business; and
that fixed place of business is located outside the Republic solely or mainly for a purpose other than the postponement or reduction of any tax imposed by any sphere of government in the Republic:
Provided that for the purposes of determining whether there is a fixed place of business as contemplated in this definition, a controlled foreign company may take into account the utilisation of structures as contemplated in subparagraph (i), employees as contemplated in subparagraph (ii), equipment as contemplated in subparagraph (iii), and facilities as contemplated in subparagraph (iv) of any other company –
if that other company is subject to tax in the country in which the fixed place of business of the controlled foreign company is located by virtue of residence, place of effective management or other criteria of a similar nature;
if that other company forms part of the same group of companies as the controlled foreign company; and
to the extent that the structures, employees, equipment and facilities are located in the same country as the fixed place of business of the controlled foreign company.'
The location of the 'primary operations', referred to in s 9D(1)(a)(ii)–(iv), is pivotal in determining whether CGFM is an FBE as defined. This requires a determination as to the nature of CGFM's business in Ireland, and in particular,
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Nicholls JA (Makgoka JA and Nhlangulela, Salie and Mali AJJA concurring)
whether the primary operations have been outsourced, and if so, whether an exemption in terms of s 9D is applicable.
Pleadings and Evidence:
The undisputed evidence on behalf of CGFM was that it was incorporated in Ireland during 1997 to provide opportunities for clients to invest in South African and Irish domiciled collective investment funds (CIS). On 23 October 2007, CGFM applied to the Irish Financial Services Regulatory Authority for authorisation of an Undertakings for Collective Investment and Transferable Securities (UCITS). On 25 October 2007, it received its licence from the Central Bank of Ireland (CBI) as a 'management company' in accordance with the European Communities Regulations under Investment Services Directive 93/22/EEC 2125.
In its business plan, attached to its licence application, CGFM presented an outsource business model where CGFM concentrates on being a 'product provider'. All non-core functions, such as investment, administration and custodial functions, are outsourced. The provision of investment management services and...
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