Coronation takes SARS to ConCourt

Coronation CEO Anton Pillay

The Constitutional Court has decided to hear Coronation’s application for leave to appeal the Supreme Court of Appeal’s (SCA) decision on its dispute with the South African Revenue Service (SARS).

In February, the SCA ruled that SARS was within its rights to claim taxes from the asset manager for income earned by its Irish subsidiary, reaching back to 2012.

Coronation will have to convince the Constitutional Court that SARS erred in how it assessed its offshore operations.

“On Friday, 1 September 2023, the Constitutional Court issued a directive that it will hear the company’s application for leave to appeal and hear arguments on the merits of the matter. The matter will be set down for hearing by the Constitutional Court in due course,” said the company.

The matter relates to SARS’ assessment of Coronation’s taxable income in 2012, which included the profits earned by Coronation Global Fund Managers (CGFM) based in Ireland.

Coronation appealed the assessment to the Western Cape Tax Court, which ruled in their favour in 2021 and set aside SARS’ assessment.

SARS then appealed this ruling to the SCA, which ruled in the taxman’s favour in February 2023 and reinstated the assessment.

In addition to the additional taxes, Coronation must also pay the interest accrued on the amount assessed by SARS and costs. The SCA dismissed SARS’ claim for penalties.

Coronation saw a 97% decrease in its basic and headline earnings per share in its interim results for the period ended 31 March 2023 due to the tax ruling against the company.

The company subsequently did not declare an interim dividend.

The central issue is whether the profits of CGFM should have been included in the taxable income of the South African holding company Coronation Fund Managers or if it qualified for a tax exemption as a foreign business establishment.

ENSafrica’s Charles de Wet explained that to be classified as a foreign business establishment, the primary functions of the business have to be conducted outside of South Africa.

This is effectively an anti-avoidance provision that prevents South African tax residents from shifting income to lower tax jurisdictions by simply investing through a company located in a foreign jurisdiction.

Coronation would want to pay tax in Ireland because the country has lower tax rates than South Africa.

In this case, CGFM has offices in Ireland and licenses to operate there but outsources its work to South Africa, where Coronation’s investment management operations are.

Based on this analysis, the SCA ruled that CGFM does not qualify for the tax exemption as a foreign business establishment because its primary functions – investment management – are performed in South Africa and not in a foreign jurisdiction.

And so, CGFM’s profits should be included in Coronation’s taxable income, according to the SCA.

The judgments from the Western Cape Tax Court and the SCA differ because the SCA took a narrower interpretation of what a foreign business establishment is, explained De Wet.

According to the SCA’s ruling, essentially, the entire business must be in Ireland to qualify for a tax exemption.

De Wet added that the “odds are in [SARS’] favour”.