Coronation wins big

Coronation Fund Managers is set to post strong earnings growth when it reports its full-year financial results around 19 November.

This comes after a big win against SARS, which resulted in it reversing a provision raised to cover a potential tax bill. 

The company released a trading statement on Tuesday, 29 October, outlining just how significant the victory over the revenue service was earlier this year. 

In June, the Constitutional Court ruled in favour of Coronation in its legal battle against SARS relating to the assessment of the company’s taxable income in 2012. 

SARS’ initial assessment included the profits earned by Coronation Global Fund Managers (CGFM), which is based in Ireland.

After a series of appeals, the matter was brought before the Constitutional Court, which ruled in favour of the asset managers and set aside orders from the Supreme Court of Appeal (SCA). 

One of the orders set aside was a present obligation placed on Coronation to pay the additional taxes and interest, which includes years of assessments from 2012 to 31 March 2024.

This is why Coronation’s total obligation payable to SARS in 2023 for this matter amounted to R716 million, contributing to its hefty bill that year.

The company also raised a provision to cover potential penalties and other claims if it lost the case at the Constitutional Court. 

As a result of the successful outcome of the tax litigation and resultant reversal of the provision raised in the year-ended 30 September 2023, Coronation expects its earnings to skyrocket. 

In its trading statement, the company said it expects earnings per share, headline earnings per share, and diluted headline earnings per share to increase by between 225% and 245%. 

This increase would take its earnings per share to a rang of 594.4 cents per share to 631 cents per share. 

Coronation attributes this large increase to its win against SARS and the reversal of the provision raised in the previous financial year. 

Funa management earnings per share, excluding the impact of the SARS case, is expected to increase by less than 10% compared to the prior period. 

When including the win against SARS, this increase jumps to between 255% and 275% for the financial year. 

Coronation has already paid shareholders a special dividend of 153 cents per share to share some of its court winnings from its battle in August.

Explaining the tax battle

The key question in the case between Coronation and SARS was whether the company’s Irish subsidiary was a controlled foreign company (CFC) or a foreign business establishment (FBE). 

Experts at PwC said SARS had effectively accused Coronation of underestimating the taxes owed by the Irish subsidiary by exempting its net income from tax claims. 

FBEs have a critical tax exemption under section 9D of the Income Tax Act, which Coronation claimed applied to its Irish subsidiary. 

SARS said that Coronation’s business model – which separated fund management from investment management and outsourced the latter to Ireland – was disqualified from this exemption.

To be classified as an FBE, the ‘primary operations’ of the business have to be conducted outside of South Africa. 

SARS had argued that fund management formed the primary operations of Coronation’s subsidiary, and this activity occurred in South Africa, while investment management was outsourced to Ireland. 

This interpretation would result in the company paying tax on the net income of CGFM to SARS. 

However, the Constitutional Court disagreed and said the Irish subsidiary’s licence only permitted fund management, not investment management. Thus, Coronation’s interpretation was correct, and its net income was exempt. 

The experts from PwC said the Coronation case could have major implications for South African businesses with international operations. 

The experts noted that the National Treasury indicated it would amend the definition of an FBE to clarify that all important company functions must be performed within the same jurisdiction for the FBE exemption to apply.