Coronation’s tax woes explained

Experts say that the Supreme Court of Appeal’s (SCA) ruling against Coronation is a matter of interpretation of highly complex legislation and not necessarily indicative of untoward business practices.

The matter related to SARS’ assessment of Coronation’s taxable income in 2012 when it included the profits earned by Coronation Global Fund Managers (CGFM), which is 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 also has to pay the interest accrued on the amount assessed by SARS and costs. The SCA dismissed SARS’ claim for penalties.

Coronation, in a SENS announcement, has said it is in the process of quantifying the exact amount it would owe, but estimations range between R250 million and R500 million.

This would have a material impact on Coronation’s earnings and cash flow, forcing the company to caution investors that it may withhold its interim dividend to cover the payment.

Coronation is considering appealing the SCA’s ruling to the Constitutional Court and maintains that it is tax compliant in all jurisdictions in which it operates.

This news sent Coronation’s share price tumbling 11%, wiping nearly R1 billion off its market cap in a single day.

Expert opinion on Coronation’s tax assessment

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 how, 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 it outsources its work to South Africa, which is 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.

De Wet said, according to the SCA’s ruling, “pretty much the whole business must be there [Ireland]” for it to qualify for a tax exemption.

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

Pieter Janse van Rensburg from AJM Tax pointed out that this is “one of the most complex pieces of legislation” and often comes down to interpretation.

The SCA waiving penalties for Coronation is an admission that this case is simply down to a “matter of interpretation of extremely complex tax law”, said Janse van Rensburg.

Due to the complex nature of the legislation, Janse van Rensburg said that this issue is a “matter of interpretation of factual circumstances rather than there being anything untoward in [Coronation’s] operations”.

Janse van Rensburg added that the “amounts are staggering”, and the complex nature of the legislation warrants an appeal to the Constitutional Court.