National Treasury has withdrawn – for now – the far-reaching proposed amendment to the Income Tax Act pertaining to the rules governing offshore entities of SA multinationals.

Moneyweb reports that the amendment would have given effect to the SCA decision in the much-publicised Coronation case, negatively impacting several SA multinationals with similar structures as Coronation.

As previously reported, it was withdrawn because the case is now heading to the Constitutional Court.

However, tax experts say there are likely to be legislative changes, irrespective of the outcome of the litigation, which are bound to impact Coronation and several multinationals with similar offshore structures.

Lutando Mvovo, executive head of international tax at Vodacom, said the authorities have been looking at multinationals with outsourcing models and were ready to pounce on them even before the SCA win for the SARS.

Moneyweb notes that the timeline of events was the giveaway.

The SCA heard the case in November 2022. The judgment was handed down on 7 February this year. Two weeks later, the 2023 Budget Review contained an amendment codifying the SCA decision.

‘If the outcome of the Constitutional Court case is in favour of the taxpayer, we are likely to see Treasury bringing back the proposed amendment,’ Mvovo said at the annual Transfer Pricing Summit hosted by the SA Institute of Taxation in Sandton.

Nirvani Govender, transfer pricing expert at SARS, said outsourcing, in general, is ‘a no-no’. 

Mvovo suggested that SARS prepare a Practice Note to assist taxpayers with this complex area.

‘Large companies do not simply set up offshore structures to avoid taxes. Some of these structures are motivated by commercial decisions,’ he said.

The Controlled Foreign Company rules were introduced to prevent multinationals from avoiding tax in SA but have a carve-out in the form of an exemption for foreign business establishments to ensure controlled foreign companies remain competitive.  

The carve-out means that amounts attributable to a qualifying FBE are excluded from the net income of the holding company in SA.

Full Moneyweb report