Binding Private Ruling 178 (BPR 178) concerned an applicant seeking clarity on the tax consequences of an international corporate restructuring in terms of section 42 (asset-for-share transaction) and section 45 (intra-group transaction).  In particular, the applicant sought clarity whether section 45(3A) of the Income Tax Act will apply to cross-border intra-group transactions.

To the extent that section 45(3A) of the Act applies to an intra-group transaction, the holder of the debt is deemed to have acquired the loan note for an amount of expenditure of nil (which, depending on the circumstances, can trigger adverse tax consequences if distributed or otherwise disposed of at a later stage).  The uncertainty whether or not section 45(3A) of the Income Tax Act applied to cross-border intra-group transactions arose because the relevant provisions only referred to a 'group of companies' as defined in section 41 of the Act and not the broader definition of a group of companies contained in section 1 of the Act.

BPR 178 ruled that section 45(3A) will not apply to the cross-border intra-group transaction contemplated in the ruling, presumably on the basis that the debt was not advanced by the same group of companies (as defined in section 41).

We have previously indicated that, if the conclusion was reached on the basis that section 45(3A) of the Act does not apply to a loan note issued by a foreign company, which does not form part of a section 41 group of companies, the ruling appears to be at odds with the statements by National Treasury in the Explanatory Memorandum on the Taxation Laws Amendment Bill 2013 (EM) but is in line with a strict interpretation of the provisions. According to the EM, section 45(3A) of the Income Tax Act was amended to clarify that the provision applies to both domestic and foreign corporate reorganisations.

Our concerns appear to be justified as the Minister announced in the Budget that the relevant provision of section 45(3A) was inadvertently not amended to cater for cross-border intra-group transactions.  It has therefore been proposed that the relevant provisions will be amended to clarify that this section refers to the same group of companies as defined in section  1 of the Income Tax Act and applies to cross-border intra-group transactions.

The proposal will at least bring some certainty to this issue. It is comforting to see that when the SARS advance tax ruling department issued BPR 178 it applied the legislation as it read at the time and appears to have been influenced by the previous comments by the Minister in the EM. The Minster did not indicate from which date this proposed amendment will be effective.

Written by Andrew Lewis, Director, Tax, Cliffe Dekker Hofmeyr