Structured finance transactions are attracting intense scrutiny in the wake of the introduction of the revised corporate income tax returns for the 2002 and 2003 years of assessment.
The South African Revenue Service (SARS) had previously indicated that it was to clamp down on the banking industry because of the industry`s perceived small contribution to the fiscus relative to the actual profits disclosed.
It is now apparent that one of the ways in which this will be done is by scrutinising transactions that SARS refers to as structured finance products. The tax return now requires all corporate taxpayers to disclose whether they participated or advised (or both) on a structured finance product and, if so, to provide full details of the transaction.
Koos van Wyk, tax partner with PricewaterhouseCoopers, contends that taxpayers will likely have difficulty not only when it comes to answering this question in their tax returns but whether they should answer it at all.
Van Wyk points out that no definition of what is a "structured finance product" exists, either in the tax return or in the Income Tax Act. SARS has responded unofficially that professional judgment must be used and has supplied a short-list of characteristics, among them that it results in:
* The mismatch of taxable income and deductions for the participating entities; and
* The conversion of taxable income into capital or exempt income.
"However," says Van Wyk, "none of the characteristics provided by SARS are unique to a particular transaction. Indeed, they may result from almost any financing transaction entered into by the taxpayer. The elements for characterising structured finance, as indicated by SARS, are therefore so generic that almost any financing transaction, including standard loan agreements, could require inclusion."
Van Wyk reveals that the organised accounting profession and the Banking Council have been negotiating with SARS on this issue over the past few months. But in the interim, corporate income tax returns have to be lodged, including answers to this question.
He believes that answers to the question may have to differ, being dependent on the type of business in which the taxpayer is involved. In the case of banks, and especially the niche financial service operators, a high frequency and variety of such transactions form the core business of these institutions.
Practically all such transactions seem to fall within SARS`s limited guidelines and if answered in the affirmative, these institutions would need to detail all their transactions, which information is in any event available for inspection. This would cause both practical and logistical problems and would clearly be unfair from an administrative law perspective.
However, in the instance of other businesses where the occasional financing transaction has been concluded, the situation may be entirely different. However inconclusive the definition of structured finance by SARS is formulated, it will likely be obvious that all financing undertaken by a corporate, other than conventional bank loans, will have to be included.
A further question arises on the impact of not answering the question or supplying incomplete information. Technically, where any return is not comprehensively completed and information is not disclosed, SARS will be able to raise revised assessments, irrespective of whether the statutory three-year period since the original assessment has expired or not.
Fair administrative practice, however, requires SARS to state clearly what it requires by way of information and taxpayers should not be prejudiced if they refrain from supplying information based on a substantially vague requirement.
Van Wyk urges SARS to produce a clearer definition, and soon.
Until such a definition is forthcoming, corporate taxpayers should only refrain from answering the question to the extent that they can successfully argue administrative unfairness or total uncertainty on reasonable grounds as to what SARS requires.
"Taxpayers who only have a few financing transactions that even vaguely resemble the undefined term 'structured finance` should comply, failing which their tax assessments, including such transactions, may never become final."
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