Commercial transactions can often involve a range of corporate structuring which in turn could have tax implications for participants. With all the focus on getting the deal done, often participants forget that a tax benefit a participant derives from the commercial arrangement may need to be disclosed to SARS. 

In this article we take a look at what type of commercial transactions qualify as reportable transactions, what qualifies as a benefit, as well as who has to notify SARS. 

In terms of the Tax Administration Act 28 of 2011, any commercial 'arrangement‘ bearing the characteristics of those set out in section 35 of the Tax Administration Act must be disclosed to the Commissioner for the South African Revenue Service. 

Importantly, not all commercial transactions amount to an ‘arrangement’ that is reportable. An ‘arrangement’ is firstly defined as any transaction, operation, scheme, agreement or understanding, irrespective of whether it is enforceable or not. 

An arrangement is reportable if it complies with the provisions of sections 35(1) and (2) of the Tax Administration Act and/or there is a ‘tax benefit’ (which can include steps that avoid future tax liability) that can be obtained from the arrangement by any of its participants. A ‘participant’ in turn is defined as a ‘promoter’, being a person principally involved in configuring the arrangement for and on behalf of the participants, or any person or entity who might directly or indirectly obtain a tax or financial benefit pursuant to the arrangement. 

Arrangements that will qualify as reportable arrangements in terms of the Tax Administration Act include, among others:

• In terms of section 24J of the Income Tax Act 58 of 1962, an arrangement is considered to be a reportable arrangement if interest is calculated in terms of that particular arrangement as opposed to the requirements set in section 24J of the Income Tax Act.
• Section 35(1)(b) of the Tax Administration Act provides that an arrangement is reportable if it involves parties to an arrangement that take steps such as circulating funds amongst each other in what is commonly known as “round tripping” in order to obtain a tax benefit.
• Any transaction that has the effect of creating favourable conditions for a transaction with the end goal of obtaining a tax benefit.
• Any arrangement that results in a person or entity being subject to less profit before tax as a result of the arrangement itself.

In terms of section 37(1) of the Tax Administration Act, any person who is a participant in an arrangement on the date on which such arrangement qualifies as a reportable arrangement must disclose such to SARS within 45 business days after such date. In the case of a person becoming a participant to an arrangement after the date on which it qualifies as a reportable arrangement, the reporting period is within 45 business days after becoming a participant. 

Must all participants make such a disclosure? No, a participant need not make a disclosure if a written disclosure statement has been obtained from any of the other participants to the arrangement.

Section 38 of the Tax Administration Act sets out the type of information which must be disclosed. Such would include a detailed description and key features depicting the reportable arrangement including the assumed tax benefits for all of the participants (as well as their personal details) and a list of all the commercial agreements. SARS will, after receipt of the aforementioned information, issue all the participants with a reportable arrangement reference number.

So what happens if the arrangement is not reported on? Section 212 of the Tax Administration Act has strict penalties for those who fail to notify SARS of a reportable arrangement they engaged in. A participant can be fined an amount of R50,000 for each month that the failure continues (limited to a period of 12 months) whereas a promoter may be fined an amount of R100,000 for each month that the failure continues (limited to a period of 12 months).

Unfortunately, it’s not always crystal clear as to whether a transaction would amount to a reportable arrangement, and there are also exclusions where there is no duty to report on by participants. But, given the ever-present risk of substantial penalties should you have failed to report, it is vital that you confirm your reporting responsibilities, and if required to report, do so in the correct manner and with the correct information. If you are concerned about whether you should have reported a transaction or are involved in a pending transaction, play it safe and give us a call so we can help you do the necessary.


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