New Tax Law Could Hurt BEE

Business Unity South Africa (BUSA) has added to concerns about the negative effects to BEE transactions that will come with the proposed suspension of section 45 of the income tax act.

Instituted under the Draft Taxation Laws Amendment Bills, the move is said to be exposing BEE many transactions to tax devastating tax charges. One company, Phalabora Mining has already indicated that it will withdraw its BEE transaction if the proposed tax amendment became law.

“If the draft amendment was to become law, and the BEE transaction was to be implemented as presently formulated, Palabora would incur an immediate, material tax charge. This outcome is not commercially tenable for the BEE transaction,” the company said in a statement.

The company said the deal was likely to go through during this period of suspension and therefore the draft amendment would apply to the deal if the company proceeded with it. The company said the amendments to the Income Tax Act would have unintended consequences for Palabora.

“We do not believe that the impact that will be felt by Palabora and its broad-based BEE shareholders is what was intended in the legislation. Palabora pays taxes and will always pay taxes, the broad-based BEE deal was not set up as a tax avoidance structure,” said a company spokesperson.

In its statement BUSA said while business supports the broader intention of the Draft Taxation Laws Amendment Bills to bolster inclusive growth and development, BUSA has serious concerns about the impact of the decision by the National Treasury to suspend section 45 of the Income Tax Act until December 2012, in view of the negative effect this will have on BBBEE transactions and transformation.

This has generated a great deal of uncertainty, as many BEE transactions have been structured in terms of this section.  The unintended consequences of the suspension of section 45 of the Income Tax Act have a serious potential of effectively terminating BBBEE deals.  The likely impact on some of the BEE deals implies that the changes could result in the BEE partners paying double or even triple tax charges.

We urge the National Treasury to reconsider its decision to proceed with this tax change until further consultation has taken place.

 

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