Access to the global market exposes the South African Tax resident to a new difficulty: the offshore corporate action. What happens when Rolls Royce issues you a "C" share for every "A" share you own? Did you have to pay tax when Kraft Foods and Heinz merged to form a single entity, The Kraft Heinz Company? How did you or your portfolio manager tackle the SAB/AB Inbev merger? If you elected the simple cash sale option, did you identify the two separate tax events?
The past few years have seen an enormous rise in the popularity of offshore markets, strongly aided by the increase in foreign tax allowances from R4 million up to R11 million by National Treasury. Where the investor would initially be content with onshore investments, the global market is now just as alluring, allowing even your everyday investors an opportunity to easily own shares in flagship investments such as Apple, Microsoft and Google. Such freedoms, however, created a lot of new complications...
What makes offshore corporate actions so complex?
The complications that accompany the above scenarios is that these events are not structured with the South African taxpayer in mind. Additionally, foreign countries allow for different corporate structures and different types of corporate actions.
Where a South African taxpayer may see a spin-off as a simple "unbundling" or demerger, complexities may arise where the spin-off is actually not of a subsidiary, but just a division in the company, and this division is issued its own tracking shares instead of ordinary shares. The South African Income Tax Act (the Act) caters seamlessly for events listed on a South African stock exchange, with South African resident companies now routinely providing tangible and effective tax guidance. Naturally, companies registered in other countries generally do a great job of seeing to their own tax residents.
What are tax managers already doing?
What does a tax manager in asset management or wealth management do in these situations? One option is to attempt to mimic the offshore tax guidance and apply it to yourself or your managed portfolios. In such a situation, you will in all likelihood find yourself applying a tax treatment that is completely contrary to the Act, opening you up to possible queries, both from clients and SARS. Another option would be to just apply the accounting treatment. This too comes with some caveats, as it is a well-known fact that tax and IFRS/GAAP apply very different principles to corporate events. There is also the risk that the event is interpreted incorrectly, resulting in a completely incorrect tax treatment. This brings us to one more option: outsourcing.
Singular Systems' has a tax team who have been at the forefront of capital gains tax (CGT) processing and reporting technologies for over a decade now.
Why outsource corporate actions research?
Lee Kuan Yew once said: "If you deprive yourself of outsourcing and your competitors do not, you're putting yourself out of business."
Singular uses its very own CGT Express software that was built in-house through the combined efforts of an experienced group of tax specialists and software developers. A large part of the software and the outsource process is the interpretation and review of corporate events. In the last few years, with offshore investments becoming much more common and the sharp increase of offshore corporate events, Corporate Actions Research has become a separate solution. Clients have approached Singular to assist in solely providing interpretations of corporate events and, in certain situations, assisting with reviewing the processed events, especially where that client utilises CGT Express themselves. Some clients who do not use CGT Express require annual independent reviews/audits of their processing of corporate events in their own systems.
Clients receive a comprehensive document with the following information per corporate action event:
1. Instruments involved in the event.
2. Salient features of the event.
3. Important event dates.
4. Applicable market prices.
6. Potential tax implications.
7. Assumptions made (if any).
8. Additional information (e.g. reasonability tests, if required).
9. Key information sources.
Should the client use CGT Express, a spreadsheet indicating how exactly the event needs to be captured in the system is also provided.
The Corporate Actions Research Solution provides the client with comfort that the terms of the event have been appropriately considered, discussed and concluded on by a team of experienced professionals. The tax implications are extensively deliberated, providing the client with a deep understanding of how Singular has come to its conclusions. This enables open dialogue between itself and its clients, where it can provide peace of mind that the complexities have been simplified.