1231. Tax relief for black economic empowerment transactions?
October 2004



Editorial comment: Although this article refers to the mining sector, its relevance extends to many other industries.


The Mining Charter requires that a black economic empowerment (BEE) partner must hold at least 25% plus 1 share. Some companies (and others still have to), therefore, have entered into various forms of structures, some very innovative and complex, to accommodate the requirement of the 25% plus 1 share.


However, one of the fundamental stumbling blocks in achieving a cost-effective BEE structure is the tax inefficiencies, which usually arise from the transactions. In most instances, the additional tax costs arise due to the fact that the Income Tax Act, 58 of 1962 (the Act) does not contain provisions specifically catering for tax relief for BEE transactions. This additional tax cost, which is normally borne by the buyer, has the effect of increasing the cost of the business to be acquired, which in turn increases the extent of the funding required by the buyer to acquire the business.


Although most companies do consider the tax implications attendant upon the structure before implementation thereof, the tax exposures/inefficiencies (which in most instances are significant) are often only discovered after the transaction has been implemented. The tax exposures/inefficiencies arise mainly as a result of either incorrect or no tax advice being obtained and/or incorrect implementation of the transaction.


From our experience, the areas where the most significant tax exposures arise and accordingly where tax relief is most needed relates to the deductibility of financing costs on share acquisitions and the tax implications arising on the issuing of shares as purchase consideration for acquiring the business or shares in the target company.


In many instances the corporate relief provisions contained in sections 41 to 47 of the Act would not apply to transactions as some of the prerequisites for these provisions to apply would not be satisfied.


In those instances, where shares are transferred, the tax implications that need to be considered include the non-deductibility of the financing costs, stamp duty and CGT. Where the buyer issues shares as consideration for the acquisition of shares in the target company or in respect of the acquisition of a business (and the transaction does not fall within the provisions of one or more of the corporate relief provisions), the CGT base cost of the asset so acquired (i.e. the shares or the business) would be zero. Editorial comment: Refer SARS Draft Interpretation Note, which can be accessed at > Services to Members > SAICA Tax Page > Other. The effect of this is that on a future disposal, the total proceeds should be treated as a capital gain and accordingly would be subject to CGT in the hands of the present buyer (on the assumption that the asset is held on capital as opposed to on revenue account). Where the business (as opposed to the shares) of the target company is transferred, the tax exposures/inefficiencies are even worse as, in addition to CGT, there are complex provisions relating to income tax recoupments and limitation of capital allowances (due to the fact that the parties in most instances are connected persons as defined in section 1 of the Act). Regard should also be had to the secondary tax on companies (STC) and donations tax implications.


The corporate relief provisions usually do not apply to these transactions since the relief is usually conferred on companies that form part of the same group of companies. A "group of companies" is defined in section 1 of the Act and in general requires a shareholding of at least 75% in the equity share capital of the involved companies. However, as the Mining Charter requires a BEE partner to hold at least 25% plus 1 share, the "group of companies" requirement will not be met. The "group of companies" requirement is also a requirement for other sections of the Act that provide relief, for example, from STC and donations tax.


Professional bodies like SAICA have made submissions to National Treasury identifying the typical tax issues encountered in BEE transactions and suggested some solutions with regard to providing tax relief in this regard. Minister Trevor Manuel also announced in the 2004 Budget Speech that measures are being considered and investigated which would result in providing tax relief to employees and employers for equity participation in the employer companies by previously disadvantaged employees (PDE). It is suggested that this relief should be extended to BEE transactions in general.


Until such time as the Act has been amended to cater for tax relief for BEE transactions, companies should carefully consider the tax implications attendant upon their BEE transactions.




IT Act:S 1, definition "connected person", "group of companies",

IT Act:S 11(a),

IT Act:S 41,

IT Act:S 42,

IT Act:S 43,

IT Act:S 44,

IT Act:S 45,

IT Act:S 46,

IT Act:S 47, Part V,

IT Act:S 64B,

IT Act: 8th Schedule par 20