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Oct. 3 — South Africa's tax authority is warning shareholders of global brewing company SABMiller Plc against participating in share transactions purely to benefit from a tax deferral on the back of the $104 billion takeover by Anheuser-Busch InBev NV.
The transactions involve shareholders disposing of their shares during the takeover to collective investment schemes—also referred to as unit trusts or pooled investments—through an asset-for-share swap.
Since a tax event isn't triggered at this stage, no capital gains tax is due as per rules exempting such schemes, until the original shareholders dispose of the units received in exchange from the schemes.
At the heart of the matter are concerns that the schemes consider the disposal is on capital account, and that they received the shares through a tax-free transaction and will dispose of them through a tax-exempt transaction.
SABMiller shareholders that don't opt for this and take a cash offer instead would incur a full taxable event. A part-share, part-cash transaction would be considered a partial reorganization, taxable when the shareholder disposes of shareholdings.
The tax dispute comes during the final stages of the Anheuser-Busch InBev takeover of SABMiller, which will unite brands such as Corona, Stella Artois, and Castle Lager under the world’s largest brewing company.
The South African Revenue Service (SARS) is warning that while the swap may be permitted under section 42 of the Income Tax Act, 1962, the tax consequences could also amount to “impermissible avoidance arrangements.”
“SARS would like to point out that if it is found that the proceeds are instead on revenue account it will have a detrimental effect on the Scheme and particularly current unit holders,” the revenue authority said in a Sept. 29 notice.
It said that it hasn't made a ruling on this question yet “but it is likely that the proceeds from the intended disposal of the shares by the schemes would not be of a capital nature as the schemes deliberately acquired the shares with the intention of disposing of them.”
In an interview with Bloomberg BNA—without referring to SABMiller—Franz Tomasek, group executive for SARS legislative R&D division in Johannesburg, said there may be serious tax considerations for such transactions.
“Since the shares are being acquired and then disposed of during the very short takeover period, it does look like something occurring in a revenue account. But collective investment schemes don't have an exemption for dealings on revenue account, therefore this could be subject to normal income tax at full rate,” said Tomasek.
Further, collective investment schemes have 12 months in which to pass on profits to unit-holders, who are then taxed at the rate applicable to them, depending on whether their status is that of an individual or corporation.
SARS warns that the schemes will therefore have to pay tax on any profits derived from the transactions.
Tomasek said that where it is quite obvious that transactions are being carried out solely to defer tax, they start to trigger conditions for anti-avoidance.
South African legislation sets out three primary conditions that must be met for such market activity to be considered among the “impermissible avoidance arrangements”—including deferral of tax; sole purpose to gain a tax benefit; and the third, which relates to a lack of commerciality.
“Given that the transactions are aimed at postponing potential capital gains tax liabilities, two of the requirements for the existence of an impermissible avoidance arrangement appear to have been met. These are that the transactions result in a tax benefit, which includes the postponement of tax, and that the transactions’ sole or main purpose was to obtain a tax benefit,” SARS said in the statement.
In the case of SABMiller, the commerciality of the transaction would still have to be investigated by the revenue authority.
SARS added in the statement that a detailed analysis of the facts and circumstances of the transactions entered into would be required to determine whether these and the remaining requirements have been met.
“SARS wishes to advise original shareholders and schemes to carefully consider the questions set out above with respect to any decisions to enter into the transactions described.”
Richard Farnsworth, SABMiller’s group media spokesman, declined to provide comment.
Keith Engel, chief executive of the South African Institute of Tax Practitioners, told Bloomberg BNA the majority of SABMiller shareholders entering into the transaction would opt for currency, benefitting from the strength to the South African rand to the British pound.
“For this there would be tax consequences without a deferral, while shareholders would also have the option of swapping their shares, on a tax-free-basis, however, if you get the overseas equivalent in shares, it would be subject to tax,” he said.
Engel added that many in the tax field don't view the decision facing shareholders as a major tax avoidance issue because shareholders where simply looking to extract maximum benefit for their shares by deciding whether to cash-in or hold-onto their shares.
“Deferral of shares is an international standard, which happens all over the world,” he said.
The so-called “megabrew” takeover—the largest corporate deal in U.K. history—is set to close Oct. 10, while shares of the new company are due to start trading on stock exchanges worldwide three days later, according to a Sept. 28 statement from SABMiller.
SABMiller’s stock has risen by 24 percent since reports of AB InBev’s interest in the London-based brewer were first reported in September 2015. The company had group revenue of 24.1 billion for the year through March 2016, according to its annual report.
In the last 10 years, SABMiller's share price has soared 352.2 percent to 44.95 pounds ($57.90), according to data compiled by Bloomberg BNA.
Minority shareholders representing 75 percent of SAB Miller’s value to approve the deal last week at a meeting in Brussels, the statement said.
The brewer’s two largest shareholders—Malboro maker Altria Group Inc. and BevCo Ltd., the holding company of Colombia’s Santo Domingo family—were treated separately to other investors and formed one class of stock for voting purposes following an Aug. 28 ruling from the U.K. High Court.
The court ruling came about due to the two options that AB InBev gave to SABMiller shareholders for the takeover: an all-cash bid or a cash-and-stock alternative. The Leuven, Belgium-based brewer designed the cash-and-stock alternative for Altria and BevCo as a way to reduce their capital gains taxes through the reduced amount of cash.
Yet other SABMiller shareholders, such as Aberdeen Asset Management Plc, saw the structure as unfair.
Altria’s 430 million shares in SABMiller—the world’s third largest brewer by market capitalization—have a value of $25 billion. The Santo Domingo family’s 225 million shares, meanwhile, are valued at $13 billion, according to data compiled by Bloomberg BNA.
The Santo Domingos, Colombia’s richest family, control their $15.9 billion fortune through New York-based investment company Quadrant Capital, according to the Bloomberg Billionaires Index.
Together, the two companies control almost 41 percent of the Peroni and Beck’s brewer.
With assistance from Edwin Naidu in Johannesburg and Thomas Buckley in London.
To contact the editor on this story: Rita McWilliams at email@example.com
Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.
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