In addition to tax liabilities (tax capital amounts), taxpayers are also subject to an array of penalties and interests in respect of late payments, understatements, specific punitive penalties, and compliance-related penalties in terms of various tax Acts, such as the Income Tax Act, and the Value-Added Tax Act. This is often the case when there are uncertain tax positions, where taxpayers had to take a view on specific interpretations on a tax Act, or where assessments have not been finalised and there is a potential threat of penalties.
These uncertainties are often an impediment to the conclusion of transactions and deals, and one often finds in agreements that an amount has to be kept in trust (or escrow) to accommodate any potential or unforeseen tax liabilities which may arise as a result of the transaction. These amounts that have to be withheld (or “parked”) until such a time that a dispute or matter has been finalised, come at a significant interest cost and parties to the agreement do not always favour this as a standard term in agreements.
Internationally, there has been an increase in the number of instances where persons can insure their tax positions as they relate to tax capital, interests, and penalties. In other words, no amounts have to be kept back in trust/escrow, and parties are free to conclude and finalise transactions with full cash flows. Rather, instead of having the escrow amount, taxpayers insure their position by payment of a monthly premium in respects of their exposure to an insurance business. The cumulative premiums in this regard is, firstly, significantly less than the amount that has to be withheld and, secondly, does not mean an immediate cash flow in respect of such amounts. Your tax obligations are therefore fully insured, in a similar fashion to how you would insure your motor vehicle.
The South African insurance industry has not fully caught up with these international trends and there are very few (if any) comprehensive insurance products available to insure tax positions, in respect to unsure tax positions. On face-value, such insurance products appear to cater to “aggressive” or “abusive” schemes, and for taxpayers who want an “out” in respect of abuse of the tax system. However, this is not the case at all – such insurance products accommodate for ease of transaction flow, saving on transaction costs, keeping companies liquid, removing uncertainty from transactions, and facilitating deal flows without fear of adverse tax consequences.
One would hope that the South African insurance market is cognisant of international trends and that they consider making such products available locally, since the risks relating to the product can be proactively managed by both the insurers and the insured party, with the assistance of suitably qualified tax professionals.
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)