Coronation HY dividend hangs in balance as court orders it to pay up in tax case

Fund manager anticipates a material impact on earnings and cash flows.

Fund management company Coronation said it might not pay an interim dividend after the Supreme Court of Appeal (SCA) ordered it to pay additional taxes linked to its Irish operations in a ruling in favour of the South African Revenue Service (Sars).

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SCA judgment

In the SCA judgment handed down on Tuesday, the fund manager was ordered to pay additional taxes (with interest and costs) in respect of profits earned by its international operations, Coronation Global Fund Managers (CGFM) based in Dublin.

It did however dismiss Sars’s claim for penalties.

Coronation said it is in the process of quantifying the financial implications, indicating that it anticipates a material impact on earnings and cash flows.

Coronation set to appeal ruling

It said it is considering appealing the judgment.

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“The company maintains, based upon consistent professional advice, that its tax treatment has been appropriate, and is therefore naturally disappointed by this judgment,” the fund manager said in a cautionary annoucement on Wednesday.

Following the court order, the result of an appeal by Sars, Coronation’s share price shaved 11.05% off its value on Wednesday to close the trading session at R31.80.

Coronation at loggerheads with Sars

Sars and Coronation have been in court over a dispute about whether the profits of Coronation Global Fund Managers (CGFM), the asset manger’s subsidiary registered in Ireland, should have been included in the taxable income of its South African holding company, or whether it qualified for a tax exemption.

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Whether a tax exemption on income earned by CGFM is applicable depends on the primary functions of CGFM in Ireland; if the primary operations are conducted in Ireland, then the exemption applies.

“Of particular significance is that CGFM has adopted an outsource business model and the attendant ramifications that may have for its tax status,” the SCA said in its ruling.

“Aligned to this is whether the primary business of CGFM is that of investment (which is not conducted in Ireland), or that of maintaining its licence and managing its service providers (which is conducted in Ireland),” it further said.

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During the 2012 tax year, Sars assessed Coronation’s tax liability to include the Irish CGFM’s entire profits, but Coronation later appealed this, with the Western Cape tax court ruled in favour of Coronation. It argued that CGFM was a foreign business establishment and thus qualified for a tax exemption.

Listen to Fifi Peters discussing the ruling with Pieter Janse van Rensburg of AJM Tax (or read the transcript here):

This article originally appeared on Moneyweb and was republished with permission.
Read the original article here.

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