THE South African Revenue Service (SARS) has achieved a coup of sorts by settling its pending disputes with major institutions and expects to receive about US $435 million.

The SARS has resolved its disputes with large institutions relating to cross border transactions, and entered into settlement agreements that are expected to yield a total value in excess of Rand three billion (US $435 million). SARS has also received an undertaking from these institutions not to enter into similar or substantially the same transactions in future as well as terminate the tax effects of these transactions immediately.

According to the SARS press release, the disputed cross border transactions constituted unacceptable tax avoidance that inter alia, eroded the South African tax base. The institutions, which were not identified, claimed that they had acted in good faith when they entered into the transactions in light of independent legal advice furnished to them at the time.

Such cross border transactions, encountered by tax administrations worldwide, are aimed at using double taxation avoidance treaties between countries or permissible relief measures in domestic law to generate tax benefits, states the release. Such tax benefits usually flow from the fact that the tax relief claimed is in excess of any economic double taxation that has occurred on post tax dividends or interest income. The benefits are shared between the institution and its foreign counterparty through the pricing of the transactions that typically lead to a financial loss for the institution in the absence of tax benefits.

Such transactions have been challenged internationally. While SARS continues its investigations into similar transactions, it has encouraged participants to explore dealing with such transactions in a non-litigious manner.