M. Stiglingh

The timing of the recognition of a liability for secondary tax on companies in accordance with international financial reporting standards

United States Generally Accepted Accounting Practice (“US GAAP”) generally requires taxes to be measured at the rate applicable to distributed profits, while International Financial Reporting Standards (“IFRS”) requires the undistributed rate to be used. This current conflict between US GAAP and IFRS has particular relevance in South Africa, which has a dual tax system as a result of Secondary Tax on Companies (“STC”) being levied when a company distributes its profits. Currently, under US GAAP, South African companies would be required to raise a liability for the tax that would become payable on the future distribution of profits, while under IFRS, this is only recognised when the profits are distributed. The objective of the study is, therefore, to consider the timing of the recognition of a liability for STC. The literature study has indicated strong arguments for both the recognition of a liability for STC prior to the declaration of a dividend and the non-recognition of a liability for STC prior to the declaration of a dividend. The empirical study, however, concluded that the recognition of a liability prior to the declaration of a dividend is not appropriate, as a majority of the respondents believe that no “past event” has occurred and therefore the definition of a liability in terms of the IASB Framework is not satisfied. The results of the empirical study, however, also indicate that if the “past event” hurdle could be overcome, uncertainty exists as to whether the recognition of a liability for STC prior to the declaration is appropriate. This is as a result of mixed opinions among the respondents as to whether the “probability” and “measurability” criteria, in terms of the IASB Framework, could be satisfied prior to the declaration of a dividend.

Recognising an STC liability versus recognising a deferred tax asset for unused STC credits according to the IASB framework : a comparison

South African companies have, in the past, not recognised an asset for unused Secondary Tax on Companies (“STC”) credits. AC 501, Accounting for “Secondary Tax on Companies (STC)”, which is effective for annual periods beginning on or after 1 January 2004, now requires South African companies to recognise a deferred tax asset for unused STC credits, to the extent that it is probable that an entity will declare dividends of its own, against which the unused STC credits can be utilised. In terms of AC 501 and IAS 12 (AC 102), Income Taxes (the local and international accounting standard on income taxes), the recognition of a liability to pay STC has to be postponed until the declaration of a dividend. Some accounting commentators have indicated that they find it anomalous to recognise a deferred tax asset in respect of unused STC credits, while no liability is recognised for the STC that would be payable on the future distribution of retained earnings. The objective of the study is to consider whether it is conceptually anomalous to recognise a deferred tax asset for unused STC credits while no liability is raised for the STC that would become payable on future dividend declarations on profits already recognised in the financial statements. The study concludes that it is conceptually anomalous to recognise a deferred tax asset for unused STC credits when no corresponding liability is raised.

Tax transparency reporting by the top 50 JSE-listed firms

As a result of increased regulatory focus on a number of firms’ tax behaviour, tax compliance is now recognised as a source of reputational risk. Transparency on the reporting of tax related matters in public corporate reports could mitigate a firm’s reputational tax risk. In this study, we develop a framework to evaluate tax transparency in such reports. This framework is then applied to the corporate reports of 50 large firms in South Africa to identify the performance of these firms in terms of the framework. We find that 86% of the firms comply with more than 70% of the mandatory tax reporting requirements. We also show that 50% of the firms are transparent regarding their disclosure of tax strategy and risk management, tax figures and performance, their total tax contribution and the wider economic impact of their tax behaviour.

Integrated Thinking and the Transparency of Tax Disclosures in the Corporate Reports of Firms

The purpose of our study was to link two global corporate developments, namely integrated thinking and the transparency of tax disclosures. The International Integrated Reporting Councils long-term vision is for integrated thinking to be embedded in mainstream business practice, facilitated by integrated reporting. The development of the transparency of tax disclosures was driven by tax avoidance practices of multinational companies. The vision of embedding integrated thinking into mainstream business and the increased focus on the transparency of tax disclosures have developed independently, but thus far there has been no serious consideration of how they may be related. We argue that there is a natural relationship between these two developments. We use PwCs (2014) framework for measuring the transparency of tax disclosures and apply the framework to the corporate reports of a sample of 45 large firms. We use regression analysis to test the association between the transparency of tax disclosures in corporate reports and integrated thinking and find them to be positively associated.

Determinants of internal tax compliance costs : evidence from South Africa

Small businesses tend to rely on external service providers (tax practitioners, accountants, lawyers and bookkeepers) for assistance with their tax affairs. Payments to external service providers clearly affect a small business’s tax compliance costs. This study uses multiple regression analyses to investigate the key drivers of small business external tax compliance costs. This will assist Revenue Services in understanding what factors (determinants) could increase a small business’s external tax compliance costs and might assist in managing tax compliance behaviour and contribution. Overall, the results show that although the legal form, age, use of small business tax concessions, level of education of the respondents and the type of accounting system used are statistically significant determinants of external tax compliance costs, turnover is the greatest determinant. The results also indicate that external tax compliance costs are regressive in relation to the size of a business, confirming previous research findings in this arena.

The Complexity of Tax Simplification: Experiences from South Africa

Tax system simplification requires a balance between the competing goals of efficiency, equity, and administrative ease (World Bank, 2009, p. 6). The World Bank’s notion is honourable and makes intuitive sense. However, for the South African government (past and present), the reality is that tax reform efforts are nearly always negated by political and economic objectives, tipping the balance towards the goal of equity in lieu of efficiency and administrative ease. Despite this, historical tax reform crusades by the South African government in some instances did result in tax simplification interventions.

Applying the probability recognition criterion to recognise a deferred tax asset for unused ‘secondary tax on companies’ credits

According to AC 501, Accounting for ‘Secondary Tax on Companies (STC)’, a deferred tax asset for unused STC credits is recognised if it is probable that an entity will declare dividends against which unused STC credits can be used. This study examined the dividend declaration profile of companies recognising a deferred tax asset for unused STC credits to satisfy AC 501. In a literature review, the term ‘probable’ was analysed, showing that future dividend declarations are only regarded as ‘probable’ if their likelihood is 64% to 79%. A survey revealed that 45% of the surveyed companies with unused STC credits recognised a deferred tax asset for unused STC credits in their 2004 financial statements, and therefore believed they had satisfied the probability recognition criterion in AC 501. The survey also showed that companies that recognised a deferred tax asset have a dividend policy shareholders are familiar with, and most declare dividends annually. These two indicators can help assess the probability of future dividend declarations.

The source of a debt defeasance receipt

A debt defeasance arrangement is an arrangement whereby a debtor’s obligation to pay a creditor is nullified. The debtor and other parties perform a variety of legal and other actions in order to effect a valid debt defeasance arrangement. One of the actions that should be taken by the debtor is to pay an amount to a third party who takes over the obligation to pay the debt. The money received by the third party is referred to as a debt defeasance receipt. Debt defeasance arrangements are used in countries such as the United States of America and Australia. The financial community in South Africa is becoming increasingly interested in the debt defeasance arrangement. As South Africa is becoming part of the global community, more foreign companies are doing business in South Africa. Because it is a relatively unfamiliar arrangement, that has not yet been addressed by the South African taxation authorities, there are probably a number of unanswered tax questions regarding the arrangement. One issue that is not yet clear is what the source of a debt defeasance receipt would be if it were to be received by a non‐resident in South Africa. A survey was done among South African banks, auditing firms and taxation senior counsel to determine the majority opinion of South African respondents regarding the source of a debt defeasance receipt. Although a variety of alternatives are identified as possible sources, the majority view is that the source is the debt defeasance business activities that are conducted by the recipient. It therefore follows that if the recipient of a debt defeasance receipt conducted his or her debt defeasance business activities in South Africa, the receipt will be of a South African source.

Openbaarmaking van belastinginligting in die finansiële verslae van maatskappye : vereistes, riglyne en mate van voldoening

The purpose of this study was to determine the requirements and guidelines for the disclosure of taxation information in the financial reports of South African companies in order to determine the extent to which leading South African companies comply with these requirements and guidelines. It was determined that there are comprehensive requirements and guidelines in respect of the disclosure of taxation information in the financial reports of South African companies. These requirements and guidelines are regulated by the Companies Act, No. 61 of 1973, as well as the statements of Generally Accepted Accounting Practice that are issued by the South African Institute of Chartered Accountants. The analyses undertaken of the financial statements of the selected companies indicate that leading companies in South Africa comply to a large extent with the requirements and guidelines for the disclosure of taxation information in financial reports.