Financial institutions often offer local government authorities, public entities and private sector institutions structured loans that carry interest rates that are below the prevailing commercial lending rates. The common denominator in many of these structured loans is that the tax benefit that is derived from aggressive tax structuring is used to "subsidise" the borrower’s cost of borrowing.
Although the borrower has the benefit of the reduced interest rate, the so-called "tax risk" (i.e. the possibility of the tax structure being successfully contested by SARS resulting in the financial institutions paying additional tax) is invariably passed on to the borrower. This means that, in the event of the tax structure being dismantled, the borrower would be faced with a substantial "tax risk" liability towards the financial institution which has to pay the additional tax. The elimination of the tax benefit, in effect, means that the interest rate "subsidisation" previously generated by means of aggressive tax structuring disappears, whereafter the interest rate charged by the financial institution reverts retrospectively to a market-related rate.
It is becoming evident that certain borrowers have, in the past, received substantial loans at significantly reduced interest rates from a number of financial institutions. SARS wishes to alert recipients of loans that depend on aggressive tax structuring for the low interest rate offered, that such borrowers could potentially face cash flow problems through the cumulative effect of the "tax risk" liabilities that, in the foreseeable future, could be passed back to them should SARS raise assessments for additional tax on financial institutions that have engaged in such aggressive tax structuring.
SARS strongly urges users of structured loans to ensure that they clearly understand the tax assumptions underlying any structured loan involving aggressive tax planning and that they are financially capable of assuming the risk that they carry contractually in respect of the so-called "tax risk".
ISSUED BY THE COMMISSIONER FOR THE SOUTH AFRICAN REVENUE SERVICE