Not many companies can brag about playing a role in rearranging a country’s tax policy.
Edcon can, though it probably doesn’t want to.
For a few years after Bain Capital swooped on the country’s largest nonfood retailer, the SA Revenue Service (Sars) seemed unperturbed about the loss of one of its largest corporate contributors.
This changed dramatically in 2011. It was as though Sars suddenly realised that Bain Capital’s tight grasp on Edcon’s profit flow wasn’t going to be released for some time, spelling disaster for Sars’s coffers.
This is how it worked: in 2008, Edcon reported a trading profit of R1.9bn and a tax liability of R429m, but it was saved from actually having to hand over this money by a huge R2.5bn of net financing costs, which led to a net loss of R1.3bn. It was a similar story in 2009 (a net loss of R640m) and 2010 (a net loss of R1bn).
By now Sars had realised that something had better be done. So in June 2011 it made a dramatic announcement: there was to be an 18-month suspension of the use of section 45 of the Income Tax Act, which allows for a group to be restructured without creating a tax liability.
After a huge backlash from the investment community, treasury toned down its proposals.
The 18-month suspension was lifted, and treasury said it had no problem with restructuring that didn’t pose a significant risk to the tax base.
"Government continues to be committed to allowing the use of section 45 to facilitate the tax-neutral movement of assets between members of a group of companies which do not give rise to artificial structuring to avoid paying taxes," it said.
Instead of closing down section 45 oversight, it was simply tightened.
Then, in August 2012, the inevitable happened. Sars announced it was unhappy with Edcon’s tax treatment of interest payable on the financing of the Bain acquisition.
Keen to avoid messy public litigation, Edcon settled with Sars — though its CFO at the time, Mark Bower, said the board believed it was in compliance with the law.
Edcon didn’t reveal the financial impact of the settlement, but analysts reckoned the group would have to pay tax sooner than it had expected.
The company also agreed, with effect from 2014, to limit its deduction (for tax purposes) of interest on some of its debt.
Edcon never warned its bondholders of the risk of a new tax assessment, only of how SA’s investment environment was being hindered by unemployment, poverty, crime and a relatively low level of education.
Which is pretty much why government desperately needs a tax system with integrity to finance these goals.