Does the tax opinion provide the Taxpayer with the required level of “comfort” in the tax risk management of a transaction?

The Coronation and Thistle Trust income tax cases (Supreme Court of Appeal) and the Hudaco “settlement” with SARS shared two common features:?

• in all three scenarios referred to above the taxpayers were in possession of tax opinions (whether in terms of section 223 or otherwise) from prominent tax practitioner that supported the tax treatment of the transactions; and
• the taxpayers lost their cases the Supreme Court of Appeal (Coronation and Thistle Trust) while Hudaco decided to settle rather than go to court. The conclusion on these matters will probably result in substantial tax payments to SARS unless appeals to the Constitutional Court succeeds (Coronation and Thistle Trust).

Tax is an expense that should be managed like any other expense and a corporate will therefore attempt to minimize the cost thereof.?It may be useful to “position” the role of the tax opinion (and external tax advice) in the overall tax risk management (“TRM”) and as part of managing tax as an expense by the corporate. The TRM of a corporate would normally include its “tax risk appetite” which, as I see it, is the total amount / level of exposure the corporate is willing to put at risk in relation to tax and the tax treatment of transactions. If such tax risk(s) materialize it will in all probability result in tax payments to SARS.

The tax risk appetite and approach to tax risk management will differ between corporates. Some corporates have a “healthy” appetite to take on tax risk while others are very conservative and have almost zero tax risk tolerance and would even prefer to avoid any form of tax uncertainties. Ascertaining the tax risk appetite/level of tax risk tolerance of a corporate is, in my opinion, crucial for its tax practitioner as it will determine the level of comfort required from a tax opinion by the corporate. In my concluding remarks I will refer to this “relationship” between the corporate and its tax practitioner and why they should be in sync.

The corporate would normally approach their preferred tax practitioner with the purpose of obtaining a tax opinion on the treatment of a particular transaction(s). The tax opinion may be obtained for various purposes including:?

1. guidance on the tax consequences of the particular transaction where the corporate has no “internal view” (tax perspective) on the treatment thereof. The corporate is looking towards the tax practitioner for “the answer” and a section 223 “likelier than not” opinion for purposes of avoiding penalties; or
2. the corporate has formulated an “internal/preferred view” on the tax consequences of the particular transaction but would like to have it “reviewed” by their external tax practitioner and want to use the tax practitioner to act as “sounding board” for their view. The tax practitioner will provide his/her advice and views and issue a section 223 “likelier than not” opinion for purposes of avoiding penalties; or
3. the corporate finalized their “internal/preferred view” on the tax consequences of the particular transaction and the tax practitioner is purely approached for purposes of a section 223 opinion. (I often refer to this as the CYA opinion-frequently found in large corporates).

A corporate can never “outsource” the tax risk management (of a transaction) to the tax practitioner and the tax opinion can never substitute the corporate’s obligation to manage its tax risk associated with a transaction(s) within its TRM processes. The tax opinion is but one of the “tools” available to the corporate in managing the tax risk associated with the transaction. In analyzing the role of the tax opinion (and specifically a section 223 opinion) in the management of the tax risk by the corporate it is important to note that a tax opinion:

• is no guarantee that SARS will agree with the tax treatment of a particular transaction (and tax opinion).
• is just an “opinion” i.e., the considered view of a tax practitioner where he applied his mind, knowledge, and experience to the facts, as provided to him.
• provides for just a > 50% chance of success if the matter proceeds to Court (my interpretation of the “odds” is therefore that the chance of success for the taxpayer is anything from 51% to 99,9%).
• is no guarantee that the courts (including the Supreme Court of Appeal) will agree with the conclusion in the tax opinion (IF the corporate is willing to actual go the litigation route on a particular tax matter)

The tax opinion however remains a very important tool in the tax risk management process of a corporate but is certainly not the only one. The “value” of the tax opinion can, in my opinion, be greatly enhanced if the tax practitioner has a broad understanding of the specific corporate’s tax risk appetite / level of tax risk tolerance. Is the tax practitioner aware of whether:?

• the corporate (its client) is looking for 51%, 99% (or something in between) in terms of level of “comfort” from the tax opinion?
• the corporate actually “have the stomach” to go to Court if SARS does not agree with the tax treatment of a transaction the tax practitioner opined on?

The tax opinion issued by the tax practitioner, in my view, becomes a much more powerful tax risk management tool when issued within the context of the corporate’s tax risk appetite and level of tax risk tolerance. Once the tax practitioner and the corporate are in sync regarding the level of tax risk appetite (and tolerance), the tax opinion becomes a much more client focused and value-added document and not merely a “ticking the box” for purposes of avoiding understatement penalties in terms of the Tax Administration Act.