Paul Janisch

Enterprise Development and tax and thanks to Marisa

  Marisa is away on a two week holiday so she'll only read about this when she returns.  She and I were discussing enterprise development and ways of making contributions, most of which are contemplated in the Benefit Factor Matrix.

I hadn't noticed that there was a 100% benefit factor for an "interest-free loan with no security requirement supporting enterprise development", it was Marisa who pointed it out to me.  A recent judgment in the Supreme Court of Appeal now makes these loans taxable (reported in the Business Day on the 14th of September, 2007).  And I quote:

The appeal court ruled in favour of the South African Revenue Service (SARS), holding that the receiver had correctly assessed the companies to tax on the basis that the right to use loans interest-free had a money value and formed part of taxable income.

Now there is a thing for beneficiaries.  They will be taxed on this income - at least there is some justice in this world.

I must qualify this last statement.  I cannot comprehend the ludicrousness of an incentive to give interest free loans with no security (you'll notice that standard loans only carry a 60 - 70% benefit to the loaning company).  If they pay tax on the loans then they will at least experience some type of real world business practise.

Where in the real world do people get money at no interest rate and with no collateral.  I would hazard a guess and say NOWHERE!!!!!!!!   If beneficiaries just get used to this kind of loan they will fall horribly short when they go to any other lending institution, including the NEF,IDC, Khula. 

Enterprise development is about building sustainable businesses.  Sustainable businesses understand the cost of money and loans and the complexities of finance and the need for security on these loans.  Interest-free loans don't breed this kind of business.

I say get rid of that stupid nonsensical matrix and follow business principles and we will start getting somewhere.

BEE and tax - and lockins etc

I have been a bit slow here.  These two articles do have an impact on BEE, one more so than the other.

Income tax laws support BEE deals

BEE deals will happen - hopefully they'll soon become more like normal M@A deals in time and not specifically deals that are done with people because they are black (the lock-in clause on most deals demonstrates that it is a black face that is desired). 

I'll summarise the article but I do recommend that you read it.

Section 24N of the Income Tax Act  gives a helping hand to companies who are concerned about the effect that income tax would have on seller-financed sales of equity stakes.  This section overrides the general principle of tax law which declares that tax is payable on the full benefit of an amount paid in the year of assessment in which it occurs, even if payment of some of the benefit was planned to take place some time in the future. 

This amendment to the Income Tax Act actively promotes the seller-financed sale of equity stakes in businesses as the seller is only taxed on the proceeds of the sales as and when they become payable. 

Another benefit of the provision is that it makes empowerment deals work by deterring black economic empowerment entities from making an early exit from the transaction.

This was controlled through a provision which penalised the purchaser if it sold its holding before all the instalments had been paid. The capital gains tax became correspondingly higher as the base cost of the transaction was lowered.

The expert in the article was Professor Peter Surtees, a director at Deneys Reitz Tax Services

SAsolved

There was a lot of press about the new Sasol ownership deal that included white employees.  One article stated that the dti "rather than praising the deal, the trade and industry department on Friday slammed Sasol’s plan to include white employees in the employee share ownership programme element of the scheme."   You can read another article here.

When I read about this I thought that this behaviour was typical of all government departments, especially the dti.  It does seem this time that the Business Day and a few other publications might not have been reporting the complete story.  A letter from Vukani Mde (ministerial spokesperson, trade and industry department) to the Business Day yesterday put things in a better perspective (strange that I am leaning towards the dti - I normally relish in lambasting them).

This is the significant paragraph

We pointed out, however, that in terms of the process for awarding empowerment credits envisioned in the BEE codes of good practice, Sasol’s proposed employee share ownership scheme would fall short .... meaning it would not qualify as part of a BEE deal......... Sasol has since clarified that they do not intend to claim BEE credits with the scheme,  and the department is confident Sasol’s BEE deal is in line with the codes.

The debate then continues as to whether companies should include white employees in their ESOPs.  I think it's a good idea, especially if the scheme is used as a reward and retention scheme.  The chances are highly likely that the majority of employees within most organisations will be black - so you won't be messing with too many BEE points.  By limiting ownership to black employees only you could find yourself in all sorts of constitutional shit and on the wrong side of Solidarity.

That's sorted then.

EE October deadline looms

Did you see that jungle jim's appeal to remove white women as beneficiaries from employment equity has not been successful - White women still part of job equity - Mdladlana.  This does not mean that you don't have to submit your latest reports, deadline is October 1, 2007. 

I was asked by Jimmy and Manny of Supreme Hardware (they are out in Martindale, corner Main Road and Millar Street, JHB), to submit their latest reports.

I knew it was going to be hard,  but  I had  no idea  how much  information they require.  So I thought I'd dive in headfirst.  This is what I learned.

1. The EEA2A form is for smaller employers (less than 150), it is exactly the same as the standard form but you don't have to fill in as much (and I really pity larger employees).
2. There is NO EEA4A form - you have to fill in the standard EEA4 form which wants a "plethora" of information on wage differences and disparities.  This one will take a while to complete.
3. You can fill the forms in online.  I struggled like a demon getting it right. I phoned the DoL (0860101018) and spoke a fantastic guy called Robert who was really patient and helpful.  We eventually figured out that the problem lay with my browser (I use Firefox), so now I use IE for the submissions.  I also contacted Jan-Hendrik Munnik of EES-Siyakha to see if he had had any problems with the submission - he prefers the delivery to Labour's offices method.  (By the way EES has a comprehensive two day BEE conference coming up, I don't know why they haven't asked me to speak at it, but I'll give them a punt anyway).
4. The front page asks for some information that doesn't make much sense.  I found this spreadsheet that explains things quite well.

If you have to submit your reports and don't feel like doing it or need help - I'd be really happy to assist. Give me call or email me.

Cisco re-routes

And there I was getting so excited about HP.  Cisco has gone one better in my humble opinion.  All listed multinationals should be looking at this option.  Simply put, Cisco has provided Cisco Systems Inc (NASDAQ:CSCO) long-term share participation rights to numerous people within South Africa.  The CSCO shares are equal to the rather sterile figure of 25.1% of three local operations within South Africa.  There is also the traditional lock-in clause until 2017.  An explanation can be found on the Cisco website.

I have always loved this idea - you are now creating some serious wealth for new players.  The stock is no longer dependent on the performance of the local bourse, it is linked to the primary listing.  So if the the JSE goes south on its own and the NASDAQ pumps you are in the pound seats.

Now - what isn't clear is how they did this.  The codes tried to make it as difficult as possible for this to happen.  Paragraph 6 of Code 100, statement 103 (recognition of equity equivalents for multinationals) is the relevant section.

6.3 In calculating their ownership score. Multinational Businesses may recognise sales of Equity Instruments in non-South African Enterprises to black people, on the following basis:

6.3.1 the non-South African Enterprise must form part of the chain of ownership between the Multinational Business and its eventual holding company; (this is not too difficult) and
6.3.2 the transaction must comply with South African exchange control requirements; (this limits the maximum investment of each person to about R500k per year and to the best of my knowledge it is only natural people who can do this) and
6.3.3 the percentage of the value of the Equity Instruments sold to the value of the Multinational Business represents the recognisable black claim to Economic Interest (again not too difficult)
6.3.4 the percentage of Exercisable Voting Rights ceded to the buyers of the Equity Instruments in the Multinational Business represents the recognisable black right to Exercisable Voting Rights; (this is the bugger, there has to be a cession of rights in the local operation, this is probably VERY difficult.  Shareholders have voting rights on the shares and shares in the parent company are attached to the company as a whole, not its subsidiaries).and
6.3.5 the rights of ownership in the Equity Instruments are comparable to rights that would have accrued had the Equity Instrument B-BBEE  in the Multinational Business.

Cisco has somehow got around this.  We not quite the  press release does state that "the transaction is subject to customary closing conditions, including regulatory approvals".