Coronation Fund Managers counts cost of Sars tax battle

Asset manager Coronation Fund Managers issued a cautionary notice this week to advise shareholders that it expects its earnings per share and diluted headline earnings per share to fall between 45% and 55% for the year to September 2023.

Fund management earnings per share are expected to decrease by between 55 and 65%. Fund management earnings are used by management to measure operating financial performance, being profit for the period excluding the net mark-to-market impact of fair value gains and losses, and related foreign exchange, on investment securities held.

The company has attributed the expected material changes to the financial impact of the Supreme Court of Appeal judgment in respect of recent tax litigation relating to the group’s international operations.

The full impact on earnings of the tax and interest related to the tax ruling amounts to 205 cents per share.

Earlier this year, Coronation Fund Managers did not issue an interim dividend – owing to the material financial impact of the judgment.

The dispute between the South African Revenue Service (Sars) and Coronation relates to whether or not the income of Coronation Global Fund Managers (CGFM), registered and tax resident in Ireland, should be included in the taxable income of the South African holding company, Coronation Investment Management SA (Cimsa).

Sars first raised the issue in 2017, and the market has not responded well. Coronation’s share price has plunged 46% from a high of R54.62 in April 2019 to close at R29.45 on Wednesday, 25 October.

The court of appeal ruled earlier this year that the case would depend on what the primary functions of CGFM in Ireland were.

“If it were found that the primary operations were conducted in Ireland, then [a tax] exemption would apply.

“CGFM had adopted an outsource business model where its investment management function was conducted by Coronation Asset Management in South Africa and Coronation International Limited in the UK,” a statement from Sars noted.

In a nutshell, the court found that the primary operations of CGFM’s business – and, therefore, the business of the controlled foreign company as defined – was that of fund management, which includes investment management. These were not conducted in Ireland, said the court.

Therefore, CGFM did not meet the requirements for the tax exemption and was ordered to pay additional taxes and interest.

Coronation has indicated that, as at 31 March 2023, the estimated effect of the ruling will be an additional financial obligation of R716-million – made up of R529-million tax and R187-million in interest – for the 2012 to 2022 tax assessment years.

Coronation’s chief financial officer, Mary-Anne Musekiwa, indicated in court papers that both PwC and Ernst & Young were comfortable that the CGFM business qualified for a foreign business entity tax exemption.

Musekiwa said any understatement that existed as a result of Cimsa claiming the exemption constituted a bona fide inadvertent error, and that any underestimation of provisional tax was not a result of negligence, deliberate conduct or a serious failure to calculate the estimate.

The Constitutional Court has issued a directive that it will hear Coronation’s application for leave to appeal, and hear arguments on the merits of the matter, but has not yet set down a date. DM