Cornered! Losses as Absa Loses Sh438.3bn Battle
Key Highlights
- South Africa’s Constitutional Court ruled Absa participated in an impermissible tax avoidance arrangement.
- The dispute involved R1.9 billion (approximately 438.3 billion Ugandan Shillings (UGX) in preference share transactions linked to complex financial structures.
- SARS successfully reclassified tax-exempt dividends as taxable interest for 2014–2018.
- The court rejected Absa’s defence that it lacked knowledge of the full scheme.
- The ruling strengthens SARS’s authority to target complex corporate tax avoidance strategies.
Constitutional Court Delivers Final Verdict in Long-Running Dispute
South Africa’s Constitutional Court has concluded an eight-year legal battle between Absa Bank, its subsidiary United Towers, and the South African Revenue Service (SARS), issuing a decisive ruling on tax avoidance.
The court dismissed Absa’s appeal and confirmed that the bank was part of an impermissible tax avoidance arrangement tied to a series of preference share transactions valued at approximately R1.9 billion (approximately 438.3 billion Ugandan Shillings (UGX).
The case centred on transactions executed between 2011 and 2015, in which Absa invested in preference shares structured through multiple entities. These investments generated dividend income that the bank treated as tax-exempt.
SARS Reclassifies Income and Wins Legal Backing
SARS challenged the arrangement, arguing that it was deliberately structured to convert taxable interest into tax-free dividend income.
According to the tax authority, the scheme involved a layered structure including offshore trusts, financing vehicles, and Brazilian government bond transactions. This configuration enabled a circular flow of funds designed to reduce tax liability.
Invoking South Africa’s General Anti-Avoidance Rules (GAAR), SARS reclassified the dividends received by Absa as taxable interest and issued additional tax assessments covering the 2014 to 2018 financial years.
The Constitutional Court upheld this position, concluding that the financial arrangement, when stripped of its artificial elements, functioned as a loan generating taxable interest rather than legitimate dividend income.
Court Rejects “Lack of Knowledge” Defence
A central issue in the case was whether Absa could be considered a participant in the tax avoidance scheme despite claiming limited knowledge of its downstream components.
Absa argued that it was not aware of key elements of the broader structure, including offshore trusts and additional financial transactions, and therefore could not be held accountable.
The Constitutional Court rejected this argument.
In its majority judgment, the court ruled that participation in a tax avoidance arrangement is determined by a taxpayer’s role in the transaction, not by their level of knowledge.
The judgment emphasized that allowing companies to avoid liability based on incomplete knowledge would undermine the effectiveness of anti-avoidance laws and enable deliberate ignorance.
The court held that Absa’s involvement in the transaction chain was sufficient to classify it as a “party” to the arrangement.
Tax Benefit Confirmed Under Economic Substance Test
The court also addressed whether Absa derived a tax benefit from the arrangement.
It found that the bank received enhanced income through the scheme, even if the immediate tax advantage arose elsewhere within the structure.
Applying an economic substance approach, the court assessed the transaction without its avoidance features. It concluded that, in substance, the returns represented taxable interest that had been disguised as tax-exempt dividends.
This recharacterisation confirmed that Absa obtained a tax benefit within the meaning of GAAR.
Dissent Raises Concerns Over Fairness and Legal Limits
A dissenting judgment argued that liability should not extend to parties unaware of the full arrangement.
The dissenting view held that knowledge is essential to being considered a participant in an arrangement and warned that the majority’s interpretation could expose taxpayers to consequences for transactions beyond their awareness. It also questioned whether Absa itself obtained a direct tax benefit, suggesting that the advantage may have arisen elsewhere in the structure.
Wider Implications for Corporate Tax Planning
The ruling marks a significant expansion of SARS’s enforcement powers under GAAR.
The court confirmed that SARS can act against any party connected to a tax avoidance arrangement, not only those directly responsible for structuring it.
The judgment reinforces the authority of tax regulators to recharacterise transactions based on their economic substance rather than their legal form.
It also places greater responsibility on financial institutions and investors to fully understand the structures they engage in, including downstream components and associated risks.
Experts note that the decision will influence how companies approach structured finance deals and compliance oversight, as institutions can no longer rely on limited visibility as a defence.
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