Cross-border tax is tricky, it has subtleties that are sometimes not apparent and will eventually have to be decided in a court of law. This appears to be the situation with Coronation.
The Supreme Court of Appeal judgement handed down ordered that:
- Coronation has to pay the additional tax imposed by SARS.
- Coronation has to pay the interest due on those taxes.
- Coronation was not liable for understatement and underestimation penalties because the understatement was a bona fide error.
- Coronation has to pay the legal costs for SARS and SARS has to pay the legal costs for Coronation.
Market impact
Coronation has not yet quantified the costs. However, in their recent news release management says that this will have a material impact on earnings and cash flow, so they do not expect to declare an interim dividend.
Last year, Coronation paid an interim dividend of R2.14 per share. The cash flow impact of the dividend was about R750 million. So this could be an indicator of the quantum of the tax bill they are expecting to pay.
Immediately prior to news of the tax judgement, Coronation’s share price was around R35.05 and it ended up closing at R31.80 on 8 February 2023 (See Figure 1). That is a drop of R3.25, which means the market is expecting a hit to cash flow of about R1.136 billion. This is significantly higher than the implied cost of a missed interim dividend.
Full report available here: Coronation Fund Managers analysis of SCA judgement and market reaction
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