Naspers runs into tax pressure

• Deal aims to close valuation gap and boost free float of Prosus

Only a day after investors had to absorb a new plan by Naspers to address the long-standing gap between its market value and the sum of its parts, investment bank

JP Morgan said the Cape Town tech investor must pay more tax. This adds to growing calls for large technology investors to pay taxes in their countries.

Only a day after investors had to absorb a new plan by Naspers to address the long-standing gap between its market value and the sum of its parts, investment bank JP Morgan says the Cape Town tech investor must pay more tax.

This adds to growing calls for large technology investors to pay taxes in their countries.

A share swap deal — also intended to cut Naspers’s size on the local stock exchange and boost the free float of its global internet arm, Prosus — is the latest in a string of attempts by CEO Bob van Dijk and his team to narrow the multibillion-rand valuation shortfall.

At its core, the transaction will see Prosus, which listed in Amsterdam in 2019 as part of the previous attempt to deal with the valuation problem, issue new shares in exchange for a stake of about 45% in the parent.

The complex nature of the transaction has sparked questions about the tax implications of such a transaction, and the implications for investors who choose to act on the plan.

In a report, seen by Business Day, JP Morgan analysts flag this, saying Naspers should pay more tax in SA.

“There’s a moral argument to make that Naspers cannot relist the parent company under a new name in Holland and escape all responsibility.”

For its part, Naspers says it “will continue to be a significant tax contributor to the SA fiscus”, having contributed an estimated R10.2bn in direct and indirect taxes to SA’s public finances in its latest financial year.

This includes an estimated R7.2bn related to the listing of Prosus. The group says its proposed share swap is expected to generate R3.8bn-R5.8bn of tax revenues for SA.

The investment bank said the first time Naspers sold down its prized stake in Chinese internet player Tencent — a stake now worth more than $200bn — the transaction “resulted in zero additional tax”. Even as Naspers has detailed the tax implications of the deal, JP Morgan says it is unclear how much tax will actually be paid by Naspers as a result of the new share swap, but noted statements in Naspers’s presentation that the transaction was expected to generate “incremental tax for Sars [SA Revenue Service]” and that it was “tax efficient,” without citing an amount.

JP Morgan says there may be an opportunity for the state to benefit more from the growth of Tencent as Naspers’s stake in the Chinese company is roughly 70% of SA’s GDP in 2020. The bank said the R6.1bn in investment commitments and Covid19 assistance made to SA by Naspers is less than 0.3% of the capital gain on its Tencent stake.

These statements come at a time when other large global technology investors such as Amazon, Google, Facebook and Microsoft have been accused of avoiding paying tax. This week Amazon won a bid to topple a €250m tax bill in Europe.

TAX IMPLICATIONS

Outside Naspers, there may be tax implications for investors, especially with regard to capital gains tax. According to Sars, a capital gain arises when one disposes of an asset for proceeds that exceed its base cost.

Naspers says institutions — such as mutual funds — will not be paying capital gains tax. But retail investors — ordinary people trading on their own — who choose to do the swap will have to pay tax.

“It is capital gains they always would have paid at some point when they would cash in the share, but now that capital gains tax is accelerated,” said Van Dijk, explaining that these taxes would have been paid eventually when investors sell their shares. This transaction merely brings that date forward.

“So it’s not an extra tax, it just gets triggered because of this,” he said.

NASPERS CANNOT RELIST THE PARENT COMPANY UNDER A NEW NAME IN HOLLAND AND ESCAPE ALL RESPONSIBILITY

JP Morgan Investment bank