Income Tax

12 Months Ended

Jun. 30, 2020

19. Income tax

Impact of Tax Cuts and Jobs Act

On December 22, 2017, the Tax Cuts and Jobs Act (the “TCJA”), was enacted into law, significantly modifying U.S. federal tax laws. The TCJA reduced the federal statutory tax rate for corporations from 35% to 21% effective from January 1, 2018, eliminates alternative minimum tax for corporations, limits net operating loss carryforwards (and eliminates carrybacks), repeals indirect foreign tax credits carry-forward rules, limits the deductibility of interest expense and transitions the system of U.S. international taxation of corporations from a worldwide tax system to a territorial tax system.

The transition to a territorial tax system has not significantly impacted the Company. The Company generates the majority of its taxable income in tax jurisdictions with tax rates that are higher than the federal statutory tax rate of 21% (mainly South Africa, where its income is taxed at 28%). The most meaningful impact on the Company relates to the limitations on the deductibility of interest and the inclusion of certain passive, so called sub-part F, income in its federal taxation computation.

Global intangible low taxed income

The TCJA creates a new requirement that certain income earned by controlled foreign corporations (“CFCs”) must be included in the gross income of the CFCs’ U.S. shareholder. Global intangible low taxed income (“GILTI”) is the excess of the shareholder’s “net CFC tested income” over the net deemed tangible income return, which is currently defined as the excess of (1) 10 percent of the aggregate of the U.S. shareholder’s pro rata share of the qualified business asset investment of each CFC with respect to which it is a U.S. shareholder over (2) the amount of certain interest expense taken into account in the determination of net CFC-tested income.

GILTI was only applicable for the Company’s tax year commencing July 1, 2018 (i.e. its June 2019 tax year). The Company has not incurred a GILTI tax during the years ended June 30, 2020 and 2019, because it primarily operates in tax jurisdictions (such as South Africa and South Korea) which have higher corporate income tax rates than the United States and certain of its South Africa subsidiaries and most of its non-South African subsidiaries have incurred operating losses. However, due the nature and operation of the tax law regarding GILTI, the Company believes that it may incur a GILTI tax in future periods because GILTI is calculated and assessed on an annual basis without regard to prior periods. Any net operating loss carryforwards generated in foreign jurisdictions are excluded from the annual GILIT computation. The result of this is that the Company may pay a GILTI tax on income generated by a controlled foreign corporation in its foreign jurisdiction that is not taxed in that foreign jurisdiction due to the utilization of foreign net operating loss carryforwards.

Deemed repatriation of foreign earnings liability

The TCJA also requires a U.S. shareholder of a specified foreign corporation to include a deemed repatriation of foreign earnings (“Transition Tax”) as part of the transition to a territorial tax system. However, the Company did not incur a net Transition Tax liability because it generated sufficient foreign tax credits to offset any potential repatriation transition tax liability. The Transition Tax is a tax on previously untaxed accumulated and current earnings and profits (“E&P”) of certain of the Company’s foreign subsidiaries. In order to determine the amount of any Transition Tax liability, the Company was required to determine, in addition to other factors, the amount of post-1986 E&P of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. During the year ended June 30, 2018, the Company made a reasonable estimate of its Transition Tax liability as of June 30, 2018, and recorded a provisional Transition Tax, before the application of any foreign tax credits, of $55.8 million, and had no liability after the application of generated foreign tax credits. In fact, the Company generated excess foreign tax credits. During the year ended June 30, 2019, the Company finalized its Transition Tax liability as of June 30, 2018, and incurred a Transition Tax, before the application of any foreign tax credits, of $56.9 million, and has no liability after the application of generated foreign tax credits.

Income tax provision

The table below presents the components of income before income taxes for the years ended June 30, 2020, 2019 and 2018:

Presented below is the provision for income taxes by location of the taxing jurisdiction for the years ended June 30, 2020, 2019 and 2018:

		2020		2019		2018
				(as restated)^(A)		(as restated)^(A)
Current income tax		$	1 652	$	4 789	$	90 467
	South Africa		1 552		3 689		35 745
	United States		12		1 100		55 788
	Other		88		-		(1 066)
Deferred taxation charge (benefit)			932		(8 917)		10 108
	South Africa		653		(8 538)		9 149
	United States		0		4		477
	Other		279		(383)		482
Foreign tax credits generated – United States			72		(944)		(55 778)
Change in tax rate – United States			-		-		309
	Income tax provision (benefit)	$	2 656	$	(5 072)	$	45 106

(A) Deferred taxation (benefit) charge – South Africa for 2019 and 2018 have been restated to correct the misstatement discussed in Note 1.

There were no changes to the enacted tax rate in the years ended June 30, 2020, 2019 and 2018. However, during the year ended June 30, 2018, there were changes to the U.S. tax code which, among other things, changed the Federal tax rate. The Company has a June year end and used a blended rate of 28.10% for its tax year ending June 30, 2018, in the U.S. Certain of the Company’s deferred tax assets and liabilities which it expected would be utilized/ reversed during the period ended June 30, 2018, were re-measured at the blended rate and those deferred taxes that the Company believed would only be utilized/ reversed in subsequent tax years, were re-measured at 21%. The net impact of the change in the tax rate on the Company’s deferred taxes included in income tax expense during the year ended June 30, 2018, was $0.3 million. The Company also provided an additional valuation allowance of approximately $0.6 million during the year ended June 30, 2018, related to net operating loss carryforwards that it believed would not be utilized as a result of the enactment of the TCJA.

During the years ended June 30, 2020 and 2019, the Company incurred net operating losses through certain of it its South African wholly-owned subsidiaries and recorded a deferred taxation benefit related to these losses. However, the Company has created a valuation allowance for these net operating losses which reduced the deferred taxation benefit recorded. The movement in the valuation allowance for the year ended June 30, 2018, is primarily attributable to the creation of the valuation allowance related to excess tax credits recognized from the preliminary Transition Tax calculation and the creation of a valuation allowance related to net operating losses generated during the year ended June 30, 2018, that the Company does not believe it will be able to utilize in the foreseeable future.

The Company incurred a net capital gain, after the application of capital loss carryforwards, related to the internal restructuring of a wholly-owned subsidiary during the year ended June 30, 2020. The Company also generated taxable capital gains during the year ended June 30, 2020, related to the disposal of FIHRST (refer to Note 3) and the sale of DNI (refer to Note 10) but utilized capital loss carryforwards to reduce the capital gains on these transactions to zero ($0).

The Company calculated its Transition Tax liability as of June 30, 2018, and incurred a Transition Tax, before the application of any foreign tax credits, of $55.8 million, and has no liability after the application of generated foreign tax credits. During the year ended June 30, 2019, the Company recorded the difference of $1.1 million between the Transition Tax liability of $56.9 million and the provisional Transition Tax liability of $55.8 million in current income tax, United States. During the year ended June 30, 2019, the Company also included the additional foreign tax credits utilized of $1.1 million against this Transition Tax in foreign tax credits generated – United States. During the year ended June 30, 2018, the Company included a provisional Transition Tax of $55.8 million in current income tax, United States. Foreign tax credits of $65.3 million were generated and included in the computation of provisional Transition Tax of which $55.8 million were utilized against the Transition Tax in that year. The foreign tax credits utilized are included in Foreign tax credits generated – United States for the year ended June 30, 2018.

As discussed above, the Company has generated excess foreign tax credits related to the Transition Tax and any distribution received from Net1’s subsidiaries will first be applied against the deemed distributions recognized as a result of the Transition Tax as so called “previously taxed income, or PTI”. Therefore distributions actually made during the year ended June 30, 2018, were treated as PTI and did not generate any additional foreign tax credits because the quantum of the actual distributions were lower than the deemed distributions calculated as a result of the Transition Tax.

A reconciliation of income taxes, calculated at the fully-distributed South African income tax rate to the Company’s effective tax rate, for the years ended June 30, 2020, 2019 and 2018, is as follows:

			2020	2019	2018
				(as restated)^(A)	(as restated)^(A)
Income taxes at fully-distributed South African tax rates			28,00%	28,00%	28,00%
	Release from FCTR		(14,65%)	-	-
	Non-deductible items		(10,38%)	(3,33%)	13,25%
	Foreign tax rate differential		(4,17%)	(0,07%)	0,14%
	Subpart F inclusions		(2,85%)	-	-
	Movement in valuation allowance		1,64%	(22,98%)	6,35%
	Capital gains differential		(1,59%)	(1,46%)	(1,92%)
	Foreign tax credits		(0,08%)	0,35%	(58,99%)
	Prior year adjustments		(0,01%)	(0,03%)	0,04%
	Taxation on deemed dividends in the United States		-	1,45%	2,04%
	Transition Tax		-	(0,34%)	58,79%
	Change in tax laws – United States		-	-	-
		Income tax provision	(4,09%)	1,59%	47,70%

(A) Non-deductible items for 2019 and 2018 have been restated to correct the misstatement discussed in Note 1.

Percentages included in the 2020 and 2019 columns in the reconciliation of income taxes presented above are impacted by the loss incurred by the Company during the year ended June 30, 2020 and 2019. For instance, the income tax provision of $2,7 million represents (4,09%) multiplied by the net loss before tax of $ (65 016). Movement in the valuation allowance for the year ended June 30, 2020, includes allowances created related to net operating losses incurred during the year and valuation allowances created for a deferred tax asset recorded related to the deconsolidation of CPS and other corporate transactions. Release from FCTR for the year ended June 30, 2020, relates to the releases from accumulated other comprehensive loss (refer to Note 16) that are not deductible for tax purposes. Non-deductible items for the year ended June 30, 2020, includes the option termination fee paid and the goodwill impairment loss recognized.

Movement in the valuation allowance for the year ended June 30, 2019, includes allowances created related to net operating losses incurred during the year and a valuation allowance created for a deferred tax asset recorded related to the DNI disposal capital losses generated (refer to Note 10) and the Cell C capital loss following the fair value adjustment (refer to Note 7). Non-deductible items for the year ended June 30, 2019, includes the impairment losses recognized related to goodwill impaired.

Non-deductible items for the year ended June 30, 2018, includes the impairment loss recognized related to goodwill impaired, non-deductible interest on borrowings and the accretion of interest. The impact on foreign tax during the year ended June 30, 2018, was primarily due to the impact of the Transition Tax.

Deferred tax assets and liabilities

Deferred income taxes reflect the temporary differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The primary components of the temporary differences that gave rise to the Company’s deferred tax assets and liabilities as of June 30, and their classification, were as follows:

					June 30,		June 30,
					2020		2019
							(as restated)^(A)
Total deferred tax assets
	Capital losses related to investments				$	36 721	$	43 569
	Net operating loss carryforwards					32 459		35 821
	Foreign tax credits					32 799		32 799
	Provisions and accruals					3 936		13 230
	FTS patent					181		277
	Other					815		529
		Total deferred tax assets before valuation allowance				106 911		126 225
			Valuation allowances			(106 433)		(125 887)
				Total deferred tax assets, net of valuation allowance		478		338

Total deferred tax liabilities:
	Intangible assets					171		340
	Investments					1 755		1 019
	Other					53		69
		Total deferred tax liabilities				1 979		1 428

Reported as
	Long-term deferred tax assets					358		234
	Long-term deferred tax liabilities					1 859		1 324
		Net deferred income tax liabilities			$	1 501	$	1 090

(A) Total deferred tax liabilities: Investments and long-term deferred tax liabilities have been restated to correct the misstatement discussed in Note 1.

Increase in total net deferred income tax liabilities

Capital losses related to investments

Capital losses as of June 30, 2020, related to investments decreased primarily related to the 2020 utilization of capital losses generated in prior years and due to the impact of currency changes between the South Africa Rand against the United States dollar. The June 30, 2020 amounts comprises the capital loss arising from the difference between the amount paid for Cell C in August 2017 and the its fair value as of June 30, 2020, of $0.0 million, and difference between the amount paid for CPS in 2004 and the its fair value as of June 30, 2020, of $0.0 million.

Net operating loss carryforwards

Net operating loss carryforwards have decreased primarily as a result of the utilization of prior period net operating loss carryforwards and currency changes between the South Africa Rand against the United States dollar, but partially offset by the increase in losses incurred by certain of the Company’s subsidiaries.

Provisions and accruals

Deferred tax assets – provisions and accruals decreased during the year ended June 30, 2020, primarily as a result of the deconsolidation of CPS.

Decrease in valuation allowance

At June 30, 2020, the Company had deferred tax assets of $0.5 million (2019: $0.3 million), net of the valuation allowance. Management believes, based on the weight of available positive and negative evidence it is more likely than not that the Company will realize the benefits of these deductible differences, net of the valuation allowance. However, the amount of the deferred tax asset considered realizable could be adjusted in the future if estimates of taxable income are revised.

At June 30, 2020, the Company had a valuation allowance of $106.4 million (2020: $125.9 million) to reduce its deferred tax assets to estimated realizable value. The movement in the valuation allowance for the years ended June 30, 2020 and 2019, is presented below:

		Total		Capital losses related to investments		Net operating loss carry-forwards		Foreign tax credits		FTS patent		Other
	July 1, 2018	$	48 691	$	3 226	$	9 047	$	32 644	$	57	$	3 717
Charged to statement of operations			79 029		40 159		26 570		155		-		12 145
Reversed to statement of operations			(881)		-		(198)		-		(57)		(626)
Utilized			(1 730)		-		(10)		-		-		(1 720)
Foreign currency adjustment			778		184		452		-		-		142
	June 30, 2019		125 887		43 569		35 861		32 799		-		13 658
Reversed to statement of operations			(14 314)		(5 486)		(77)		-		-		(8 751)
Charged to statement of operations			27 700		5 399		20 602		-		-		1 699
Deconsolidation			(16 130)		-		(15 830)		-		-		(300)
Utilized			(3 896)		-		(3 632)		-		-		(264)
Foreign currency adjustment			(12 814)		(6 761)		(4 651)		-		-		(1 402)
	June 30, 2020	$	106 433	$	36 721	$	32 273	$	32 799	$	-	$	4 640

Net operating loss carryforwards and foreign tax credits

United States

The TCJA amends the rules regarding net operating loss carryforwards for Federal income tax purposes effective from July 1, 2018. The new rules prohibit net operating loss carrybacks, allow indefinite net operating loss carryforwards and limit the amount of the net operating loss carryforwards generated after July 1, 2018, that may be used against future taxable income, to 80% of taxable income before the net operating loss deduction. These new rules did not impact the Company’s net operating loss carryforwards generated during the year ended June 30, 2018 and in prior periods.

In March 2020, the Coronavirus Aid, Relief and Economic Security (the “Cares Act”) was enacted. The Cares Act, among other items, provides for a temporary repeal of the 80 percent net operating loss limitation and provides temporary modifications to the limitation on deductibility of business interest.

As of June 30, 2020, Net1 had net operating loss carryforwards that will expire, if unused, as follows:

Year of expiration	U.S. net operating loss carry forwards
2024	$	1 141