Wednesday, 17 June 2015

Keynote Address at CIMA Gauteng Branch Graduation Ceremony

As a Fellow of CIMA (Chartered Institute of Management Accountants), I was privileged to be able to address the graduands and their families at the graduation ceremony of the CIMA Gauteng Branch on 11 June 2015.

Here is my keynote address, in which I address how a personal sense of ethics and duty in the professional business person can play a vital role in keeping the South African democracy aligned with the values enshrined in our Constitution:

Good evening officers of The Chartered Institute of Management Accountants in South Africa, distinguished guests, graduands, ladies and gentlemen.

At the outset, I would like to express my sincere thanks to The Chartered Institute of Management Accountants for asking me to present this speech on the occasion of this graduation ceremony. 

This graduation, as is the case with all graduations, is an auspicious occasion. This ceremony marks the culmination of years of perseverance and devotion, excitement and a sense of relief on completing the requirements for your qualification. 

For that you, the graduates, deserve our heartiest congratulations. It is appropriate also to acknowledge the contributions made by your parents, relatives, friends and significant others and mentors, for ensuring that you reached this milestone. Without the support and encouragement of these people, it is unlikely that you would be at this ceremony today.

You are graduating at an important time in the life of South Africa. During 2014 we completed the fifth democratic election since 1994. This year marked the twenty first year since the first democratic elections were held under the fully democratic dispensation agreed to by the various political parties in 1994.

Once the Independent Electoral Commission had certified the results of the 2014 election, the 400 parliamentarians elected by the electorate were sworn in. All parliamentarians are required to swear an oath of allegiance to the Constitution of the Republic of South Africa, undertaking that they will serve in the best interests of the people of South Africa.

Likewise, the President and Ministers of Cabinet were administered their oath of office by the Chief Justice who were required to confirm that they would also uphold the Constitution and all other laws of the country.

No doubt, you are wondering why I am raising the question of oaths that were administered and sworn to by parliamentarians, the President and his Cabinet.

The dictionary defines an oath as “a solemn promise, often invoking a divine witness, regarding one’s future action or behaviour.”

It is appropriate also to draw your attention to the Hippocratic Oath  historically undertaken by medical doctors upon their graduation from an institution of learning. In essence, that oath required the doctor to take care of his or her patients, and preserve patient confidentiality whilst adhering to certain standards of ethical conduct. Certain medical schools, such as Wits and others in South Africa require their graduates to subscribe to a modern version of the Hippocratic Oath.

A similar oath, that may not be as well known, is the “Themis Oath”, which is a pledge undertaken by the graduates of the School of Law in current-day Greece, based on an oath that was taken hundreds of years ago.

Upon graduating, the graduands of the School of Law in Greece are required to affirm today as follows:

“Before the President and the Dean of the School of Law, I give my solemn pledge to faithfully abide by the ordinances of justice with all my heart and soul, and that on leaving this sacred institution, I will render my services to all those that need my education and training, always in peace and ethical conduct. I will pursue the path of righteousness in life, and dedicate myself to that which is true and just, and to the protection of virtue and wisdom. May this pledge be accompanied by the blessings of the professors and my beloved teachers, and may the gods be with me during all my life.”

The question that I ask is this: Just as we expect our parliamentarians and other public officials to take an oath of allegiance, should universities and professional bodies in South Africa not require their graduands to undertake an oath or pledge along the lines of either the Hippocratic Oath or the Themis Oath, adapted to the particular field of study concluded by the graduands?

An oath such as the Themis Oath, prescribes the standards of conduct expected of law graduands in Greece and the sentiments expressed therein can contribute to the enhancement of ethical conduct in the future careers of all graduands in South Africa, including you, who are the future of South Africa.

As graduands, you have an important role to play in society and you are privileged to have been able to further your education and receive a qualification from the Chartered Institute of Management Accountants. There is no doubt that the qualification obtained by you will stand you in good stead as you carve out your careers in this country.

The Institute has provided you with the tools required to conduct your chosen profession and has instilled certain values in you as to how you should conduct yourself in future.

I would like you to carefully consider the words contained in the various oaths I have referred to, because a truly democratic South Africa needs you to pursue your careers in both a peaceful and ethical manner in the dealings that you will have with all members of our community.

Remember, too, the framework of our Constitution and the Bill of Rights which has now turned twenty one years old, enshrines the values agreed on by the political parties as we moved from the previous dispensation to the democratic South Africa.
Our respect of the democratic values of the country should affect not only how we conclude transactions in business, but also should be applied to our daily lives as we travel on the roads from one destination to another and also in our interactions with people from all walks of life.

It is important, therefore, that in our daily lives we all uphold the values contained in the Bill of Rights set out in the Constitution. We need to respect the rule of law in our dealings with one another and in all aspects of our lives.

The Bill of Rights which forms the foundation of the Constitution of this country comprises 27 rights, which rights are required to be respected by the State in its dealings with the people of South Africa and indeed also in the interactions of people with one another. It is interesting to note that the carved wooden doors of the Constitutional Court, being the highest court in South Africa and the guardian of the Constitution, contains reference to each of the 27 rights protected in the Bill of Rights.

It is not possible to refer to all of the 27 rights set out in the Bill of Rights, and I would urge you to examine the Constitution and be familiar with the rights set out therein which form the cornerstone of democracy in South Africa. The Bill of Rights provides that everyone is equal before the law and has the right to equal protection and benefit of the law and this right is fundamental in addressing the inequalities which existed prior to 1994. 

Furthermore, human dignity is entrenched as a right whereby the law recognises that everyone has inherent dignity and the right to have their dignity respected and protected. The Constitution also protects a person’s right to privacy, which includes the right not to have their person or home searched and enshrines the right of all persons to freedom of conscience, religion, thought, belief and opinion. 

In addition, the Bill of Rights upholds the principles of freedom of expression and the right of people to assemble peacefully and to demonstrate and present petitions. Furthermore, the Bill of Rights contains procedural rights whereby persons are entitled to request information from the State regarding that person and also upholds the principle of fair administrative procedure where persons interact with the State and state organs. Additionally, everyone has the right to have any dispute that can be resolved by the application of law decided in an open court, which hearing is presided over by judicial officers who are independent.

The rule of law encompasses the provisions contained in the Constitution, as well as other laws of the country. It is essential that citizens respect the laws of the country, regardless of how much of a nuisance they may be. This can be a small thing such as a driver on the road not going through a red robot or talking on a cell phone, thereby jeopardising the lives of other innocent people on the roads.

It is also requires citizens to respect the property rights of others and this includes not purchasing stolen goods or acquiring, what appears to be, unbelievably cheap DVDs which are the result of illicit copies made in violation of copyright laws and other rights held by the original artists thereto.

Thus, we as citizens of this country, all have a responsibility to recognise and voluntarily choose to adhere to the dictates of ethical behaviour in our interaction with each other as citizens of the country and particularly in business dealings. If we each dedicate ourselves to pursuing that path of righteousness, we can only enhance and improve the lives of all citizens in this our beloved country.

By receiving your qualification today, you are bringing to an end a chapter in your life which will enable you to go forward with your chosen career. It must be remembered that now that you have received a qualification, does not bring your learning to an end but is in fact merely the beginning thereof as you move through the university of life and interact with people from all walks of life in your career.

In closing, I would like to refer to the words of American editor and speech writer, Jack C Yewell:

“Giving of yourself, learning to be tolerant, giving recognition and approval to others, remaining flexible enough to mature and learn - yields happiness, harmony, contentment and productivity. These are the qualities of a rich life, the bounteous harvest of getting along with people.”

If we all respect that which is both true and just, virtuous and wise and if we can recognise the value of others, regardless of their background, that can only yield a future South Africa that provides a bounteous harvest of harmony and peace for all her citizens.

Nkosi sikelel’ iAfrika and congratulations and best wishes to the graduands and their families.

Tuesday, 9 June 2015

Tax Consequences of Foreign Companies Rendering Services in South Africa

Where a foreign company renders professional services to a South African company, it is important that the foreign entity considers whether, as a result of rendering such services, the foreign company will create a permanent establishment in South Africa. 

The reason why this becomes important is that where a foreign company creates a permanent establishment in South Africa, South Africa will under the provisions of a Double Taxation Agreement (“DTA”) concluded with another country, be entitled to subject that foreign entity to tax on the profit attributable to that permanent establishment created in South Africa.

In the case of X LLC, case number 13276 heard in February 2015, as yet unreported, the Tax Court had to determine whether X had created a permanent establishment in South Africa, and as a result thereof, was liable to tax in South Africa. The case involved a corporation incorporated in the United States of America and the court therefore had to consider the provisions of the DTA concluded by South Africa and the United States of America.

Article 7(1) of the DTA concluded by SA and the USA provides that the profits of an enterprise of the USA shall  be taxable only in USA, unless that enterprise conducts business in South Africa through a permanent establishment located in South Africa. 

Furthermore, the DTA provides that where business is carried on through a permanent establishment, the profits of the enterprise may be taxed in South Africa, but only to the extent that they are attributable to that permanent establishment.

Article 5(1) of the DTA in turn provides as follows:

“for the purposes of this Convention, the term ‘permanent establishment’ means a fixed place of business through which the business of an enterprise is wholly or partly carried on.”

In addition thereto, Article 5(2) of the DTA provides that the term ‘permanent establishment’ includes especially-

“(k)          the furnishing of services, including consultancy services, within a contracting state by an enterprise through employees or other personnel engaged by the enterprise for such purposes, but only if activities of that nature continue (for the same or connected project) within that state for a period or periods aggregating more than 183 days in any 12 month period commencing or ending in the taxable year concerned.”

The court had to decide how the DTA should be interpreted and whether it was necessary for X to have met the requirements of both Articles 5(1) and 5(2)(k) of the DTA.

The taxpayer contended that it is necessary that a permanent establishment be created first and only once that has occurred, is it then necessary to take account of the provisions of Article 5(2)(k) of the DTA. 

SARS on the other hand, argued that if X fell within the provisions of Article 5(2)(k) a permanent establishment exists and it is not necessary that X met the requirements of Article 5(1) of the DTA.

Vally J in his judgment handed down on 15 May 2015 reached the conclusion that Articles 5(1) and 5(2)(k) cannot be read disjunctively. He expressed the view that as a result of the usage of the words ‘includes especially’ Article 5(2)(k) of the DTA should be read as specifying those specific activities which will be regarded as creating a permanent establishment in South Africa. 

The Tax Court reached the decision that taking account of the number of days spent by X’s staff in South Africa, it met the time requirement specified in Article 5(2)(k) of the DTA and for that reason a permanent establishment had been created in South Africa. 

The court also reached the conclusion that X had a fixed base in the boardroom of its client in South Africa, and had therefore established a fixed place of business in South Africa while rendering services to its client in South Africa. 

It must be remembered that Article 5(1) of the DTA, in defining a permanent establishment, refers to ‘a fixed place of business through which the business of an enterprise is wholly or partly carried on’. 

The court expressed the view that it is not necessary that the non-resident carries out all of its business from the fixed place of business which is established in South Africa. 

The court reached the conclusion that a permanent establishment is created where X performs only some of its obligations in terms of a contract concluded with its client, and even if it conducted part of its business from its client’s boardroom.

In assessing X to tax in South Africa, SARS levied tax on the fees derived by X in South Africa, after deducting therefrom attributable expenditure and imposed additional tax of 100% and interest on the underpayment of provisional tax in accordance with section 89quat(2) of the Income Tax Act. 

The court reached the decision that the additional tax was not disproportionately punitive and therefore dismissed the appeal against the additional tax. Insofar as the imposition of interest is concerned, the court expressed the view that X should have familiarised itself with the taxation laws of the country within which it conducts its operations, and for that reason it was decided that X had been negligent in not seeking advice regarding the tax consequences of the contract concluded with its client. 


The court therefore came to the conclusion that SARS was correct in imposing interest on the underpayment of provisional tax.

Based on the above case, which admittedly deals with the interpretation of articles contained in the SA and USA DTA, it is important that non-residents rendering services to clients in South Africa must evaluate whether they will create a permanent establishment in South Africa, thereby triggering income tax on the profit attributable to the services rendered in South Africa.

Furthermore, if the non-resident creates an enterprise as envisaged under the provisions of the VAT Act, it would also be necessary to register for VAT purposes, and charge VAT on the fees received from the resident client and pay that to SARS. 

Furthermore, where persons from abroad are sent to South Africa to render the services that may, depending on the circumstances and the provisions of the DTA in question, give rise to the non-resident entity being required to register as an employer in South Africa with the obligation to withhold and deduct PAYE from amounts paid to persons sent to South Africa to render services here.

Clearly, any South African tax paid by the non-resident entity, would under the terms of the DTA be recognised as a credit claimable against tax paid in the home jurisdiction of the entity rendering the services in South Africa. Non-resident employees who become liable to tax in South Africa should also be entitled to claim such tax as a credit in their home jurisdiction under the DTA in question.


It is important therefore that non-resident entities rendering services into South Africa carefully consider how to plan and structure their affairs in South Africa, so that they do not fall foul of the provisions of the Income Tax Act read together with any applicable DTA.

Dr Beric Croome is a Tax Executive  at ENSafrica This article first appeared in Business Day, Business Law and Tax Review, June 2015. Image purchased from www.iStock.com


Monday, 11 May 2015

Automatic Exchange of Information for Tax Purposes

South Africa is a member of the Global Forum on Transparency and Exchange of Information for Tax Purposes. It has been confirmed that South Africa has undertaken to exchange information automatically in relation to new accounts and pre-existing individual high value accounts by the end of September 2017.

South Africa has concluded a large number of double taxation agreements with trading partners, which allows for the exchange of information in terms of those agreements.

Furthermore, South Africa has signed the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (“Multilateral Convention”), which Convention was gazetted during the course of last year, such that the Convention took effect in South Africa on 1 March 2014. That Convention envisaged the automatic exchange of  information by the various countries which had signed the Convention.

Subsequently during October 2014, South Africa together with 50 other jurisdictions translated their commitments under the Multilateral Convention into action by way of the signing of a Multilateral Competent Authority Agreement that activates the automatic exchange of information based on the Multilateral Convention.
The Competent Authority Agreement is a multilateral framework agreement, such that the subsequent bilateral exchanges will take effect between those countries which file the subsequent notifications under section 7 of the agreement. Furthermore, the agreement sets out the particulars of what information will be exchanged, as well as the timing thereof.

The agreement comprises eight sections:

·         section 1 contains definitions of terms used in the agreement
·         section 2 sets out the information which will be automatically exchanged
·         section 3 sets out the timing and method of the automatic exchange of information
·         section 4 describes how the parties to the agreement will co-operate to ensure compliance with the agreement
·         section 5 contains provisions to ensure confidentiality and the safeguarding of data
·         section 6 sets out the process to consult to ensure the smooth operation of the agreement and also to amend the agreement
·         section 7 sets out the subsequent notifications required under the agreement and how the agreement is then subsequently brought into effect
·         section 8 sets out the role of the secretariat

    As indicated above, section 2 of the agreement sets out in greater detail the information which countries are required to exchange automatically. 

    Under the agreement, South Africa will be required to exchange information regarding so-called “reportable accounts” of another jurisdiction which comprises financial accounts maintained by a reporting financial institution which has been identified as an account which is held by one or more persons that are reportable persons in relation to another country.

      Information which South Africa will be required to exchange with other countries under the agreement is as follows:

·      the name, address, tax identification number and date and place of birth in the case of an individual
·       the account number
·       the name and identifying number of the reporting financial institution
·      the account balance or value as of the end of the relevant calendar year or other appropriate reporting period
·      the total amount paid or credited to the account holder with respect to the account during    the calendar year or other period as the case may be

Under section 3 of the agreement, the information is required to be exchanged automatically within nine months after the end of the calendar year to which the information relates.

For South Africa to comply with its obligations under the Multilateral Convention and indeed the Multilateral Competent Authority Agreement, it will require substantial information from the financial institutions in the country regarding accounts linked to persons resident in other countries.

Under the provisions of section 26 of the Tax Administration Act No. 28 of 2011 (“TAA”) the Commissioner may issue public notices requiring financial institutions to submit returns to SARS reflecting detailed financial information.

South Africa has concluded an agreement with the United States of America whereby South African financial institutions are required to report significant financial information to SARS for onward transmission to the United States of America. 

A detailed public notice was issued under section 26 of the TAA describing the comprehensive financial information to be collated by financial institutions in South Africa for onward transmission to United States of America. No doubt further public notices will be issued by SARS setting out exactly what information financial institutions are required to supply to SARS so that that information may ultimately be made available to other countries in terms of the Multilateral Convention.

The OECD has indicated that the Global Forum will establish a peer review process whereby ensuring the effective implementation of the automatic exchange of information.

Furthermore, governments who are party to the Multilateral Convention have also undertaken to increase the level of information exchanged upon request by including a requirement that beneficial ownership of all legal entities be made available to tax authorities and capable of being exchanged with treaty partners. This will enable tax authorities to ascertain who owns assets held by companies and trusts located around the world.

The Global Forum has indicated that 89 of its member countries have committed to implement reciprocal exchange of information on financial accounts automatically.

At the seventh meeting of the Global Forum held in Berlin during October 2014, it was announced that an initiative will be launched in Africa to increase awareness of the benefits of the exchange of information across the African continent and also to increase the number of African countries who are members of the Global Forum. The Global Forum will also assist tax administrations in Africa regarding the exchange of information.

It is clear therefore that the automatic exchange of information will commence in many countries during 2017 or no later than 2018. Just as South Africa must provide financial information to other countries, SARS will receive information from other countries regarding South Africans who have bank accounts abroad.

Taxpayers who are in default and have not made full and proper disclosure of their affairs to the South African Revenue Service should utilise the Voluntary Disclosure Programme (“VDP”) enshrined in the TAA thereby ensuring that they can remedy their defaults without facing criminal prosecution and in many cases escaping penalties which would otherwise be payable. It must be remembered that the VDP contained in the TAA is a permanent feature of the law and does not have a date by which taxpayers must apply for relief. 

Furthermore, those persons who may have violated the exchange control regulations should consider regularising their affairs with the Financial Surveillance Department of the South African Reserve Bank, thereby ensuring that they regularise their affairs without facing criminal sanction for prior violations of exchange control regulations.


Dr Beric Croome is a Tax executive: Edward Nathan Sonnenbergs Inc. This article first appeared in Business Day, Business Law & Tax Review (May 2015).Image from IISD Please contact me if there are copyright issues relating to use of image.

Tuesday, 14 April 2015

Procedures Governing Objections and Appeals to SARS

A taxpayer who receives an assessment from the Commissioner: South African Revenue Service with which they do not agree, is entitled to lodge an objection against that assessment and Chapter 9 of the Tax Administration Act, No. 28 of 2011 (“TAA”) sets out the procedures that must be followed. 

Taxpayers also need to be mindful of the rules governing objections and appeals promulgated under section 103 of the TAA, which sets out in greater detail the steps to be followed in the objection and appeal process.
Under section 96(2) of the TAA, the Commissioner is obliged to supply the taxpayer with the grounds of the assessment so that the taxpayer can understand the basis on which the assessment has been issued. 

Unfortunately, far too many cases are seen where the Commissioner summarily disallows deductions claimed by taxpayers without supplying any information as to the legal basis on which the deduction was denied. 

In these cases the taxpayer is entitled to demand that the Commissioner complies with his statutory obligation to supply the grounds for the assessment in compliance with section 96(2) of the TAA. 

The taxpayer is required to submit the request for grounds of assessment where SARS has failed to fulfil its legal obligation to do so at the time of issuing of the assessment within 30 business days of the date of the assessment in question.

Once the taxpayer has received the grounds of assessment, they are entitled to submit an objection against that assessment within 30 days of receiving the grounds for the assessment. Where the Commissioner has supplied the grounds of the assessment as required at the outset, the taxpayer is required to lodge the objection within 30 business days of the date of the assessment.

According to the SARS’ website, taxpayers need to submit the correct documentation for the objection to be valid. In the case of personal income tax, a notice of objection or form NOO is required to be submitted via e-filing. Corporate income taxpayers are also required to file the objection electronically by using the form NOO. 

Where a trust disputes an assessment issued by SARS, it is necessary to complete form ADR1 and submit that either by hand or by email to an appropriate official at SARS. In the case of value-added tax, payroll related taxes and all other taxes , such as donations tax, dividends tax etc. a taxpayer can only file the objection using form ADR1 and is unable to lodge the objection electronically. 

Unfortunately, it does not appear that SARS officials are familiar with the procedure set out on the SARS website and officials have often rejected objections on the basis that they are invalid on the grounds that the taxpayer has not used an NOO form in respect of value-added tax or donations tax, secondary tax on companies. 

Once the legal position and SARS guidelines are pointed out to SARS officials, a letter of apology is issued and the objection is then acknowledged and confirmed as being properly filed. It is most unfortunate that SARS officials do not appear to be familiar with their own procedures.

It is critical that when the taxpayer decides to object to the assessment, that they also consider whether to pay the tax in dispute or whether they wish to apply for a suspension of payment of the tax in dispute in terms of section 164 of the TAA. 

The rules regulating the suspension of payment of tax in dispute is not discussed further here, except to point out that too often SARS does not respond timeously or at all to the letters requesting suspension of payment, as a result of the fact that the requests for suspension are not capable of being submitted to SARS electronically and are therefore not properly tracked within SARS’ systems. 

Too often taxpayers who have lawfully applied for suspension of payment receive demands for payment or in a worst case scenario, are informed that judgment has been taken against them even though SARS has sat on their request for suspension for many months.

When the taxpayer submits their objection, it is most important that the grounds of the objection are properly considered and fully set out in the letter of objection submitted to the Commissioner.

Where SARS has failed to supply the grounds of assessment or failed to supply proper reasons for the decision to issue the assessment, the taxpayer should insist that SARS complies with their statutory duty to inform the taxpayer for issuing the assessment in question. The taxpayer cannot properly object to an assessment without knowing the basis on which SARS has issued the assessment concerned.

It is also important that when the objection is prepared, that statements made in the letter of objection can be supported subsequently by documentary evidence should the case proceed on appeal to the Tax Court, or another court. The letter of objection needs to be carefully contemplated and drafted, so that the taxpayer sets out their case properly and knows that they can support the statements made in their letter of objection. There is nothing worse for a taxpayer to lodge an objection only to discover that documents which they believe to exist, which would support their case, in fact are no longer available or do not exist.

Under the rules governing objections and appeals, taxpayers also cannot unilaterally add to the grounds of objection without following proper procedures laid down in the rules governing objections and appeals and this applies equally to SARS insofar as its grounds of assessment are concerned.
On 8 December 2014 Rogers J delivered judgment in the case of ABC (Pty) Ltd v Commissioner for SARS,  as yet unreported.

In ABC’s case, the Commissioner submitted an application to the Tax Court for consent to amend its grounds of assessment under rule 10 of the rules which previously governed the objection and appeal process.

The case related to the application or otherwise of section 103(2) of the Income Tax Act, No. 58 of 1962 (“the Act”) and in his Rule 10 Statement, the Commissioner indicated that he was relying not only on the first change in shareholding but also on the subsequent change of shareholding which occurred during November 2003. 

These factors were important in determining whether section 103(2) of the Act could apply to the transaction in dispute or not. From a review of the decision of Rogers J, it would appear that the Commissioner informed the taxpayer of the grounds of assessment setting out the basis on which the assessment was issued, without reference to the second change of shareholding and now sought the court’s consent to supplement his grounds of assessment.

The new rules governing objections and appeals took effect on 11 July 2014 and the court indicated that the Commissioner’s Rule 10 Statement was filed at the time that the old rules applied. Rogers J indicated that he was required to establish what could lawfully be contained in a Rule 10 Statement and he reached the conclusion that the coming into force of the new Tax Court rules did not affect that evaluation.

The court referred to the fact that the question as to whether the Commissioner or the taxpayer could introduce new grounds into their Rule 10 and 11 Statements not covered by the earlier steps in the assessment process is not entirely settled in law. In ITC 1843 Claasen J held that the Commissioner and the taxpayer were entitled to depart from their previously stated positions in letters of assessment and letters of disallowance of objection.

Subsequently in HR Computek (Pty) Ltd v The Commissioner for the South African Revenue Service the Supreme Court of Appeal indicated that the taxpayer does not have the freedom of amendment which Claasen J accepted in ITC 1843.

Rogers J reached the conclusion that a distinction should be made between a tax appeal which relates to objective questions of fact and law and tax appeals which relate to the exercise by the Commissioner of discretionary powers. The court analysed section 103(2) of the Act extensively and reviewed the grounds of assessment set out in the Commissioner’s Rule 10 Statement. 

The court indicated that the Commissioner cannot support the existing assessment made by the him on the basis of matters on which he was not satisfied when he first issued the assessment in dispute. The court therefore came to the conclusion that the Commissioner’s application to amend its grounds of assessment set out in their Rule 10 Statement should be refused and that the taxpayer’s counter application to strike out those amendments should succeed. The taxpayer in the case of ABC (Pty) Ltd therefore succeeded in preventing SARS from amending its grounds of assessment and also received an order of costs in its favour.

The lesson to be learnt from the ABC case is that the taxpayer must formulate its grounds of objection properly and likewise SARS must formulate its grounds of assessment adequately and cannot supplement that at will and thereby prejudice the taxpayer.


Dr Beric Croome: Tax Executive, ENSafrica. This article first appeared in Business Day, Business Law & TAx Review, April 2015. Photograph by Judy Croome.

Thursday, 9 April 2015

On the Record

(Photograph of Croome by Russell Roberts, 2013. Other photos by Michael Hammond, UCT)
The University of Cape Town's Law Faculty recently surveyed students and alumni on what drew us to the profession and what keeps us going. 
(Photograph of Croome by Russell Roberts, 2013)

Monday, 9 March 2015

Tax Clearance Certificates issued by the South African Revenue Service

The Tax Administration Act 28 of 2011 (“the TAA”) which took effect on 1 October 2012 contained provisions regulating the issue of tax clearance certificates by the South African Revenue Service (‘SARS’). 

Section 256 of the TAA was substituted in its entirety as a result of section 64 of the Tax Administration Laws Amendment Act 44 of 2014 (“TALAA”). The new provisions governing the issue of tax clearance certificates took effect on date of promulgation of the TALAA, namely, 20 January 2015. 

The ‘Memorandum on the Objects of the Tax Administration Laws Amendment Bill of 2014’ indicated that a new tax clearance system has been introduced by SARS to enhance the functionality by SARS in issuing tax clearance certificates for purposes of applying for government tenders for both taxpayers and those entities that are awarding tenders. 

Under section 256 of the TAA, taxpayers are entitled to request confirmation of tax compliance status regarding tenders, good standing, utilisation of the foreign investment allowance or those persons wishing to emigrate.

A taxpayer seeking a tax clearance certificate is required to apply in the prescribed form and manner to SARS and SARS is then required to issue confirmation of that taxpayer’s compliance status within 21 business days from the date the application is submitted, or such longer period as may reasonably be required if a senior SARS official is satisfied that the issue of the tax clearance certificate may prejudice the efficient and effective collection of taxes.

SARS may only provide confirmation of the taxpayer’s tax compliance status as compliant where that taxpayer is registered for tax and does not have any outstanding tax debt due to SARS, excluding an amount which is in dispute and which has been suspended under section 164, or where the taxpayer has concluded an instalment payment agreement with SARS under section 167 of the TAA or the taxpayer has compromised the tax debt with SARS under section 204.

Furthermore, SARS may not issue confirmation that the taxpayer is compliant where the taxpayer has any return outstanding to SARS, unless the taxpayer has made an arrangement with SARS regarding the submission of that return.

Previously, section 256 required that there were no outstanding requests for information and that has been removed as a requirement for confirmation of the taxpayer’s tax compliance status, but that amendment will be reviewed during the 2015 legislative cycle.

Once SARS is satisfied that the taxpayer is compliant, it must issue confirmation of the taxpayer’s compliance status in the prescribed format, and include the original date of issue of the tax compliance status confirmation, as well as the taxpayer’s tax reference number and other identifying details.

Generally, SARS is not entitled to disclose information regarding a taxpayer to any other person, in light of the confidentiality provisions contained in Chapter 6 of the TAA. However, section 256 provides that SARS may confirm the taxpayer’s tax compliance status upon request by an organ of state or any other person to whom the taxpayer has presented the tax compliance status confirmation.

Where SARS discovers that it has issued the confirmation of the taxpayer’s compliance status in error, or that the confirmation was obtained on the basis of fraud, misrepresentation or non-disclosure of material facts, SARS may alter the taxpayer’s tax compliance status from compliant to non-compliant, so long as it has given the taxpayer an opportunity to respond to the allegations of at least 14 days prior to the withdrawal of the confirmation of the taxpayer’s compliant status.

The taxpayer will be regarded as non-compliant from the period commencing on the date that the taxpayer no longer complies with the requirements specified in section 156(3) of the TAA, and ending on the date that the taxpayer regularises their non-compliance.

SARS has indicated that it is intended that where a taxpayer’s request for confirmation of tax compliance status is successful, it will issue the taxpayer with a personal identification number (‘PIN’) for their specific request. When the PIN is utilised by any other person, that person will be able to ascertain the compliance status of the taxpayer on a real time basis on the date on which that PIN is utilised. It is intended that the tax compliance status process will allow taxpayers to print a tax clearance certificate in the previous format from the new system during the phasing in period of the new real time tax clearance status system, by utilising the PIN provided by SARS.

Unfortunately, cases have been encountered where taxpayers have applied for tax clearance certificates, only to be declined on the basis that they have an outstanding tax debt, which relates to an amount in dispute for which the taxpayer has applied for postponement under section 164 and to which SARS has not responded. This flows from the fact that applications for suspension of payment are not tracked on the SARS system and too often SARS delays making a decision on whether the taxpayer’s request for suspension is granted or not, and hopefully this deficiency will be rectified in the future.

Dr Beric Croome Tax Executive: Edward Nathan Sonnenbergs Inc. This article first appeared in Business Day, Business Law & Tax Review, March 2015. Image by Judy Croome

Monday, 9 February 2015

Effect of Taking Professional Advice on Imposition of Understatement Penalties and Interest

On 18 November 2014 Wepener J delivered judgment in the case of Mr Z v The Commissioner for South African Revenue Service, case number 13472 in the Tax Court Johannesburg (as yet unreported), which dealt with how amounts paid by the taxpayer to an erstwhile shareholder of a company in which the taxpayer had invested should be dealt with for capital gains tax purposes, as well as the imposition of the understatement penalty and interest imposed on the underpayment of provisional tax.

The judgment indicated that during November 2003, A Investments Ltd (“A”) disposed of its shareholding in B (Pty) Ltd. During August 2007 Mr Z, together with another shareholder, Mr X, disposed of 600 000 ordinary shares in B (Pty) Ltd to F. The shares represented 30% of the total issued share capital of B (Pty) Ltd with the taxpayer holding 27,005% and Mr X holding the balance.

Mr Z disposed of his shares for R841,655,833. A Investments Ltd informed the taxpayer that it had discovered that Mr Z had withheld material information from it when he represented A during its transaction with F. As a result, A instituted action against Mr Z on the basis of the 2003 transaction and in particular Appellant’s failure, as A’s agent to inform A that F would be prepared to extend minority protections to A. 

The dissatisfied shareholder claimed an amount of R925,000,000 from Mr Z on the basis that that was the value of the shares and claims it would have held and which it lost by virtue of having disposed of its shares and claims in B (Pty) Ltd. Mr Z concluded a settlement agreement with A to pay it an amount of R694,888,271 in full and final settlement of its claim. Mr Z reflected the net amount derived by him as proceeds for capital gains tax purposes and SARS subsequently increased the proceeds of R216,218,233 originally disclosed by the taxpayer by an amount of R625,437,601 to an amount of R841,655,833. 

The Tax Court reached the conclusion that SARS was correct in disregarding the amount paid by the taxpayer to A of R625,437,601 and thus effectively taxed the taxpayer on an amount he never retained. The court reached the view that the Eighth Schedule to the Income Tax Act No. 58 of 1962, as amended (“the Act”) afforded no relief to the taxpayer in the particular circumstances. This aspect is not discussed further in this article.

SARS imposed an understatement penalty of R46,907,820 on the amount paid by Mr Z to A. In addition, SARS imposed interest on the alleged underpayment of provisional tax in terms of section 89quat of the Act.

The Commissioner adjusted the taxpayer’s taxable income for the 2008 year of assessment and applied the provisions regulating the understatement penalty in terms of section 221 of the Tax Administration Act No. 28 of 2011 (“TAA”).

The Commissioner reached the conclusion that the taxpayer had not taken reasonable care in submitting the tax return to SARS or alternatively that there were no reasonable grounds for the tax position taken. The Commissioner applied the understatement penalty table with the result that the penalty was imposed at a level of 75%, which was the rate of penalty applicable at that time.

Mr Y gave evidence on behalf of SARS and indicated that the 75% penalty was determined by taking account of the fact that there were no reasonable grounds for the tax position taken by the taxpayer.

Most of the provisions of the TAA took effect on 1 October 2012 and at the time of its commencement, the level of penalty imposed on the basis of no reasonable grounds for tax position taken amounted to 75%. That was subsequently reduced to an amount of 50% by way of the Tax Administration Laws Amendment Act No. 39 of 2013 with effect from 16 January 2014. However, the court indicated that should the court decide that Mr Z had no reasonable grounds for the tax position taken the penalty provided for is 50%.

The court indicated that Mr Z’s unchallenged evidence was that the tax position he took was based on his belief that his calculation of capital gains tax was correct and that there was no intention to evade or delay the payment of tax. The taxpayer sought professional advice regarding the completion of his tax returns and denied being negligent in the returns submitted to SARS. Wepener J accepted that the taxpayer obtained professional advice regarding the submission of his tax returns to SARS and the deduction which was the subject of dispute in the case.

The court concluded that the provisions of section 270(6D) of the TAA applied and that the taxpayer had reasonable grounds for the tax position taken by him. The court reached the conclusion that there was a substantial understatement with the result that that triggered the payment of a 10% understatement penalty. The court decided that there were no extenuating circumstances as envisaged in section 270(6D) of the TAA. 

In the result the court decided that the understatement penalty should be reduced to an amount of 10%, taking account of the fact that the taxpayer had relied on advice received from his accountant and others.

The court then considered the imposition of interest under section 89quat of the Act and by virtue of the fact that the dispute related to the 2008 year of assessment, the basis on which the court had to decide whether to remit the interest, was whether the taxpayer had acted on reasonable grounds.

The Court made the point that when the court is required to establish the correctness of the exercise of a discretionary decision, which is subject to objection and appeal, the matter must be reheard by the Tax Court. The court referred to Juta’s Income Tax where the following is stated:

“The test as to whether the grounds are reasonable, is objective, in relation to actions of the taxpayer. A mere subjective belief by the taxpayer that a deduction should be allowed, without taking advice on the matter, is unlikely to be reasonable. On the other hand, the reliance by the taxpayer on expert advice, even if this is wrong, will in most cases constitute reasonable grounds for the action taken.”

The court came to the conclusion that the taxpayer’s reliance on the advice received was reasonable and therefore directed that the Commissioner should waive the section 89quat interest in full.

Unfortunately, the discretion conferred on SARS to waive interest on the underpayment of provisional tax has been significantly narrowed, such that SARS may only take account of circumstances beyond the control of the taxpayer in respect of years of assessment ending on or after 1 November 2010. For individual taxpayers, the restricted discretion applies with effect from years of assessment ending on or after 28 February 2011.

SARS relied on an internal template setting out the basis on which it determined the understatement penalty applicable to the taxpayer in this case. SARS led evidence relating to the template and the reasons contained thereon, which sets out the process SARS adopted in reaching the conclusion that the taxpayer in this particular case had no reasonable grounds for the tax position taken by him. Taxpayers who are subjected to understatement penalties should therefore request reasons from SARS regarding the imposition of the understatement penalty and must remember that where the understatement penalty is challenged, the onus to satisfy the court as to the penalty imposed lies upon SARS in terms of section 102(2) of the TAA.

It is essential that taxpayers exercise caution in submitting their tax returns to SARS and seek professional advice from a registered tax practitioner which may assist in reducing the exposure to the imposition of the understatement penalty where SARS takes a different view regarding the tax treatment of an amount received or a deduction claimed. 

Remember, too, that where a taxpayer has obtained an opinion from a registered tax practitioner in the manner prescribed under section 223 of the TAA, SARS is compelled to waive the penalty which would otherwise have been imposed. This was not the issue before the court, as the taxpayer did not hold a written opinion for the 2008 year of assessment, as that return was filed long before the TAA took effect. 

The fact that the taxpayer took advice at the time of completing his returns was sufficient for the court to show that the taxpayer had acted reasonably and therefore the level of penalty to be imposed was 10%, which under the penalty table is the lowest possible level of penalty which can be imposed.

Dr Beric Croome, Tax Executive: ENSafrica Inc. This article frist appeared in Business Day, Business Law and Tax Review, February 2015. Image purchased from  iStock.