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.

Thursday, 29 January 2015

Amendments to the definition of relevant material for purposes of the Tax Administration Act

Introduction

The Minister of Finance tabled the Tax Administration Laws Amendment Bill No. 14 of 2014 in Parliament on 22 October 2014 at the same time that he introduced the 2014 Medium Term Budget Policy statement. The Bill as introduced by the Minister of Finance, also contained the memorandum on the objects of the Tax Administration Laws Amendment Bill of 2014. 

This article will consider certain of the amendments proposed to the Tax Administration Act No. 28 of 2011 which will take effect once the Bill is enacted.

Amendment of section 45 of the Value-Added Tax Act No. 89 of 1991

Clause 32 of the Tax Administration Laws Amendment Bill (‘TALAB’) proposes amending section 45 of the Value-Added Tax Act (‘VAT Act’), which regulates the payment of interest to a vendor, where SARS delays a refund payable to the vendor.

It is important to note that it was previously proposed by way of section 271, read with paragraph 134 of schedule 1 to the Tax Administration Act No. 28 of 2011 (‘TAA’) that with effect from a date to be determined by the President by proclamation in the Gazette that a delayed refund would not be payable if a person fails to, without just cause, submit relevant material requested by SARS for purposes of verification, inspection or audit of a refund in accordance with chapter 5 of the TAA. 

In addition, the provision applied where a taxpayer failed to furnish SARS in writing with particulars of the account required in terms of section 44(3)(d) of the VAT Act to enable SARS to transfer a refund to that account. The date on which the proposed amendment was to take effect was not determined as it related to interest which was dealt with in Government Gazette 35687 published on 14 September 2012.

Clause 32 of the TALAB now removes the reference to where a taxpayer fails to submit relevant material requested by SARS for purpose of verification, inspection or audit of a refund in accordance with chapter 5 of the TAA. Thus, the fact that a taxpayer fails to submit the necessary material to SARS will not prevent the payment of interest to the taxpayer once the refund is finalised and paid to the taxpayer. 

The requirement to furnish SARS in writing with particulars of the account required in terms of section 44(3)(d) of the VAT Act to enable SARS to transfer a refund to that account remains in place. Thus, where a taxpayer fails to comply with that requirement, no interest will accrue on the amount refundable from the date that the refund is authorised until the date that the person submits the bank account particulars. 

The proposed amendments will take effect on the date on which the TALAB is promulgated. The Explanatory Memorandum on this particular provision contained in the TALAB indicates that in practice it has proven factually difficult and impractical for SARS to apply the rules set out in the proposed amendment.

Clause 37 of the Tax Administration Laws Amendment Bill

Clause 37(b) of the TALAB proposes that the definition of “relevant material” in section 1 of the TAA will in future provide as follows:
“means any information, document or thing that in the opinion of SARS is foreseeably relevant for the administration of a tax Act as referred to in section 3”

Previously, the definition of “relevant material” did not refer to “in the opinion of SARS”. The rationale for the above amendment as set out in the Explanatory Memorandum on the Objects of the TALAB is to prevent protracted disputes about the information which SARS believes it is entitled to under the information gathering powers contained in the TAA.

The Explanatory Memorandum points out that the proposed amendment seeks to clarify that the statutory duty to determine the relevance of any information, document or thing for the purposes of, for example, a verification or audit is that of SARS and the term “foreseeable relevance” does not imply that taxpayers may unilaterally decide relevance and refuse to provide access thereto. SARS indicates that in practice taxpayers are deciding what information should be submitted to SARS and what information should not be so provided.

In addition, the Explanatory Memorandum indicates that according to the literature, which is not cited in the Explanatory Memorandum, the test of what is foreseeably relevant for domestic tax application would have a low threshold and the application of what is “foreseeably relevant” follows the following broad principles:

·         Whether at the time of the request there is a reasonable possibility that the material is relevant to the purpose sought;

·         Whether the required material, once provided, actually proves to be relevant is immaterial;

·         An information request may not be declined in cases where a definite determination of relevance of the material to an ongoing audit or investigation can only be made following receipt of the material;

·        There need not be a clear and certain connection between the material and the purpose, but a rational possibility that the material will be relevant to the purpose; and

·         The approach is to order production first and to allow a definite determination to occur later.

The Explanatory Memorandum points out that the protection of taxpayer information received by SARS is confidential and protected under chapter 6 of the TAA and may only be disclosed to another party in certain specific circumstances referred to in chapter 6 of the TAA.

The Explanatory Memorandum indicates that SARS received comments that SARS should provide reasons for each request for information, explaining why the material requested is considered relevant. SARS indicates that this is impractical when auditing taxpayers and referred to the case of Australia and New Zealand Banking Group Limited v Konza, [2012] FCA 196, which SARS relies on as a basis not to justify why material requested is in fact relevant. It is unfortunate that SARS does not draw attention to the fact that Australia does not have a Bill of Rights enshrined in a constitution as is the case in South Africa where the right to administrative justice set out in section 33 of the Constitution of the Republic of South Africa is paramount.

SARS indicates that where a taxpayer is dissatisfied in the manner in which SARS requests information, taxpayers have the following remedies:

·         Request SARS to withdraw or amend the decision to request material in terms of section 9 of the TAA;

·         Pursue the internal administrative complaints resolution process of SARS;
·         Approach the Tax Ombud;
·         Approach the Public Protector.

SARS refers to the internal administrative complaints resolution process of SARS and it is unfortunate that these have not been clarified and publicised on SARS’ website. It is questionable whether the particular issue falls within the mandate of the Tax Ombud as set out in the TAA.

Section 17 of the TAA sets out the limitations placed on the Tax Ombud’s authority and the Tax Ombud may not review SARS’ policy or practice generally prevailing other than to the extent that it relates to a service matter or procedure or administrative matter arising from the application of the provisions of a tax Act by SARS. It may therefore be possible for a taxpayer to argue that where SARS exceeds its powers enshrined in the TAA in requesting information which is clearly irrelevant, that a taxpayer may be entitled to file a complaint with the office of the Tax Ombud.

Where SARS chooses to undertake a field audit at the taxpayer’s premises in terms of section 48 of the TAA, it is important that the material requested falls within the scope of the audit as required under section 48 of the TAA. Section 48(2) requires that SARS issues a notice to a taxpayer indicating the initial basis and scope of the audit or investigation and this should, restrict the scope of information requested and should not entitle SARS to call for all documents and records pertaining to the taxpayer which bears no relationship to the scope of the audit underway.

Taxpayers must remember that under the provisions of the common law, SARS is not entitled to request information which is protected by legal professional privilege. Generally, where a taxpayer has sought advice from an attorney or an advocate, such advice is protected by the so-called advice privilege and furthermore, where a taxpayer is engaged in litigation the documents relating to that litigation will, depending on the circumstances, also be privileged. Based on the decision of the court in Heiman Maasdorp and Barker v Secretary for Inland Revenue and Another 1968 (4) SA 160 (W), 30 SATC 145 the court upheld the principle that SARS is not entitled to request information which is protected by privilege. 

It is unfortunate that the information gathering powers conferred on SARS in sections 46 to 48 do not deal with the question of documents which may be subject to legal professional privilege, as is the case where SARS conducts a search and seizure operation where specific rules are in place to regulate the treatment of documents which may be subject to legal professional privilege. Section 64 of the TAA regulates the process relating to search and seizure operations but does not unfortunately apply specifically to requests for information or field audits conducted by SARS. 

On many occasions SARS will also request copies of advice and opinions obtained by a taxpayer from a person other than an attorney or an advocate and it is questionable whether such information would constitute relevant material as envisaged in section 1 of the TAA. An opinion is generally an analysis of the law and an interpretation thereof which would in a legal dispute be regarded as inadmissible in court as the court is required to adjudicate on matters of legal interpretation. Taxpayers need to consider SARS request for opinions and make a decision whether SARS is lawfully entitled to call for such opinions.

Amendment to the definition of “return”

Clause 37(c) of the TALAB proposes amending the definition of “return” to provide as follows:
“means a form, declaration, document or other manner of submitting information to SARS that incorporates a self-assessment, is a basis on which an assessment is to be made by SARS or incorporates relevant material required under section 25, 26 or 27 or a provision under a tax Act requiring the submission of a return;”

It is therefore clear that the definition of “return” will be expanded and the Explanatory Memorandum indicates that the amendment seeks to clarify that a return is also an information gathering mechanism to obtain third party information which may not on its own constitute a basis of an assessment but is relied on by SARS to verify the correctness of returns submitted by taxpayers. In addition, the purpose of the amendment is to ensure that SARS obtains information required for purposes of SARS meeting its obligations to exchange information under international tax agreements.

The intended amendment seeks to ensure that the definition of a return is more closely linked to the provisions in the TAA and other tax Acts dealing with returns.

Amendment to section 46 of the TAA

Clause 46 of the TALAB contains a requirement that where SARS requests relevant material under section 46, the taxpayer must submit that relevant material to SARS in the format, which must be reasonably accessible to the taxpayer.

Where, for example, taxpayers possess relevant material in electronic format, they would be obliged to make that version of the material available to SARS once the amendment takes effect. SARS indicates in the Explanatory Memorandum that historically taxpayers would only supply SARS with printouts of the electronic version of the material. Thus, this amendment seeks to ensure that where a taxpayer receives a request for relevant material from SARS in terms of section 46 of the TAA, it must be supplied in the format required by SARS if reasonably accessible to the taxpayer. Where, for example, a taxpayer does not maintain electronic records, it would not be acceptable for SARS to insist that the taxpayer captures manual records electronically to suit SARS purposes. Furthermore, a taxpayer should not be obliged to manipulate date and supply it in the particular format which SARS requires if that is not readily available and accessible to the taxpayer.

Tax compliance status

Clause 64 of the TALAB amends section 256 of the TAA which regulates the process regarding the issue of tax clearance certificates to taxpayers.

SARS is compelled to issue or decline to issue the confirmation of the taxpayer’s compliance status within 21 business days from the date on which the taxpayer’s application is submitted or such longer period as may reasonably be required where a senior SARS official is satisfied that the confirmation of the taxpayer’s tax compliance status may prejudice the efficient and effective collection of revenue.

Furthermore, a  senior SARS official may provide a taxpayer with confirmation of the taxpayer’s compliance status as compliant only where they are satisfied that the taxpayer is registered for tax and does not have any outstanding tax debt, other than a tax debt contemplated in sections 167 or 204, or where a tax debt has been suspended under section 164 or does not exceed the amount referred to in section 169(4). Furthermore, the tax clearance certificate may be denied where a taxpayer has an outstanding return, unless an arrangement acceptable to the SARS official has been made for the submission of the return in question.

Section 256(4) of the TAA will provide that a confirmation of tax compliance status must be issued in the prescribed format and refer to the original date of issue of the tax compliance confirmation to the taxpayer, the name, taxpayer reference number and identity number or company registration number of the taxpayer, the date of the confirmation of the tax compliance status of the taxpayer to an organ of state or a person referred to in section 256(5) of the Act and the confirmation of the tax compliance status of taxpayer as at the date referred to above.

SARS will be entitled, in terms of section 256(5) of the TAA, to confirm a taxpayer’s compliance status as at the date of the request by an organ of state or a person to whom the taxpayer presented the tax compliance status confirmation, despite the provisions protecting confidentiality of taxpayer information in chapter 6 of the TAA.

Section 256(6) of the TAA will provide that SARS will be entitled to alter a taxpayer’s compliance status to non-compliant if the confirmation was issued in error or was obtained on the basis of fraud, misrepresentation or non-disclosure of material facts and SARS has given the taxpayer prior notice thereof and an opportunity to respond to the allegations made of at least 14 days prior to the alteration of their status.

Section 256(7) of the TAA provides that a taxpayer’s tax compliance status will be indicated as non-compliant by SARS for the period commencing on the date that the taxpayer no longer complies with the requirements under section 256(3) of the Act and ending on the date that the taxpayer remedies the non-compliance. The new provisions regulating tax clearance certificates will take effect on the date on which the TALAB is promulgated. The Explanatory Memorandum indicates that the requirements of no outstanding requests for information is removed as a requirement for a tax clearance certificate, but that that will be reviewed during the 2015 legislative cycle. SARS has introduced a new tax clearance system which will cater for sending a letter to taxpayers advising them as to the change in their status from compliant to non-compliant, thereby enabling taxpayers to remedy their non-compliant status.

Conclusion

The amendments proposed to the TAA are significant and taxpayers need to be aware thereof. SARS is clearly concerned that taxpayers may resist its request for relevant material when requesting information under section 46 and indeed when undertaking a field audit at the premises of the taxpayer under section 48 of the Act. Clearly, in the case of a field audit, the law requires that SARS specifies the scope of the audit and it would be untenable for SARS to request information which falls outside of the scope of the audit as prescribed in section 48 of the TAA. It is hoped that certain of the provisions contained in the TAA regulating the request for information and particularly what is envisaged by the term “relevant information” will ultimately be adjudicated by the courts to provide clarity for taxpayers and SARS.

Dr Beric Croome,  Tax Executive, ENSAfrica. This article first appeared in TAX TALK ProfessionalJanuary/February 2015 edition from The South African Institute of Tax Professionals.



Monday, 1 December 2014

UCT Celebrates 100 Years of Income Tax in South Africa

During 1914, General Jan Smuts, in his capacity as Minister of Finance, tabled legislation in the Parliament of the Union of South Africa introducing income tax in the country with the Income Tax Act of 1914. Taxpayers in the Union of South Africa became liable to income tax with effect from 20 July 1914. [Source: Wikipedia]

In 2014, twenty years since South Africa became a constitutional democracy , the University of Cape Town marked this milestone since with the "INCOME TAX IN SOUTH AFRICA: THE FIRST 100 YEARS 1914 – 2014" conference.   

Dr Beric Croome addresses attendees at the
 "Income Tax in South Africa: The First 100 Years" conference,
with Prof Jennifer Roeleveld, a conference organiser, looking on
 

[Photograph Michael Hammond].
I was privileged to be part of this special occasion and presented a paper called "The shift to a constitutional democracy in 1994 and the impact thereof on tax law in SA." This paper, together with all the other conference papers, will be published in 2015 by Juta's Law, who also hosted the gala dinner.
The Deputy Tax Ombud of South Africa, Advocate Hanyana Eric Mkhawane, speaking at the Gala Dinner held in Smuts Hall at the University of Cape Town
[Photograph Michael Hammond].
You can read a media report on this conference here . You can view the UCT Finance and Tax  conference photo album HERE and the Juta Law's Gala Dinner photo album HERE. Below are some photos from the conference:
Prof Jennifer Roeleveld, Head: Taxation, Department of Finance and Tax,
 University of Cape Town and a co
nference organiser chats to Mr Kent Karro, Chairman of Horwath Zeller Karro and Chairman of SAICA's monthly tax journal Integritax's editorial panel.
[Photograph Michael Hammond].


[Photograph Michael Hammond].
Thanks to the University of Cape Town's Professors Jennifer Roeleveld, Craig West and Johann Hattingh for an excellent conference and to Jutas Law Mr Wayne Staples and Ms Melanie Wagner for an entertaining Gala Dinner. 
Prof Peter Surtees addresses the attendees
[Photograph Michael Hammond].
Here are some of the items from the "goody bag" the attendees received: