Exchange Control and the Shuttleworth Decision

Background

Mr Shuttleworth realised substantial proceeds on the disposal of his business, having realised approximately R4,2 billion, and decided to emigrate from South Africa on 23 February 2001.  As a result, the assets located in South Africa were blocked.  

In order to remit the funds from South Africa, Shuttleworth was required to pay a 10% levy to the South African Reserve Bank of R250,474,893.50.  This was not the first time that Shuttleworth had to pay a 10% levy for wanting to take assets out of South Africa.  

Under the rules in place governing exchange control, he was required to submit an application to transfer his blocked assets out of South Africa via an authorised dealer, that is, a commercial bank authorised to deal in foreign exchange, and submitted an application via his bank, namely, Standard Bank.  

In submitting the application to remit funds from the country, he requested Standard Bank to place before the South African Reserve Bank a document that he had prepared containing certain representations regarding his application.  Standard Bank omitted to place before the South African Reserve Bank the written representations prepared by Shuttleworth, and, when that was discovered, he instructed Standard Bank to place those representations before the South African Reserve Bank for it to reconsider its position regarding the imposition of the 10% levy.  

Subsequently, the South African Reserve Bank confirmed its earlier decision taken on 13 October 2009, whereby it imposed the 10% levy on the funds Shuttleworth wished to remit from South Africa.

Shuttleworth subsequently requested reasons for the decisions to impose a 10% levy, and the South African Reserve Bank responded to that request by pointing out that the Minister of Finance’s Budget Speech of 26 February 2009 contained details whereby emigrants’ blocked assets were to be unwound and that amounts of up to R750,000.00 will be eligible for removal from South Africa without charge.  

It was indicated that those emigrants who wished to remove more than R750,000.00 from South Africa would have to apply to the Exchange Control Department of the South African Reserve Bank for approval and will be subject to an exiting schedule and an exit charge or levy of 10% of the amount removed from South Africa.  

Shuttleworth sought relief from the Court(MR Shuttleworth v South African Reserve Bank and Others, Case No 307 09/210, North Gauteng High Court, as yet unreported) that the 10% levy paid by him was unlawful and should be returned to him and that certain provisions of the law and the regulations regulating exchange control did not comply with the Constitution of the Republic of South Africa, Act 108 of 1996, as amended, and should, therefore, be found to be unconstitutional.

Currency and Exchanges Act of 1933

It is appropriate to point out that the legal framework regulating exchange control in South Africa flows from the provisions of the Currency and Exchanges Act, No 9 of 1933, and the regulations, rules and orders which have been issued in terms of that statute.  It is thus clear that the Currency and Exchanges Act was enacted long before the dawn of the constitutional democracy in South Africa and the Bill of Rights contained in the Constitution.

The Currency and Exchanges Act was introduced to amend the law relating to legal tender, currency, exchange and banking.  It also creates a framework regulating exchange control and has thus been in place on the statute books for many years, and did not originate, as is often thought, after the aftermath of the Sharpeville massacre in 1961.  The legislation was designed in such a way that it can be amended quickly and easily by way of the issue of regulations in order to address developments in the economy and the currency markets quickly so as to protect the South African currency.

The legal challenge

Shuttleworth sought an order reviewing and setting aside the decision of the South African Reserve Bank taken during 2009 to impose a 10% levy as a condition permitting the transfer of his remaining blocked assets out of the Republic.  Shuttleworth, therefore, sought a refund of the levy paid of R250,474,893.50, together with interest thereon.

Furthermore, he sought an order declaring that the words “and an exit charge of 10% of the amount” used in Exchange Control Circular No D375 of 26 February 2003, and Exchange Control Circular No D380 of 26 February 2003 and section B2(E)(iii)(e) of the exchange control rulings were at all material times inconsistent with the Constitution and, thus, invalid.

In addition, Shuttleworth sought an order declaring that section 9 of the Currency and Exchanges Act is inconsistent with the Constitution and invalid, and in the alternative sought an order declaring that certain specific sub-sections of section 9 of the Currency and Exchanges Act are invalid.

The order requested the Court to declare certain paragraphs of regulation 3(1) of the exchange control regulations to be inconsistent with the Constitution and thus invalid, and that regulation 10(1)(b) of the exchange control regulations was invalid, together with an order declaring that regulations 18 and 19(1) of the Exchange Control Regulations are inconsistent with the Constitution and therefore invalid.

Shuttleworth also sought an order directing that parts of regulation 22 of the exchange control regulations were inconsistent with the Constitution and thus invalid, as well as the orders and rules issued under the exchange control regulations were inconsistent with the Constitution and thus invalid.

“Closed-door Policy”

Currently, under existing policy, persons wishing to seek approval from the South African Reserve Bank regarding transactions dealing with foreign exchange are required to communicate with the South African Reserve Bank via authorised dealers.  

Shuttleworth sought an order that the policy of the South African Reserve Bank to refuse dealing with members of the public directly in the exercise of its delegated powers under the exchange control regulations was inconsistent with the Constitution and therefore invalid.  

It is therefore not possible for a person seeking approval under the exchange control regulations to engage with the South African Reserve Bank directly, but is required, under the regulations, to approach the South African Reserve Bank via their own commercial bank.  In the judgment, this was referred to as “a closed-door policy” and the Court had to determine whether that process was procedurally right and fair.

Mootness of proceedings

The South African Reserve Bank raised the question whether the proceedings before the Court are academic or moot, in light of the decision by the Minister to do away with the 10% levy on blocked assets or funds.  

In considering this question, the Court looked at the merits and historical background to the exchange control system in South Africa, and pointed out that it is important that the authorities are able to react quickly and without delay to changes in the international monetary system, which is achieved via the current structure in place of empowering an official to issue regulations, which has been a central feature of exchange control in South Africa since 1933.

The Exchange Control Department of the South African Reserve Bank was subsequently replaced by the Financial Surveillance Department and exists in order to protect the value of the Rand in the interests of a balanced and sustainable economy in South Africa.  

The purpose of the Financial Surveillance Department within the South African Reserve Bank exists in order to regulate the inflow and outflow of capital in terms of the powers granted to it by the legislature.  The Financial Surveillance Department also comprises an investigations division, which is required to investigate alleged contraventions of the exchange control regulations and to recoup losses suffered insofar as the country’s foreign currency reserves are concerned.

The judgment contains a useful summary of the inception of exchange control in South Africa and the refinements made thereto over the last number of years.

 

The Court held that the issues raised by Shuttleworth were not academic or moot and that he had an interest in the Court ruling on those issues and, in addition thereto, it was in the public interest that the issues raised in his challenge on the various regulations and sections of the statute regulating exchange control should be considered by the Court.

The regulations, orders and rules governing exchange control

The primary legislation regulating exchange control is, therefore, contained in the Currency and Exchanges Act of 1933, and, in accordance

Mark Shuttleworth

with that statute, regulations governing exchange control may be promulgated.  

Furthermore, the Minister of Finance is empowered to issue orders and rules under the exchange control regulations which contain various orders, rules, exemptions, forms and procedural arrangements.  Regulations may be issued by the Minister in terms of section 9 of the Currency and Exchanges Act and, furthermore, the Minister of Finance can further delegate such duties or powers to any person in terms of regulation 22E of the exchange control regulations.  

Thus, the furnishing of information or advice on exchange control or currency matters are matters governed by the regulations and, similarly, the approval or permission in respect of exchange, currency or gold transactions are also governed by the regulations.  

Shuttleworth sought to argue that the requirement that members of the public must approach the South African Reserve Bank via their bankers was contrary to the obligations imposed on the public administration by section 195 of the Constitution, as well the foundational values of accountability, responsiveness and openness of section 1 of the Constitution.  

The South African Reserve Bank pointed out that the exchange control rulings are amended from time to time by way of exchange control circulars and are made available to all authorised dealers and that the contents thereof may be made available to the public.  

In addition, the Exchange Control Manual is published by the South African Reserve Bank on its website as a general guideline for the public in an attempt to provide a general understanding of the purpose, scope and operation of the exchange control system.  

It was pointed out that the majority of applications for permission to carry out transactions fall within the scope of rulings and are dealt with by the authorised dealers.  In the judgement, it was indicated that in 2010, a total of 10,147,090 foreign exchange transactions took place, of which the Exchange Control Department only received approximately 54,000 applications from all recognised authorised dealers.  

It was therefore argued that the authorised dealer system allows for the sifting of applications such that the South African Reserve Bank is only required to deal with those applications which fall beyond the scope of authority granted to authorised dealers.

In the result, the Court found that the so-called “closed door policy” was lawful and complied with the Constitution.  

In addition, the Court declined Shuttleworth’s request to direct that the 10% exit levy paid by him be refunded on the basis that the exchange control circulars issued were valid and did not violate the Constitution.  

The decision to impose the 10% exit levy was not made by the South African Reserve Bank itself, but by the Minister of Finance, who had the authority to make such decision. 

Shuttleworth sought to argue that the regulation imposing the 10% levy had not been approved by Parliament, but this argument was rejected by the Court on the basis that the regulation did not constitute the making or promulgation of a regulation intended to raise revenue or tax as envisaged in section 9(4) of the Currency and Exchanges Act but was, rather, a measure to protect the currency of South Africa.

The Court accepted that the 10% exit levy was imposed as a means of restricting the export of capital from South Africa and that the levy was valid under the Constitution, and, therefore, refrained from directing that the levy paid by Shuttleworth be refunded.

Court’s decision on the other challenged made by Shuttleworth

The judgment deals with the various challenges made by Shuttleworth insofar as various regulations and sections of the Currency and Exchanges Act are concerned and these are summarised in the table set out below:

Section of Currency and Exchanges Act or Regulation challenged by Shuttleworth		Court Decision
1	Section 9	Dismissed
2	Sections 9(2)(a),(c) and (f)	Dismissed
3	Section 9(3)	Granted – subject to confirmation by Constitutional Court
4	Section 9(5)	Dismissed
5	Exchange Control Regulations in their entirety	Dismissed
6	Regulation 3(1)	Granted – subject to rectification within twelve months
7	Regulation 3(1)(a) to (c)	Granted – subject to rectification within twelve months
8	Regulation 3(3) and 3(5)	Granted – subject to rectification within twelve months
9	Regulation 10(1)(b)	Granted – subject to rectification within twelve months
10	Regulation 18	Dismissed
11	Regulation 19(1)	Granted – subject to rectification within twelve months
12	The wording in Regulation 22 “unless he proves that he did not know, and could not by exercise of reasonable degree of care have ascertained that the statement was incorrect”	Granted and words in issue struck down
13	Orders and rules under exchange control regulations	Dismissed

Cost Order

The Court pointed out that the issues raised in the proceedings are important from a constitutional point of view.  The decision of the Court was not only of importance for Shuttleworth, but also for the South African Reserve Bank and the Minister of Finance.  Ordinarily, the Court directs that the costs shall follow the outcome of the decision, and, in the Shuttleworth case, the Court ordered that each party must each pay his or her own costs.

Exchange Control Circular No 19/2013

On 2 August 2013, the Financial Surveillance Department of the South African Reserve Bank issued the abovementioned circular in response to the judgement handed down in the North Gauteng High Court in the matter between Mr Shuttleworth and the South African Reserve Bank and others.  

The circular summarises the decision of the Court, and points out that the Court rejected Mr Shuttleworth’s contention that the exchange control system as a whole and the legislation and regulations which comprises the system are unconstitutional.  

The exchange control circular issued on 2 August 2013, therefore, informs authorised dealers that the effect of the judgment of the Court is that the exchange control system and the administration thereof remains unchanged.

The circular confirms that the Court declared section 9(3) of the Currency and Exchanges Act constitutional, and that that declaration is subject to confirmation by the Constitutional Court.  

Furthermore, as pointed out above, the Court also declared certain regulations unconstitutional, which declaration of invalidity has been suspended for twelve months.  

The South African Reserve Bank advised all authorised dealers to note that the provisions in question remain of full force and effect until the matter has been finally adjudicated by the Constitutional Court in terms of section 172 of the Constitution.

Conclusion

It has been reported in the media that Mr Shuttleworth has decided to seek leave to appeal the decision handed down by Legodi J, and it is therefore likely that the case will proceed to a full bench of the North Gauteng High Court and, ultimately, to the Constitutional Court for final adjudication.

It is clear that certain regulations governing exchange control have been found to be wanting and that sections of the Currency and Exchanges Act must be refined in order to comply with the Constitution.  

This does not come as a surprise, taking account of the fact that the Currency and Exchanges Act was enacted in 1933, that is, long before the Bill of Rights and the dawn of the democratic era of constitutional supremacy in South Africa.

(NOTE in Without Prejudice: On September 17, 2013, the North Gauteng High Court granted Mr Shuttleworth leave to appeal and granted the Reserve Bank leave to cross-appeal)

This article by Dr Beric Croome was first published in Without Prejudice, Vol 13, No 9, October 2013. Photograph of Mark Shuttleworth from his personal blog http://www.markshuttleworth.com

Global Tax Information Exchange a Step Closer

During the course of September, 2013, the leaders of the G20 nations met in St Petersburg to deal with a number of matters.  Pursuant to that meeting, a tax annex to the St Petersburg G20 Leaders’ Declaration was released.

At the outset, it is appropriate to point out that the members of the G20 comprise the European Union together with the following 19 countries:  Argentina, Australia, Brazil, Canada, China, France, Germany, Italy, India, Indonesia, Japan, Mexico, the Republic of Korea, Russia, Saudi Arabia, South Africa, Turkey, the United Kingdom and the United States.

The G20 has been at the forefront of seeking a more effective, efficient and fair international tax system since it declared the era of bank secrecy over at the G20 London Summit held in April 2009.  The tax annex points out that in an era of a mobile economy, strengthening of international co-operation in tax matters is essential to ensure the integrity of national tax systems and to ensure trust in governments.

The Global Forum on Transparency and Exchange of Information for Tax Purposes has played an important role in creating the international standard of exchange of information on request which was endorsed by the G20 and to ensure that this standard is implemented effectively around the world.

The Global Forum has undertaken 113 peer review reports and has issued over 600 recommendations for improvement, with more than 300 of those recommendations having been dealt with.  The number of jurisdictions that have committed to implement the Global Forum’s standards and have joined the Global Forum now numbers 120.

During the G20 summit held in St Petersburg in September, the G20 has now endorsed the development of a new global tax standard, and that is the requirement of automatic exchange of information.  What this means, is that, instead of countries being required to request information from their treaty partners, they will automatically receive information for tax purposes, and, similarly, must make such information available automatically.  

Church of the Savior on Blood, St. Petersburg, Russia.

The G20 summit held in Cannes during 2011 agreed to consider exchanging information automatically for tax purposes on a voluntary basis.  During 2012, the Los Cabos Summit supported the OECD Report on Automatic Exchange and encouraged all countries to participate therein.  

The G20 has decided that it is now appropriate to migrate to a more ambitious and higher standard which the automatic exchange of information.  This has become necessary as a result of undisclosed foreign bank accounts, and the Global Forum will monitor a move to this standard to ensure its effective implementation.

During July 2013, the G20 finance ministers and central bank governors endorsed the ambitious OECD proposal for a global model for multilateral and bilateral automatic exchange of information for tax purposes and indicated their commitment to the automatic exchange of information as the new global standard.

The OECD has commenced work with the G20 countries to design a new single global standard for the automatic exchange of tax information.  It has been proposed that the new standard, included in a model competent authority agreement, will be presented that the G20 Finance Ministers and Central Bank Governors Meeting, to be held in February 2014. 

The Global Forum will establish a mechanism to monitor and report on the implementation of the new standard of automatic exchange of information and will co-operate with the OECD Task Force on Tax & Development, the World Bank and other organisations to help developing countries identify their need for technical assistance and capacity building.

The tax annex points out that it is anticipated that the automatic exchange of information on tax matters among G20 members will commence by the end of 2015.  It has been proposed that the automatic exchange of information is the standard of reporting which will be adhered to by all jurisdictions and which must be adopted in practice.  It is anticipated that the multilateral convention is key to ensuring the rapid implementation of the new standard of information exchange, thereby enabling developing countries to develop a new and more transparent environment.  

It has been confirmed that all G20 countries have signed the multilateral convention and more than 70 countries and jurisdictions are covered or are likely to be covered by the multilateral convention, including a large number of financial centres.  It has been pointed out that the multilateral convention is a powerful tool to be used in combating tax evasion, and allows for all forms of co-operation tax matters, including the automatic exchange of information.

Recently, the OECD issued a document dealing with the manner in which countries should address base erosion and profit shifting (‘BEPS’).  The tax annex points out that international collective efforts must also address tax base erosion flowing from international tax planning. 

The G20 has pointed out that the interaction of different tax rules which may result in multinational enterprises to artificially shift profits out of the countries where they are derived resulting in either very low taxes or even double non-taxation needs to be addressed, as this undermines the fairness and integrity of the various tax systems around the world.  G20 leaders, during the course of their 2012 summit, identified the pressing need to address BEPS as a priority and that it is important to achieve better international co-ordination on taxes.

Furthermore, the tax annex refers to the fact that the rules regulating international tax, which were formulated in the 1920’s, have not kept abreast with the dynamic  need to address BEPS as a priority and that it is important to achieve better international co-ordination on taxes.

It is clear that the G20 leaders intend to work closely with the OECD in advancing the BEPS agenda so as to address the problems identified by the OECD in this regard.  The tax annex refers to the action plan designed to address BEPS, which contains an ambitious agenda to examine the following fundamental aspects of international tax rules:

·         Firstly, changes to international tax rules must be designed to deal with the gaps between different countries’ tax systems while respecting the sovereignty of each country to design its own rules;

·         Secondly, the existing international tax rules regarding tax treaties, permanent establishment and transfer pricing, must be examined to ensure that profits are taxed where economic activities occur and the value is created;

·         Thirdly, more transparency will be established, including through a common template for companies to report to tax administrations on their world-wide allocation of profits and tax;

·         Fourthly, all the actions are expected to be delivered in the forthcoming 18 to 24 months;

Finally, the tax annex points out that it is intended that developing countries must reap the benefits of the G20 tax agenda, thereby enabling developing countries to secure tax revenues required to foster long-term development.  

Thus, based on the decisions taken at St Petersburg by the G20 summit, it is intended that the countries comprising the G20 will, instead of only making available tax information upon request, be required to automatically exchange certain tax information to the G20 countries.  In time, it is anticipated that the requirement to automatically exchange information will increase amongst the various countries of the world. 

South Africa currently has a large network of double taxation agreements in place, which contain articles dealing with the exchange of information from South Africa to the treaty partner and vice versa.  In time, these articles will, no doubt, be amended to comply with the decisions taken at the St Petersburg G20 summit.  

Furthermore, South Africa has concluded a number of tax information exchange agreements, a number of which are already in force, particularly with the Bahamas, Bermuda, Cayman Islands, Gibraltar, Guernsey, Jersey and San Marino.  A number of other tax information exchange agreements are in the process of being completed and will come into force in the next twelve to twenty-four months.  

In addition, South Africa signed the Multilateral Convention on Mutual Administrative Assistance on Tax Matters as amended by the protocol in Cannes on 3 November 2011, and, once the outstanding formalities have been completed, that convention will, for all practical purposes, constitute part of South African law.

Taxpayers, therefore, need to be aware of the changes taking place in the international arena whereby tax authorities will exchange information automatically from one country to another to ensure greater compliance with the tax systems around the world.

This article by Dr Beric Croome Tax Executive Edward Nathan Sonnenbergs Inc. was first published in Business Day, Business Tax and Law Review, October 2013. 

Free Image from Photo details »  Church of the Savior on Blood, St. Petersburg, Russia. » Uploaded by nataliar on Sep 6, 2008

New Book: Tax Litigation (Published by The European Lawyer, Editor David W. Chodikoff)

Tax Litigation
published by Sweet & Maxwell
first of its kind

A new tax book TAX LITIGATION, edited by David W. Chodikoff and published by The European Lawyer, a division of Thomson Reuters (UK), was launched today Wednesday, October 9, 2013 at The Harvard Club in Boston, Massachusetts, USA, during the 2013 International Bar Association Conference.

Edward Nathan Sonnenbergs was responsible for South Africa's contribution, which was co-written by my colleague Mmangaliso Nzimande and myself.

Tax Litigation is the first book of its kind. It provides owners and leaders of business, general counsel, tax lawyers, accountants and members of the general public with ready access to the fundamentals of tax litigation in a multi-jurisdictional, comparative format. The information is provided by leading practitioners within the field from around the globe. 

Whether the ultimate problem is within the common law/civil code context or involves criminal tax related offences, this book provides invaluable information regarding the identification of the relevant legislative framework, the pre-trial process, the trial process, the important individual national aspects of both documentary and witness evidence including expert witness evidence, court cost considerations, Appeals and the hot areas of interest in each jurisdiction. This work highlights the complexities of tax litigation around the world. Tax Litigation:

• Advises on the fundamentals of tax litigation in a range of international jurisdictions

• Covers over 29 jurisdictions on a country-by-country basis, each written by local expert practitioners 

• Provides invaluable information regarding the identification of the relevant legislative framework

• Adopts a consistent approach for each jurisdiction, so that quick and accurate comparisons can be readily made 

• Goes through topics such as the pre-trial process, the trial process, the important individual national aspects of both documentary and witness evidence including expert witness evidence, court cost considerations, and appeals in each jurisdiction

Tax Litigation is available for order from Sweet and Maxwell's UK website

Analysis: Taxpayer Remedies

A functional, ethical and skilled South African public sector is vital for positive and lasting change. 

The Tax Administration Act, No 28 of 2011 (the TAA) took effect on 1 October 2012, and seeks to enhance the rights that taxpayers have in their dealings with the South African Revenue Service (SARS).

Previously, for example, a taxpayer had no right to expect a report from SARS as to when an audit was likely to be completed, or the status thereof. In terms of section 42 of the TAA, SARS is now obliged to issue a report to a taxpayer 90 days after the audit has commenced and within 90-day intervals thereafter, setting out the scope of the audit and the status thereof.

When a taxpayers choose to dispute an assessment and lodges an objection against that assessment, he or she is entitled to request the postponement of the disputed tax in terms of section 164 of the   TAA. While SARS is considering the application for the postponement of payment, it is precluded from taking steps to recover the tax from the taxpayer until a decision is made on the postponement application.

Where a taxpayer fails to adhere to the provisions of the fiscal statutes, the Commissioner is empowered to take action against that taxpayer to ensure compliance with the laws of the country and to enhance tax compliance. For example, the Commissioner may initiate recovery proceedings where the taxpayer fails to pay assessed tax in time, by either filing a statement with the court, which has the effect of a civil judgement against the taxpayer, or can appoint any other person holding funds on behalf of the taxpayer as the taxpayer's agent, and direct those funds to be paid over to SARS in satisfaction of the taxes due.

Unfortunately, where SARS fails to adhere to its obligations in respect of its dealings with taxpayers in terms of the TAA, taxpayers have no remedy in the TAA itself, and SARS officials are not subject to any form of legal sanction under the provisions of the TAA.

The TAA does, however, create the office of Tax Ombud to deal with administrative difficulties faced by taxpayers in their dealings with SARS. The TAA requires that the Tax Ombud be appointed within 12 months of the TAA taking effect, that is, no later than 30 September 2013. A taxpayer is entitled to approach the Ombud for assistance once they have exhausted the existing SARS internal complaint resolution mechanisms. The Ombud is required to review complaints and to facilitate resolution thereof, so as to enhance taxpayer compliance in the country.

"When a taxpayer chooses to dispute an assessment and lodges an objection against
 that assessment, they are entitled to request the postponement of the disputed tax
 in terms of section 164 of the TAA"

It is unfortunate that the Tax Ombud does not have the power to direct SARS to refrain from taking action against taxpayers while investigating complaints, as is in the USA. The Taxpayer Advocate in the USA is entitled to issue so-called ‘Taxpayer Assistance Orders' directing the Internal Revenue Service (IRS) to refrain from taking certain steps against taxpayers while a complaint is being investigated.

Too often, taxpayers face situations where SARS does not comply with the provisions of the law and initiates recovery procedures by filing statements in court, which has the effect of a civil judgment against the taxpayer despite the new requirement that SARS is required to give a taxpayer ten days' notice before initiating the judgment procedure.

In other cases, taxpayers are experiencing extreme difficulty in securing tax clearance certificates as a result of adjustments made to assessments, particularly VAT assessments, with little or no details being supplied to taxpayers as to the nature of the adjustments made.

The only recourse available to taxpayers would be to seek the assistance of the Tax Ombud once that person has been appointed. An alternative remedy would be to approach the High Court for relief by way of judicial review of SARS' conduct in accordance with the rules of the High Court and on the basis that SARS has failed to comply with the provisions of the Promotion of Administrative Justice Act, No 3 of 2000, and the taxpayers' right to administrative justice contained in section 33 of the Constitution of the Republic of South Africa, No 107 of 1996.

Unfortunately, the cost of litigation is high and time consuming and often the nature of the disputes with SARS is not substantial in monetary terms, which results in the legal costs exceeding the tax in issue. As a result, taxpayers refrain from applying to the courts for relief where SARS has abused its powers.

In a number of overseas jurisdictions, taxpayers are entitled to recover damages or wasted costs from the revenue authority where the revenue has abused its powers and resulted in the taxpayer incurring unnecessary expenditure. It is most unfortunate that the TAA does not provide for a legal basis whereby taxpayers may seek the recovery of wasted costs and/or damages from SARS when it has abused its powers in dealings with taxpayers. As a matter of law, taxpayers should be entitled to recover wasted costs incurred where SARS has acted badly in dealing with taxpayers.

Furthermore, SARS is entitled to lodge formal complaints against registered tax practitioners under the provisions of the TAA and will no doubt do so since the new rules regulating tax practitioners took effect on 1 July 2013. Where a SARS official, for example, refuses to accept the delivery of legal documents or has acted contrary to the provisions of the fiscal statutes, taxpayers are unaware of the process to follow in pursuing a complaint against a specific SARS official.

SARS should disclose on its website and other material released to the public the process to be followed by a taxpayer wishing to lodge a formal complaint against an official for maladministration or abuse of power.

The draft Tax Administration Laws Amendment Bill of 2013 contains a proposal that the Tax Court will, in future, be permitted to deal with the review of decisions taken by SARS regarding income tax appeals, which previously may only have been heard by the High Court or the Magistrate's Court.

In conclusion, therefore, it is clear that SARS has extensive powers to take action against taxpayers who fail to adhere to the provisions of the fiscal laws of the country. It is most unfortunate that the TAA does not contain any specific sanction on SARS itself or its officials where obligations imposed on SARS and its officials are disregarded. It is hoped that the Tax Ombud will investigate the significant administrative frustrations currently experienced by taxpayers with a view to resolving systemic issues, thereby enhancing tax compliance in South Africa.

International research has shown that, where taxpayers believe that they have been abused by a revenue authority, tax compliance will    decline as a result thereof. The only effective remedy which taxpayers have where SARS fails to adhere to its obligations in the TAA is to seek relief from the High Court and an order of costs against SARS on a client-attorney basis and, in appropriate cases, to consider seeking an award of legal costs to be paid by SARS officials in their personal capacity, known as costs de bonis propriis.

• Author: Dr Beric Croome CA(SA), LLB, H Dip Tax, PhD (Commercial Law), Advocate of the High Court of South Africa, FCMA(UK), MTP(SA), TEP, is Tax Executive at Edward Nathan Sonnenbergs Inc. This article first appeared in Accountancy SA (October 2013)