Thursday 18 August 2011

South African Revenue Service: Scam Alert Notifications

The South African Revenue Service (“SARS”) website, namely,, contains various warnings to taxpayers about scams used by criminals to obtain banking details of taxpayers, or other means of obtaining personal information illicitly from taxpayers.

SARS indicates, on its website, that taxpayers must not supply their banking details to anyone via the telephone, sms or e-mail, as SARS will never request banking details telephonically, via sms or via e-mail.

The website contains details of a series of phishing/scam e-mails and letters, which were purportedly sent by SARS to taxpayers whereas such letters and e-mails were, in fact, submitted by persons who have nothing whatsoever to do with SARS.

Taxpayers must remember that under the provisions of the Income Tax Act, Act 58 of 1962, as amended (“the Act”), SARS is empowered to audit a taxpayer’s affairs, but in order to do so, must make prior arrangements with the taxpayer in terms of section 74B of the Act.  The law requires that the Commissioner must give the taxpayer reasonable prior notice of a requirement to submit information to SARS, or to conduct an audit.

Furthermore, any person arriving at business premises, contending to be a SARS official, is required, upon request, to furnish a copy of an authorisation letter as envisaged in section 74A of the Act.

The Act specifically defines an “authorisation letter” as a written authorisation granted by the Commissioner, for any person designated by the Commissioner for such purpose, to an officer to inspect, audit, examine or obtain information as contemplated in section 74B of the Act.  Where a person arrives at business premises without prior notice, demanding access on the basis that they are an official of SARS, such person can lawfully be ejected from the premises and refused access to those premises.  The only occasion whereby a SARS official may arrive at business premises, without prior notice, is where the High Court has authorised the issue of a search and seizure warrant in terms of section 74D of the Act.

Dear Taxpayer...
not all letters with the SARS logo are genuine
It would appear that a number of taxpayers have received letters purporting to be from SARS, which, from close examination, indicate that the letters in question were not issued by SARS but by the fraudsters. It would appear that letters advising a taxpayer that a VAT sales enquiry was to be undertaken, did the rounds in Limpopo Province during the course of June 2011 and, more recently, in the Sandton area during July 2011.

From a review of the letter relied on by the perpetrators of the fraud, it is apparent that the letter is deficient, inter alia, in the following respects:

·         Reference is made to the “South African Revenue Services”, which should, in fact, be to the “South African Revenue Service”.

·         Reference is made to the “Special Investigations Unit”, which unit does not appear to exist at SARS.

·         The letter also refers to a “Regional Controller”, which is not a designation of an official employed by SARS.

·         Letters of audit normally refer to the rights which taxpayers have in their dealings with SARS.

It is unclear what the perpetrators of the fraudulent letters hoped to achieve by advising a business that it is intended to subject that business to one or other tax audit.

Taxpayers who receive letters, purporting to be from SARS, which do not contain the details usually reflected thereon, should report the matter to SARS with a view to establishing if the letter was, in fact, issued by SARS or not.

More importantly though, taxpayers need to be aware that they do have certain rights in dealing with SARS, and are fully entitled to establish the bona fides of any person alleging to be an official from SARS, who wishes to have access to the business premises.  It must be remembered that a person who holds himself or herself out as an officer of SARS, engaged in carrying out the provisions of the Act, is guilty of an offence. Perpetrators of these frauds can be fined or imprisoned upon convictions of this offence.

As indicated above, SARS is required, by law, to make a prior arrangement with the taxpayer to conduct an audit, at the taxpayer’s premises, and cannot arrive without prior notice.  The only exception, where SARS may arrive without prior notice is where the High Court has issued a search and seizure warrant or, alternatively, where there is a criminal investigation and a search warrant has been issued under the Criminal Procedure Act No. 51 of 1977, as amended, which is executed by the South African Police Service.

Taxpayers receiving suspicious letters, purporting to be from SARS, need to be on their guard before making arrangements with the perpetrators to audit their affairs, or before they start disclosing personal particulars or banking details to such persons.  Should taxpayers have any doubt whether a letter requesting access to the business records is, indeed, from SARS, legal advice should be sought.

Dr Beric Croome is a Tax Executive at EDWARD NATHAN SONNENBERGS INC. This article first appeared in ENS Tax Ensight August 2011. Image from SARS.

Thursday 11 August 2011

Vital to balance taxpayers’ rights against fiscal laws

In June the Minister of Finance tabled the Tax Administration Bill in Parliament, first mooted in 2005 with the stated purpose of containing the administrative provisions affecting all taxes other than Customs and excise duties.

The bill consists of 20 chapters with 272 draft sections relating to various processes taxpayers will face when dealing with SARS.

SARS has indicated that the tabling of the legislation is the first step in rewriting the Income tax Act, Act 58 of 1962.

Once the bill has been enacted those administrative provisions currently contained in the act and other fiscal statutes will be repealed.

The bill creates a legal framework for the creation of a tax ombud in SA. Under the bill the minister must appoint a tax ombud for a period of three years. SARS has indicated that the tax ombud will follow the model used by the UK in creating the tax adjudicator’s office and the tax ombud’s office in Canada. The bill provides that the staff of the office of the tax ombud must be employed in terms of the SARS Act and will be seconded to the office of the tax ombud from SARS.

The mandate of the tax ombud, according to the legislation, is to review and address complaints by a taxpayer regarding a service or a procedural administrative matter. The tax ombud is required to review a complaint lodged by a taxpayer and resolve it, either through mediation or conciliation, and must act independently in resolving taxpayers’ complaints. The tax ombud is required to follow informal, fair and cost-effective procedures in resolving taxpayers’ complaints.

It's vital to balance taxpayers' rights against fiscal laws as the bill gives SARS the power to conduct a search and seizure operation without a warrant to protect documents from destruction.

The tax ombud may review any issue falling within its jurisdiction on receipt of a request from a taxpayer. The tax ombud may determine how a review is to be conducted and may decide that a review should be terminated before completion in certain cases.

Some commentators have raised concerns about the fact that the tax ombud will be housed within SARS and will not be created as a separate and distinct office outside SARS.

Practically, the tax ombud is required to obtain access to taxpayer information and can only do so where the ombud is regulated by the secrecy provisions contained in the fiscal statutes. The housing of the tax ombud within a tax authority is not that unusual when reference is made to the models used as a basis to create a tax ombud in SA, and is also the manner in which the taxpayer advocate’s office was created in the US, which seeks to deal with taxpayer complaints lodged against the Internal Revenue Service.

The Tax Administration Bill also seeks to ensure that taxpayers’ rights are protected where a taxpayer faces a criminal investigation. The bill requires that audits and criminal investigations are separated, ensuring that the rights of an accused under the constitution are protected.

The one power contained in the bill that has attracted comment is SARS’s power to conduct a search and seizure operation without a warrant to protect documents from destruction by taxpayers.

Currently under the act SARS may only search taxpayers’ premises and seize documents when authorised to do so by a warrant issued by a court in terms of section 74D of the act. Clause 63 of the Tax Administration Bill confers on a senior SARS official the power to search premises and seize documents without a warrant when that senior official, on reasonable grounds, is satisfied that there may be an imminent removal or destruction of records likely to be found on the premises and that the delay in securing a search and seizure warrant would defeat the object of the search and seizure.

Clearly, the power to conduct a search and seizure operation without a warrant is not aimed at those taxpayers who comply with the fiscal laws of the country but is aimed at those who choose to operate outside the law.

A concern that arises, though, is the possibility of the power contained in clause 63 of the bill being abused by senior SARS officials, particularly as there is no oversight by a third independent party as to when it is appropriate to search premises and seize documents.

It would be preferable if SARS exercised the power it seeks such that the court, after the search and seizure operation, reviewed the decision made by an official to conduct a warrantless search and seizure operation.

The difficulty that arises is that a search and seizure operation conducted without a warrant constitutes an invasion of the rights of a taxpayer to privacy under the constitution. On the other hand, SARS has a statutory duty to ensure that taxpayers comply with the fiscal laws and faces taxpayers who, once an audit commences, seek to destroy documents.

It is, therefore, necessary to strike a balance between the rights of the taxpayers on the one hand and the statutory duty which SARS has of ensuring that taxpayers comply with the fiscal laws.

It would appear that the decision which may be made by a senior SARS official to conduct a warrantless search and seizure operation constitutes administrative action as envisaged under the rules of administrative law.

That being the case, it is important that any official making a decision under clause 63 of the bill does not have a pecuniary interest in the outcome of the decision made by that official based on the general principles of administrative law in SA.

It is unclear whether SARS officials receive incentives or bonuses directly relating to the tax that they collect. Should an official have a pecuniary interest in the outcome of the decision, that would be indicative of the official being biased.

SARS should, therefore, clarify whether its officials are in receipt of incentives directly related to the taxes collected by them and, if that is the case, it raises a question as to whether clause 63 is constitutionally valid.

It remains questionable whether clause 63 complies with the constitution, particularly when reference is made to the strict rules in place in so far as issuing search and seizure warrants under the Criminal Procedure Act are concerned and, particularly, in the light of the decision of the Constitutional Court in Minister for Safety and Security v GW van der Merwe and Others, where the Constitutional Court held that the provisions of the North-West Gambling Act No 2 of 2001 authorising an inspector to enter unlicensed gambling premises without a warrant , were unconstitutional and invalid.

It is important that taxpayers note that many of the administrative provisions currently contained in the act and other fiscal statutes will continue to exist in the Tax Administration Bill.

It is unclear at this stage when the bill will be enacted and when it will take effect. It is more than likely that the provisions of the bill will become effective on different dates and taxpayers will need to take account of the provisions so that they understand the powers that SARS has under the legislation and the rights which are contained therein.

·         Dr Beric Croome is a tax executive at Edward Nathan Sonnenbergs. This article first appeared in Business Day, Business Law & Tax Review August 2011. Image free from ClipArt