Thursday 29 March 2012

Double Taxation Agreements – the noose closes

Recently, the Western Cape High Court had to determine whether the South African Revenue Service would utilise the powers contained in s74A and s74B of the Income Tax Act, (58 of 1962), as amended, to obtain information from a person in South Africa to ensure compliance with the provisions contained in a double taxation agreement (DTA) concluded by South Africa and Australia enabling the exchange of information.

This was the issue to be decided in the case of Commissioner: SARS v Werner van Kets, case number 13446/2011, as yet unreported, where Davis, J, delivered judgment on 22 November 2011.

SARS received a letter from the Australian Tax Office (ATO) requesting information in terms of Article 25 of the double taxation treaty.  The ATO’s request related to an investigation into the income tax affairs of a Mr Saville, specifically regarding his possible off-shore wealth, and his involvement with a Malaysian entity, which transferred substantial amounts into Australia.  

The information provided to SARS by the ATO indicated that Mr van Kets resided in South Africa and was a director of the Malaysian entity in question. It would appear from the judgment van Kets was in possession of information, which the ATO requested from SARS and that van Kets refused to disclose it on the grounds that it was confidential and that he was not authorised to release it.

Davis, J, indicated that the issue to be determined by the court was whether the words “any taxpayer,” used in s74A and s74B of the Act, can be interpreted to include a person who is not a “taxpayer” as defined in section 1 of the Act, but who, in terms of a DTA, has been identified as someone who can provide the information pursuant to the request made by the ATO.

s74A empowers the Revenue to request a taxpayer, or any other person, to furnish information it may require for purposes of administration of the Act. s74B, in turn, authorises SARS to request the taxpayer, or any other person, with reasonable prior notice, to furnish, produce or make available, the information or documents, which it may need to inspect, audit or examine.

s1 of the Act defines a “taxpayer” as any person chargeable with any tax leviable under the Act and includes any person required by the Act to furnish a return. Van Kets contended that the definition of “taxpayer” only relates to persons who are liable for South African income tax, or other taxes levied in terms of the Act, or who are required to furnish any return to SARS.

SARS argued that s74A and s74B provide the means by which it exercises the power to obtain information called for by foreign tax authorities, pursuant to DTAs concluded by South Africa, which obliges this country to supply information. SARS contended that if the argument put forward by van Kets was correct, it would have no legal means whereby it could request the necessary information, within South Africa, to meet the request from a foreign tax authority, even though the information may be located in this country, despite the fact that it relates to foreign taxpayers. 

Thus, SARS argued, the information-gathering provisions can be invoked for purposes of the administration of the Act, and includes the power to obtain information for purposes of meeting South Africa’s obligations under the DTAs concluded by it.

s108 of the Act empowers the National Executive to conclude agreements with governments of other countries, with a view to the prevention, mitigation or discontinuance of the levying, under the laws of South Africa, and of any other country, of tax in respect of the same income, profits or gains, or to the rendering of reciprocal assistance in the administration of and collection of taxes under the laws of South Africa and any other country.  Once Parliament has approved a DTA as stipulated in s231 of the Constitution (Act 108 of 1996), as amended, the agreement must be published in the Government Gazette and must be treated as if enacted in the Act itself.

South Africa concluded a DTA with Australia, which came into force on December 21, 1999. The DTA concluded by South Africa with Australia contains Article 25, which deals with the exchange of information by the revenue authorities of the two states.  Thus, under the DTA, the ATO can call for assistance from SARS, by requesting that SARS obtains information located in South Africa for purposes of the administration of tax in Australia.  Similarly, SARS may request assistance from the ATO to provide information, located in Australia, regarding a South African taxpayer.

Article 25 of the DTA, concluded by South Africa with Australia, provides that:

“The competent authorities of the Contractual States shall exchange such information as is foreseeably relevant for carrying out the provisions of this Agreement or to the administration and enforcement of the domestic law concerning taxes referred to in Article 2, insofar as the taxation thereunder is not contrary to the Agreement.”

In van Kets, the court had to determine whether the provisions of Article 25 can be enforced under the provisions of South African law.  SARS submitted that, without the provisions of s74A and s74B of the Act, there would be no legal basis whereby SARS would be entitled to procure the information, which is “foreseeably relevant” for the administration or enforcement of Australian domestic tax law.

Counsel for van Kets argued that s74A and s74B would only apply to a taxpayer who is subject to tax under the provisions of the Act.  It was argued that the information called for by the ATO from van Kets cannot be supplied, despite a request being made in terms of the DTA, as it does not comply with the provisions contained in those sections. The court, therefore, had to decide whether the scope of s74A and s74B should be extended by virtue of the provisions contained in the DTA and, particularly, the wording found in Article 25.

The court recognised that the provisions contained in a DTA, become part of South African domestic income tax laws. s231 of the Constitution has the effect that the provision of a DTA becomes law in South Africa once it has been Gazetted.  Davis, J, made the point that the provisions of a DTA and the Act should, where possible, be reconciled and read as one coherent whole.

The court pointed out that the purpose of the exchange of information clause contained in the DTA is to ensure that a resident of Australia does not escape Australian tax, which may be imposed in respect of income accruing to that resident from a source located in South Africa. If the DTA did not provide for an exchange of information, the ATO would be unable to obtain information about such income, and subject that to tax in Australia.

Davis, J, reached the conclusion that where the DTA is read, together with the provisions of the Act, it implies that the word “taxpayer” should include not only those persons who fall within the provisions of the Act, but also those dealt with in the DTA.

In the case at hand, SARS was requested by the ATO to provide information held by van Kets regarding an Australian resident, Saville. The court held that SARS is entitled to require another person, in this case, van Kets, to furnish any relevant information particular to Saville. 

The court decided that s74A and s74B may be relied on by SARS for purposes of obtaining information from van Kets regarding Saville, thereby enabling it to comply with its obligations under the DTA.  The court, therefore, sought to reconcile the provisions of the exchange of information article contained in the DTA concluded by South Africa with Australia, and the information-gathering provisions contained in s74A and s74B of the Act.

South Africa has, in terms of the various DTAs concluded by it, undertaken to comply with certain international obligations and, had the court found that SARS was precluded from seeking information from van Kets regarding Saville, on the basis that Saville is not a South African taxpayer, which would have undermined the provisions contained in the DTA.

During March 2010, the Organisation for Economic Co-Operation and Development (the OECD) announced that the international fight against cross-border tax evasion has entered into a new phase with the launch of a peer review process by a first group of 18 countries participating in the Global Forum on Transparency and Exchange of Information. 

It appears that the reviews are a first step in the three-year process approved during February 2010 by the Global Forum in response to the call by G20 Leaders for improved tax transparency and exchange of information.  South Africa is not currently a member of the OECD but has observer status.

It is interesting to note that the OECD had announced that South Africa would be subjected to Phase One and Phase Two reviews during the second half of 2011.  Phase One of the review process will entail the assessment of the legislative and regulatory framework, whilst Phase Two of the review involves an assessment of the effective implementation in practice of the exchange of information in accordance with international treaties.

In documents released by the OECD, it has been pointed out that the tax information must be available, that the tax authorities must have access to the information, and that there must be a basis for the exchange of any information. The OECD stated that if any of the aforementioned elements are missing, the exchange of tax information will not be effective.  If SARS was precluded from disclosing information to a foreign tax authority in accordance with the exchange of information article found in a DTA, read together with s74A and s74B of the Act, it would undermine South Africa’s participation in the Global Forum.

Based on the judgment of the court, SARS is legally authorised to disclose information to the ATO or, in fact, any other foreign revenue authority held by a South African resident, regarding a person who is tax resident in the other country in terms of the exchange of information article contained in the DTA.

# This article first appeared in Without Prejudice, March 2012. Image obtained from Please contact the blog owner for any copyright issues, and the image will be removed forthwith.

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