Taxpayers need to be aware that the South
African Revenue Service (SARS) can recover South African taxes from assets
located in another country where SA has concluded a double taxation agreement,
which contains an article dealing with mutual assistance in the recovery of tax
debts.
Similarly, SARS would be obliged to assist
foreign revenue authorities in the collection of tax debts due to those
countries where the double taxation agreement with the country concerned allows
that.
Where the taxpayer does not have assets
located within SA, the question arises as to how SARS may seek to recover South
African tax out of assets owned by the taxpayer, but which are located in another
country.
There is a principle of international law
that the judicial authority of one country will not enforce the revenue laws of
another country. This rule has become
known as “The Revenue Rule” and in COT v McFarland, 27 SATC 15, it was
decided that the courts in South Africa will not enforce any claim by a foreign
state for taxes due and payable in another country.
The
Revenue Rule is founded on the principle that the imposition
of taxation constitutes the exercise of sovereignty by a state and the
enforcement thereof in another state would constitute an infringement of the
sovereignty rights of that state. Thus,
in the absence of a custom or convention agreeing to reciprocal assistance in
the recovery of taxation, SARS cannot recover taxes due by a taxpayer from
assets located in a foreign country.
In terms of section 108 of the Act, parliament
may enter into any agreement with the government of any other country, whereby arrangements
are made with such government to prevent or mitigate the levying of taxes both
in SA and the foreign state or to render reciprocal assistance in the
administration of and the collection of taxes under the laws of SA or such
other foreign country.
Section 93 of the Act sets out the
procedure that SARS must follow where a foreign government requires assistance
from SARS to assist with the collection of taxes due to a foreign revenue
authority in respect of assets located in South Africa.
From a review of the double taxation
agreements concluded by South Africa with foreign countries, it appears that
African countries lead the way in concluding agreements containing provisions
allowing for the assistance in the collection of taxes.
The double taxation agreements concluded
with our neighbouring states, namely, Botswana, Namibia, Swaziland, Lesotho and
Mozambique, all contain articles providing for assistance in the collection of
taxes. Similar provisions are found in
the double taxation agreements concluded with Uganda, Tanzania, Ghana and
Nigeria.
Agreements concluded with Australia, the Netherlands
and more recently the UK allow for the reciprocal assistance in the collection
of taxes. Article 25A was inserted into
the double taxation agreement concluded between SA and the UK by way of
Government Notice 52 on 2 February 2012.
Article 25A of the agreement concluded
between SA and the UK requires that the two states assist each other in the
collection of revenue claims, and that the competent authorities of the
respective states will settle the manner in which the article will be
applied. In the case of SA, the
competent authority is the SARS and in the UK it is Her Majesty’s Revenue and
Customs (HMRC).
The article provides that any revenue claim
of the one state, which is enforceable in accordance with the laws of that
country and is owed by a person who cannot, under the laws of that country,
prevent its collection, that revenue claim shall, at the request of the
competent authority of that country, be accepted for purposes of collection by
the competent authority of the other state.
It is furthermore provided that the revenue
claim shall be collected by the other country in accordance with the provisions
of its own laws applicable to the enforcement and collection of its own taxes
as if the tax debt where a debt of that state.
A double taxation agreement which contains an article dealing with mutual assistance in the recovery of tax debts must be concluded. |
The agreement also provides that where a
tax claim of one of the country’s in respect of which that country, under
domestic law, may take measures of conservancy to ensure the collection of the
tax in issue, that country shall on the request of the competent authority of
that state, be accepted for purposes of taking measures of conservancy by the
competent authority of the other country.
In addition, the agreement provides that
legal proceedings in respect of the existence, validity of the amount of the
revenue claim of one country shall not be brought before the courts or
administrative bodies of the other country.
Thus, a taxpayer who is indebted to SARS cannot challenge the validity
thereof in the English Courts.
Paragraph 8 of Article 25A of the agreement
provides that the provisions of the article cannot be construed as imposing on the
United Kingdom, the obligation:
* to carry out administrative measures which conflict with the laws and administrative practice of the United Kingdom;
*to carry out measures which would be contrary to public policy;
*to provide assistance if South Africa has not pursued all reasonable measures of collection or conservancy available under its laws or administrative practice;
*to provide assistance in those cases where the administrative burden for the United Kingdom is disproportionate to the benefit to be derived by South Africa;
*to provide assistance if the United Kingdom considers that the taxes with respect of which the assistance is requested are imposed contrary to generally accepted taxation principles.
* to carry out administrative measures which conflict with the laws and administrative practice of the United Kingdom;
*to carry out measures which would be contrary to public policy;
*to provide assistance if South Africa has not pursued all reasonable measures of collection or conservancy available under its laws or administrative practice;
*to provide assistance in those cases where the administrative burden for the United Kingdom is disproportionate to the benefit to be derived by South Africa;
*to provide assistance if the United Kingdom considers that the taxes with respect of which the assistance is requested are imposed contrary to generally accepted taxation principles.
Article 25A of the double taxation
agreement concluded by South Africa and United Kingdom was considered by the High
Court of Justice, Chancery Division in the United Kingdom in the case of Commissioners for Her Majesty’s Revenue and
Customs and Another v Ben Nevis
(Holdings) Ltd and others, [2012] EWHC 1807 (Ch).
SARS requested assistance from HMRC to
assist in collecting taxes due by Ben Nevis to SARS in the amount of R2.6
billion. Ben Nevis is a company
associated with Mr David King who has featured in the press over a number of
years regarding taxes payable in SA.
Article 25A was inserted into the 2002 agreement concluded by SA and the
UK which originally came into force on 17 December 2002.
Ben Nevis argued that the provisions of
Article 25 A can only apply to South African taxes for tax years ending on or
after 1 January 2003. It was therefore
argued by Ben Nevis that Article 25A could not by utilised by SARS in seeking
to recover taxes from assets owned by it in the UK and thus the attempt to
recover the taxes due by Ben Nevis to SARS violates the Revenue Rule.
Pelling J referred to Article 27 of the
OECD Model Tax Convention on Income and Capital and the Commentary thereon
which provides that:
“Nothing
in the convention prevents the application of the provision to revenue
claims that arise before the convention enters into force, as long as
assistance with respect to these claims is provided after the treaty has
entered into force and the provisions of the article have become effective.”
The court therefore reached the conclusion
that, even though the agreement came into force on 17 December 2002, the
provisions dealing with the assistance in the recovery of tax debts applied in
respect of taxes which may have arisen prior to that date. An important factor was that the mutual
assistance was only provided after article 25A took effect.
Pelling J reached the conclusion that there
was no objectionable retrospective element that arises regarding Article 25A
and thus decided that HMRC was authorised to assist SARS in recovering taxes
due to SARS in respect of assets owned by Ben Nevis in the United Kingdom.
The fact that the UK double taxation
agreement was only amended recently does not preclude the tax authorities from
seeking assistance in respect of tax debts which may have arisen prior to the
insertion of Article 25A into the agreement in question.
· Dr Beric Croome is a
tax executive at Edward Nathan Sonnenbergs Inc. An abridged version of this
article first appeared in Business Day's Business Law and Tax Review September2012. Free image from ClipArt