SARS can recover taxes from offshore assets

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. 

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